Are subject-to's considered assets?

10 Replies

Hello BP,

I am currently submitting documentation for a cash-out refi on one of my properties per the "BRRRR" method and had a question:

Should I put down a property I acquired subject-to as an asset? The title is in my name, however, there is a $75,000 mortgage on the property.

Would listing this property as an asset help or hinder my ability to obtain a loan on the property I'm trying to refi?

Thank you,

Steve

Originally posted by @Steve K. :

Hello BP,

I am currently submitting documentation for a cash-out refi on one of my properties per the "BRRRR" method and had a question:

Should I put down a property I acquired subject-to as an asset?  The title is in my name, however, there is a $75,000 mortgage on the property.

Would listing this property as an asset help or hinder my ability to obtain a loan on the property I'm trying to refi?

Thank you,

Steve

It's a valid question. You have a moral responsibility to make the mortgage payment on the Subject To but no legal obligation. It doesn't show on your credit report. However, if the loan is backed by the US Government (Fannie Mae, Freddie Mac, VA, FHA, USDA) there is probably a question that asks about ALL obligations and payments on the application. It would probably be considered fraudulent to omit the payment information. You would also add in any payment you are receiving from the property (if you have a renter) as an asset. Reason being, the lender (the Government) has a right to know what your debt to income ratio is if they are considering lending you money. They are concerned about two things 1. The ABILITY to pay back the loan and 2. The WILLINGNESS is pay back the loan. Withholding information is consider to be Non Willing by intent of deception. Best to just play it straight. If they won't lend to you in the current circumstance, change your circumstance. But, they will probably still lend to you simply by listing all of your assets & liabilities as requested. Follow the form closely, stay out of trouble.

@Steve K. the property is an asset. The subject to mortgage is a liability. That is the true picture of the situation, Calling it anything else is deceptive.

Absolutely is an asset. The challenge is finding a banker or mortgage broker that understands and accepts that style of investing. I had one VP of a bank look at me with distain when I explained subject to investing to him. He had never heard of this style, even though he is an investor himself, and clearly thought it was terrible method. However, a branch manager at another bank nearly high-fived me I told him about my subject to deal. One of these guys will get my business and the other will not.

should show up on your tax returns..  so I don't think your going to hide it.. 

Thank you everyone for your input.

@MichaelThompson, the VP that looked at you with disdain is exactly how I felt which is why I asked the question: will it help or hinder me?

Just to clarify, I, by no means was implying that I was not going to list it or try to hide it.  I should have used better verbiage trying to explain myself.

Again, thank you everyone for taking the time to reply.

Steve

@Steve K.   If you only have one then it's unlikely to affect your prospects greatly; once you get 30 of them then it becomes a big deal. So there are a couple ways to technically not have to list those items that you might employ: 

For instance @Jay Hinrichs mentioned it showing up on your tax returns so thats an obvious giveaway right? How do you get them off your tax returns? You structure your properties under their own master LLC that is a business to the IRS; you file a separate return for that business and then the income or loss from that business just carries over onto your personal return. Now you don't have this long list of individual investment properties showing all over your personal tax return, of course they don't show on your credit either since they are sub-to deals, and since they aren't owned in your personal name; i.e. they are owned in trusts where you simply hold a beneficial interest you can legitimately state that you do not "own" any of those real properties. You hold beneficial interest yes, but the trustee owns them. Do you have a legal obligation to make the note payments that must be disclosed on the loan application? I would argue no; the trust is who bought the property, the trust owns the property, you aren't a legal owner of anything and you personally aren't obligated to make those payments.

I slightly disagree with @Ned Carey saying describing it any other way is deceptive. I would agree if you owned things in the "normal" way then yes, not disclosing it would be deceptive. But owning things in "alternative" ways as I'm describing make the ownership more akin to owning stock in a corporation that pays dividends. In fact you could set your affairs up in such a way that your sub-to would do just that. Bankers and lenders are MUCH more comfortable with "in the box" things like stock ownership, dividend payments, etc. when they start seeing a dozen properties on your loan app that are subject to they get way nervous because it's outside their box. 

Originally posted by @Robert Gilstrap :

@Steve K.   If you only have one then it's unlikely to affect your prospects greatly; once you get 30 of them then it becomes a big deal. So there are a couple ways to technically not have to list those items that you might employ: 

For instance @Jay Hinrichs mentioned it showing up on your tax returns so thats an obvious giveaway right? How do you get them off your tax returns? You structure your properties under their own master LLC that is a business to the IRS; you file a separate return for that business and then the income or loss from that business just carries over onto your personal return. Now you don't have this long list of individual investment properties showing all over your personal tax return, of course they don't show on your credit either since they are sub-to deals, and since they aren't owned in your personal name; i.e. they are owned in trusts where you simply hold a beneficial interest you can legitimately state that you do not "own" any of those real properties. You hold beneficial interest yes, but the trustee owns them. Do you have a legal obligation to make the note payments that must be disclosed on the loan application? I would argue no; the trust is who bought the property, the trust owns the property, you aren't a legal owner of anything and you personally aren't obligated to make those payments.

I slightly disagree with @Ned Carey saying describing it any other way is deceptive. I would agree if you owned things in the "normal" way then yes, not disclosing it would be deceptive. But owning things in "alternative" ways as I'm describing make the ownership more akin to owning stock in a corporation that pays dividends. In fact you could set your affairs up in such a way that your sub-to would do just that. Bankers and lenders are MUCH more comfortable with "in the box" things like stock ownership, dividend payments, etc. when they start seeing a dozen properties on your loan app that are subject to they get way nervous because it's outside their box. 

I dont know about you.. but every lender i have used wants a copy of any LLC i own and i own 15 of them and to makes matters more complicated some are single purpose just for a housing community i built and sold and we are retiring it.. so try explaining that one to them why the LLC was there last year and made X and this year its not there.. LOL.

@Robert Gilstrap If you are going for bank financing and you leave off as asset as significant as a piece of real estate I think most bankers would think that is deceptive. And leaving off the liability attached to it is more so. The issue is how much equity does he have in the property, If you don't mention the loan you are misrepresenting the your financial situation.

I will use your example but  make it more apple to apples. What if someone loaned you money for those stocks. They had the right to take away the stock if you didn't pay the loan. Shouldn't that loan be disclosed?

Bankers and lenders are MUCH more comfortable with "in the box" things like stock ownership, dividend payments, etc. when they start seeing a dozen properties on your loan app that are subject to they get way nervous because it's outside their box. 

Exactly, You know the bank isn't going to like it, so you hide it. I call that deceptive

@Steve K. I think the easy way to handle it is just list the property as an asset and the mortgage as a liability against that asset. They aren't going to check to find out it is subject to, and you have presented a honest representation of your financial situation. There is no need to mention that it is subject to. 

@Jay Hinrichs

so try explaining that one to them why the LLC was there last year and made X and this year its not there..

Yes LOL is right. We added new LLCs that became parent companies of older LLCs. They wanted to know why we were missing tax returns. Try explaining that your partnership LLC is now a disregarded entity because this year it is a single member entity with a new entity as owner. Heck I had trouble just describing it now.

@Ned Carey Not sure how any of this is deceptive... I simply described an alternative way to hold your interest. You personally don't own it, you personally have no liability and you personally have no asset other than a beneficial interest (assuming it's owned in a trust). There is no deception thats the 100% truth.

Read Steves Post: He's borrowing money as a cash out refi on property A and wonders should he be disclosing info about property B.  All I said was it depends on how you own property B.