Is Subject to fraud?
Member since 2021 · 18 posts · 3 votes
Is Subject to fraud?
Most Popular Reply
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesFraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
30 Replies
- 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Johnathan Cummings:
I have a subject to deal that I can pursue, but my broker tells me that subject to is mortgage fraud. Basically if the current owners die, go into bankruptcy, or something else, I would lose the property and it’s not worth the risk. Curious what the BP community thinks.
1) Your broker doesn't understand Sub-To deals (most of them don't)
2) Read the PA state laws from your General Assembly regarding Sub-To deals. The secretary of the Legislature can help you find them or just search them on their web site
3) Those are real challenges with Sub-To so educate yourself on them before pursuing a Sub-To deal
4) Your state law will outline whether it's considered 'fraud' or not. In NC it's not fraud, it's just 'not considered good business' and 'sus' by our legislature. Totally allowed, we just have to put a disclaimer on our contracts that they approved.
- Member since 2021 · 18 posts · 3 votes3y
Quote from @Scott Johnson:
Quote from @Johnathan Cummings:
I have a subject to deal that I can pursue, but my broker tells me that subject to is mortgage fraud. Basically if the current owners die, go into bankruptcy, or something else, I would lose the property and it’s not worth the risk. Curious what the BP community thinks.
1) Your broker doesn't understand Sub-To deals (most of them don't)
2) Read the PA state laws from your General Assembly regarding Sub-To deals. The secretary of the Legislature can help you find them or just search them on their web site
3) Those are real challenges with Sub-To so educate yourself on them before pursuing a Sub-To deal
4) Your state law will outline whether it's considered 'fraud' or not. In NC it's not fraud, it's just 'not considered good business' and 'sus' by our legislature. Totally allowed, we just have to put a disclaimer on our contracts that they approved.
Thank you for the response, I’ll definitely take a look. I appreciate it!
- 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Johnathan Cummings:
Quote from @Scott Johnson:
Quote from @Johnathan Cummings:
I have a subject to deal that I can pursue, but my broker tells me that subject to is mortgage fraud. Basically if the current owners die, go into bankruptcy, or something else, I would lose the property and it’s not worth the risk. Curious what the BP community thinks.
1) Your broker doesn't understand Sub-To deals (most of them don't)
2) Read the PA state laws from your General Assembly regarding Sub-To deals. The secretary of the Legislature can help you find them or just search them on their web site
3) Those are real challenges with Sub-To so educate yourself on them before pursuing a Sub-To deal
4) Your state law will outline whether it's considered 'fraud' or not. In NC it's not fraud, it's just 'not considered good business' and 'sus' by our legislature. Totally allowed, we just have to put a disclaimer on our contracts that they approved.
Thank you for the response, I’ll definitely take a look. I appreciate it!
No probs! Let us know how it goes!
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Sub to is not fraud at least to my knowledge in any state.
are there Risks as outlined by your broker you bet there are.
being a private lender myself and owning a HML company i am pretty familiar with mortgages and Deeds of trust. They virtually all have the same verbiage when describing the Alienation clauses.
Transferring title is Alienation of title and it is an event of Default.. HOWEVER the lender has the right to call the note due but not the obligation to do so.. Its their call solely.
If the owner dies the bank may ask to be paid off you simply pay them off.. If you cant get a loan or cash them out then thats a RISK your taking but its not fraud.
BK unless its within a short time of the transfer will not effect your either.. the BK court does have the power to step in if they feel the person going BK gave away equity that should belong to the bK estate. But this would also be rare and you would just pay them off.
The real risk in Sub too is not to you the buyer the real risk is to the seller its far more common for the buyers of these deals to default and leave the seller in a big mess.. And then they will sue you I have seen that many times.
- Member since 2021 · 18 posts · 3 votes3y
Understood, this make a lot of sense. As a buyer, it doesn’t seem like a whole lot of risk from what you’re saying.
- 3yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votesThere are risk to the buyer. If lender calls the the loan due, you better stand on your head trying to protect the sellers credit. Protecting the sellers credit is no small matter in my opinion.
Quote from @Johnathan Cummings:
Understood, this make a lot of sense. As a buyer, it doesn’t seem like a whole lot of risk from what you’re saying.
- Rental Property Investor · Provo, UT · Member since 2021 · 46 posts · 50 votes3y
@Johnathan Cummings not fraud. It is line 503 on every closing HUD. You can take anything subject to. As stated, the lender has the right to call the loan due but not the obligation. There are plenty of ways you can protect yourself from due on sale clause.
You can have the seller put the property in a land trust and then assign it to you. You can do an executory contract like an agreement for sale where the deed is transferred to the buyers name but not recorded until the balance is paid off.
If done correctly, both of these prevent the bank from ever seeing in county records that the property was sold. You can also take title in your personal name or LLC but this way should only be done if the mortgage/lender is a big authority like chase, wells fargo, etc.
You also have to make sure you do the insurance correctly. Typically what I have seen a lot of people do is they add an additional policy with the seller as an additional insured and keep the original insurance for 3 - 6 months. After, 3 - 6 months they cancel the sellers original insurance policy and just keep the new one in place. This is done to reduce the likelihood of noticing the property was sold.
But you can take any loan subject to. Almost any lien no matter the position on the property can be taken subject to as it is on the HUD.
