Questions about subject-to purchases

16 Replies

Hi everyone, 

Can someone please clarify a few things about subject-to for me? 

I understand that you essentially take over the existing mortgage from the seller, thus "subject-to the existing mortgage". 

Does the buyer have to qualify for the loan with the sellers lender? Or does title just transfer and then the buyer is responsible for the payments?

Does the lender ever call the loan due when title transfers? 

I ask because I have an opportunity to buy a property this way. The loan balance is $75k, the house is probably worth about $120k. I recently moved and have started investing in real estate full-time so I would not be able to qualify for a conventional refinance if the lender called the loan due. 

Thanks in advance for any responses!

@Indy Smith you would not contact the lender to see if you qualify for the loan. The title would just transfer and then you would be responsible for the payments. 

Yes sometimes the lender does call the loan amount due if the loan documents say they can (which most do) I have heard mixed reviews on this. I know a guy here in Orlando that all he does is Subject to investing. When I asked him if he had ever had a loan called due he said no but he did something very smart. He creates a trust in the seller's name with himself or his LLC as the trustee.

Example ... the seller is named John Smith the buyer has an attorney create the John Smith family trust with equity buyers LLC as the trustee of the trust then does a quit claim deed from John Smith to John smith family trust. The bank may get notice of the title transfer but sees it going from what looks like the owner to the owner's trust. the buyer then makes the repairs he needs to get the property to where he can refinance and change the title straight into the LLC.

Caution with subject to because at least here in Florida if you fail to make the payments on the loan you could go to jail. If the loan gets called and you can't cover it you could go to jail. 

Interesting...if the buyer can make the payments, I don't see why the bank would call the loan due and forgo all that interest. So often, I see banks make poor decisions that go against their better interests. Could you work out a deal with the bank and get a statement in writing that they would not call the loan due if the title transferred? If you have solid income and credit, they may work with you. 

If the loan isn't assumable then how can title transfer if the property is collateral for the loan?  Doesn't this put a cloud on the title in addition to put the seller in breach of contract?  This seems like it could create all types of problems, but maybe I am just unsophisticated.

Originally posted by @John M. :

If the loan isn't assumable then how can title transfer if the property is collateral for the loan?  Doesn't this put a cloud on the title in addition to put the seller in breach of contract?  This seems like it could create all types of problems, but maybe I am just unsophisticated.

 you can transfer title sub too that's legal.. 

what you have is alienation of title.. and alienation of title is an event of default.. in an event of default the lender or holder of the note and mortgage may at their choosing accelerate all payments due and payable.. that's the risk

the land trust while nice is still an alienation of title.   And it happens occasionally.. but not often.. 

the risk is really to the seller .. their buyer defaults they no longer have title and their credit gets trashed.. 

Originally posted by @Tyler Gibson :

@Indy Smith you would not contact the lender to see if you qualify for the loan. The title would just transfer and then you would be responsible for the payments. 

Yes sometimes the lender does call the loan amount due if the loan documents say they can (which most do) I have heard mixed reviews on this. I know a guy here in Orlando that all he does is Subject to investing. When I asked him if he had ever had a loan called due he said no but he did something very smart. He creates a trust in the seller's name with himself or his LLC as the trustee.

Example ... the seller is named John Smith the buyer has an attorney create the John Smith family trust with equity buyers LLC as the trustee of the trust then does a quit claim deed from John Smith to John smith family trust. The bank may get notice of the title transfer but sees it going from what looks like the owner to the owner's trust. the buyer then makes the repairs he needs to get the property to where he can refinance and change the title straight into the LLC.

Caution with subject to because at least here in Florida if you fail to make the payments on the loan you could go to jail. If the loan gets called and you can't cover it you could go to jail. 

land trust while nice is still an alienation of title and banks can and will call loans.. they are not clueless when thousands of folks all of a sudden create land trusts  LOL.. they know whats really happening..  

@Jay Hinrichs Thanks I guess you learn something new every day in this business.  So is there not much risk to the buyer then other than if they accelerate the loan and the buyer couldn't get alternative financing?

Originally posted by @John M. :

@Jay Hinrichs Thanks I guess you learn something new every day in this business.  So is there not much risk to the buyer then other than if they accelerate the loan and the buyer couldn't get alternative financing?

 Correct other than you lose whatever capital you have in the deal.. and you may get sued by the person whose credit your going to trash by not paying.. I rescued a group here in Oregon that got turned into the AG for this and they barely got out because I paid a bunch of them off.. If I had not jumped in they would have had some issues no doubt... but then again they did 30 of them..  not one or two.

and I know others that got criminal charges and ended up in jail as there business model was to get into title never pay on the first and rip the rents until the bank took the home..  one guy got 5 years in state prison for that little scheme. its a very dangerous model for those with limit money.. just like the other guy said in FLA you can end up in jail.. well you certainly can in Oregon if your scheme was to be a bad boy or girl .

@Jay Hinrichs I have no illusions about what is happening with the land trust. I did finish my statement with caution. I personally would only employ this tactic If I had the funds to make good on the loan if called. 

I only mentioned the tactic because I personally know a person that has deployed it a dozen times with no issue. That is not to say it is foolproof or that there is any guarantee the bank would not call the loan. 

Originally posted by @Tyler Gibson :

@Jay Hinrichs I have no illusions about what is happening with the land trust. I did finish my statement with caution. I personally would only employ this tactic If I had the funds to make good on the loan if called. 

I only mentioned the tactic because I personally know a person that has deployed it a dozen times with no issue. That is not to say it is foolproof or that there is any guarantee the bank would not call the loan. 

agreed it was one of my main methods for buying rentals for about a decade probably did over 100 of them.. but no land trust just took title had 3 called paid them off..  but its an advanced strategy for those with capacity.. its not a good strategy ( especially for a seller) to do this with folks with limited capital.. and no ability to write a check. 

@Jay Hinrichs   Gotcha.  It sounds like probably a bit more risk than I would be willing to take, but if I couldn't qualify for a loan I might risk it.  I guess as with everything it's all a balance of risk and reward...

Thanks for all the input everyone, particularly @Jay Hinrichs , very helpful. I was viewing it as a way to get into a property when alternative financing is not an option and when the seller does not have the equity or inclination to seller finance, but I take your point that it should only be done by people with capital and capacity. 

Originally posted by @Indy Smith :

Thanks for all the input everyone, particularly @Jay Hinrichs, very helpful. I was viewing it as a way to get into a property when alternative financing is not an option and when the seller does not have the equity or inclination to seller finance, but I take your point that it should only be done by people with capital and capacity. 

 its OK also if its a quick flip.. were your exposure is not great..  but if for some reason you had a hiccup or loan got called and the seller is now getting letters that their credit is getting trashed from non payment that's when you will have issues.. generally they lawyer up you get a bunch of nasty grams etc..  

@Tyler Gibson   If there is a law anywhere that says if you can't make your loan payments then you go to jail I want to see it. Doesn't exist.  Now if someone is convicted of fraud or some other nefarious scheme in connection with a real estate transaction then that might land them in jail but not normal buying of property subject to or any other way.

@Indy Smith    Banks don't call loans due that are performing is the reality and another reality is everyone gives banks waaaaaay to much credit for knowing whats going on because they don't and they don't care (as long as the note is being paid).  Don't let anyone scare you away from Subject-to's; they are arguably the best and safest form of real estate investing out there and if you don't want the one you're looking at now call me and I'll take it or help you do it or partner and do it.

@John M.    Remember transferring property involves to things: transferring the deed which transfers ownership of the actual property and the security instrument (mortgage, security deed or deed of trust) which shows who is on the hook for the $$ borrowed.  In a Sub to the deed gets transferred thus giving you 100% ownership of the property but the underlying security instrument stays in the old owners name and you simply keep making payments. you now have 100% control with little to no risk since nothing is in your name (assuming you are smart enough to never own real estate in your personal name).

Worst case scenario if your world ends and you can't make payments or the loan is called due and you can't pay is deed it back to the seller and move on. 

Originally posted by @Robert Gilstrap :

@Tyler Gibson   If there is a law anywhere that says if you can't make your loan payments then you go to jail I want to see it. Doesn't exist.  Now if someone is convicted of fraud or some other nefarious scheme in connection with a real estate transaction then that might land them in jail but not normal buying of property subject to or any other way.

@Indy Smith    Banks don't call loans due that are performing is the reality and another reality is everyone gives banks waaaaaay to much credit for knowing whats going on because they don't and they don't care (as long as the note is being paid).  Don't let anyone scare you away from Subject-to's; they are arguably the best and safest form of real estate investing out there and if you don't want the one you're looking at now call me and I'll take it or help you do it or partner and do it.

@John M.    Remember transferring property involves to things: transferring the deed which transfers ownership of the actual property and the security instrument (mortgage, security deed or deed of trust) which shows who is on the hook for the $$ borrowed.  In a Sub to the deed gets transferred thus giving you 100% ownership of the property but the underlying security instrument stays in the old owners name and you simply keep making payments. you now have 100% control with little to no risk since nothing is in your name (assuming you are smart enough to never own real estate in your personal name).

Worst case scenario if your world ends and you can't make payments or the loan is called due and you can't pay is deed it back to the seller and move on. 

 simply not true.. banks do call these loans … I have had it happen 3 times... and to suggest if your world ends just give it back.. well what about the sellers credit you just trashed.... ???  there are moral and ethical arguments in this scenario that your glossing over..

were it becomes illegal Is as I stated the bad people get in there rip the rents and never pay and leave the poor seller out to dry.. I had one guy who tried to borrow money from me do this to about 20 plus people and the state put him in federal prison.. it happens.

So there is a down side to this and the down side is to the seller not the buyer.. therefore sellers need to be careful and retain an attorney to walk them through the risks that they take allowing a loan to remain in their name and title to transfer.. that's the point.

of course us buyers we don't care just like you mention it don't work walk away you don't owe the debt personally.. that's just not the moral or ethical compass I would follow.. 

@Jay Hinrichs    I never suggested you should walk away from anything and unless you are a criminal looking to defraud others then there is near zero risk of ever going to jail.  One presumes that @Indy Smith is not a criminal seeking advice on an open forum as to how to commit fraud therefore anecdotal stories of criminal activity just don't seem applicable to me. 

Also when I spoke of deeding the property back under a worst case scenario I never inferred that you would be behind in payments when doing so.  We shouldn't operate from the presumption that someone is being unethical in their business dealings. What I said was if you got to the point where you couldn't pay then you should deed it back. The seller is usually no worse off than he was prior to deeding it to you. In fact he is arguably in a better position since you have made payments on time, improved his credit, made improvements to the property and either stabilized or increased it's value, paid down the principal, caught up back payments, paid the taxes, etc. 

I've never had one called in 26 years and I almost exclusively buy subject to. Do I recognize that it could happen? Yes, but the sky could fall tomorrow too but I still get up everyday.  I totally agree with you that one must factor that into their decision making when investing but buying subject to is a no-brainer for the most part. I've made millions off of them and helped people who were losing everything at the same time. When I take over someones loan they are thanking me at the closing table. It's a major win-win in my opinion.

Lastly, if you had 3 subject to's called for no reason whatsoever then I wonder what the rest of the story is and the details surrounding that because you are the first document-able person I've ever heard of who has had it happen.  

Originally posted by @Robert Gilstrap :

@Jay Hinrichs   I never suggested you should walk away from anything and unless you are a criminal looking to defraud others then there is near zero risk of ever going to jail.  One presumes that @Indy Smith is not a criminal seeking advice on an open forum as to how to commit fraud therefore anecdotal stories of criminal activity just don't seem applicable to me. 

Also when I spoke of deeding the property back under a worst case scenario I never inferred that you would be behind in payments when doing so.  We shouldn't operate from the presumption that someone is being unethical in their business dealings. What I said was if you got to the point where you couldn't pay then you should deed it back. The seller is usually no worse off than he was prior to deeding it to you. In fact he is arguably in a better position since you have made payments on time, improved his credit, made improvements to the property and either stabilized or increased it's value, paid down the principal, caught up back payments, paid the taxes, etc. 

I've never had one called in 26 years and I almost exclusively buy subject to. Do I recognize that it could happen? Yes, but the sky could fall tomorrow too but I still get up everyday.  I totally agree with you that one must factor that into their decision making when investing but buying subject to is a no-brainer for the most part. I've made millions off of them and helped people who were losing everything at the same time. When I take over someones loan they are thanking me at the closing table. It's a major win-win in my opinion.

Lastly, if you had 3 subject to's called for no reason whatsoever then I wonder what the rest of the story is and the details surrounding that because you are the first document-able person I've ever heard of who has had it happen.  

 well like you have bought well over 100 of these over the years..  one I can specifically recall was the seller went and told the credit union she sold the property promptly got a letter from said credit union they were calling the loan.. the others don't recall specifics.

agreed properly collateralized investors this is a good tool... like guns or pitt bulls in the wrong hands its a disaster.. and when people teach this its usually because the buyer does not have the money to buy any other way and looks at it as low down way to get into the deals and they have no credit to borrow money.. for well collateralized companies like yourself or us.. its great tool.. for seller highly risky in states that allow deficiency judgements.. would like to think the buyer will just deed it over but that's not been my expeirnce.

my experience with these going bad

were gurus teaching sandwhich lease options on sub too.. in our state that requires a full foreclosure to cure.. now you have a lessee int he house who is not paying.. you have your middle man who ran out of money can afford to forclose or make payments.. you have the seller usually figure it out when they are getting late notices and their credit is trashed.. I have done a lot of rescuing of these situations.

so those are just a few tid bits..  got to run  enjoy your weekend.