- Member since 2021 · 18 posts · 3 votes3y
Thanks Brady, I appreciate the additional details about protecting myself from the due on sale clause. I guess the issue I have is I have no paperwork that I can use to do this properly, will need to consult a local attorney to draft something.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
- Member since 2021 · 18 posts · 3 votes3y
Hey Scott, thank you for the information, I appreciate your response. You bring up a really valid point!
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Scott Trench:
Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
Scott,
Unfortunately with the latest round of Guru training what is being marketed by them is not what you just described.. They are leading with .
1. Need no money
2. Need no credit
This attracts the exact investors who you described.
Where this goes really bad is under capitalized buyer gets into title.. And puts a tenant in Tenant does not pay and the buyer does not have the funds to pay for the eviction and the mortgage while the tenant squats.. think about markets were evictions can take 6 to 12 months.. and the house then gets trashed and does not have the money to rehab.. the person selling it to this sub too buyer gets total screwed and credit trashed and foreclosure .. And in some states possibility a judgement against them for a deficiency. Now this sub too buyer gets sued !! and wishes they never heard the term Sub too. There is going to be a lot of pain going on in the coming years with this strategy hitting U tube and other social media sites. We started doing sub too back in the carter years late 70s. It was pretty common then but of course for those of us in the industry. The other thing you will see will be out and out crooks who wont have any personal liability to the loan will care less about the seller.. Get into title and rip the rents until the house is lost.. This again is a a lot more common than we can imagine. U see people on BP who even will blurt out .. Ya but the mortgage is not in my name so it cant hurt me. All about them. - Member since 2021 · 18 posts · 3 votes3y
All very good points, I brought this up initially because I didn’t want to do something illegal or immoral, not my intent. I appreciate the feedback
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Johnathan Cummings:
All very good points, I brought this up initially because I didn’t want to do something illegal or immoral, not my intent. I appreciate the feedback
I think the main issue is many dont do this with bad intent.. they just dont realize that stuff can happen and they dont have a legit plan B and they find themselves in a bunch of trouble. Just like many white collar criminals they dont start off that way with criminal intent but they start robbing from peter to pay paul and end up in serious trouble. - Member since 2018 · 1k+ posts · 1k+ votes3y
It may not be fraud by the buyer, but it may be fraud by the seller against the entity to whom the seller had a duty to disclose. Transferring title is a material change in condition, so why did the seller not disclose that fact to his mortgage holder?
Not a question of whether the bank had an obligation to foreclose. It's a question of violation of one's duty to disclose.
- Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes3y
It is a violation of the terms agreed to by the lender and the borrower as it violates the due on sale clause in the note/mortgage. The remedy for the lender at their discretion is to call the note due and subsequently foreclose. This is a civil violation not criminal
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes3y
I'm not a lawyer so obviously take what I say with a grain of salt, but from everything I understand, no, it is not mortgage fraud. What it does do is trigger the due on sale clause in the mortgage contract. This gives the bank the right to call the loan due. That being said, it is very rare that they actually do that. I think I've only heard of it once.
- 3yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Scott Trench nailed it.
it's not a beginner strategy, period.
- 3yTom GimerBusiness MemberDMV · Member since 2017 · 3k+ posts · 3k+ votes
Is subject-to “mortgage fraud”? No, that term has its own widely accepted definition.
But could subject-to be considered or part of a “fraud in the inducement” action? I would say absolutely, but what occurs after closing is crucial to that analysis.
Gimer Law516 Reviews - Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes3y
Quote from @Scott Trench:
Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
Bingo. You nailed it Scott.
But I'd like to respectfully ask you something...
As the President of BiggerPockets, do you find yourself morally conflicted here? The site has been heavily promoting the subject-to gurus for a while now. Heck, if you go to the homepage of www.biggerpockets.com right now the #1 book recommended is called "Wealth Without Cash - Supercharge your real estate investing with subject-to, seller financing, and other creative deals"
Now BP has offered infinite value to the real estate community over the past ~15 years. So this is not a knock on you, the site, the BP brand, or any of these gurus. I fully understand that part of staying in business is selling education.
But as you've said, subject-to is a complex strategy that should probably not be pursued by beginners who have no experience or money. Seems odd to me that the president of the site has clearly outlined an "unethical subject-to" above, but still allows the site to promote the strategy to beginners so heavy handedly.
- 3yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votesCorrect this is not for somebody buying their first properties sub2 because they are broke, with bad credit, and just came from some guru class.
Quote from @Scott Trench:
Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Quote from @Scott E.:
Quote from @Scott Trench:
Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma.
Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens.
This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized.
Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.
This puts unreasonable risk on the seller.
Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree.
IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.
Bingo. You nailed it Scott.
But I'd like to respectfully ask you something...
As the President of BiggerPockets, do you find yourself morally conflicted here? The site has been heavily promoting the subject-to gurus for a while now. Heck, if you go to the homepage of www.biggerpockets.com right now the #1 book recommended is called "Wealth Without Cash - Supercharge your real estate investing with subject-to, seller financing, and other creative deals"
Now BP has offered infinite value to the real estate community over the past ~15 years. So this is not a knock on you, the site, the BP brand, or any of these gurus. I fully understand that part of staying in business is selling education.
But as you've said, subject-to is a complex strategy that should probably not be pursued by beginners who have no experience or money. Seems odd to me that the president of the site has clearly outlined an "unethical subject-to" above, but still allows the site to promote the strategy to beginners so heavy handedly.
My personal view is that subject-to is an advanced strategy that can be used in select situations. My personal view is that investors should focus on building rock-solid financial foundations by living frugally, working hard, generating income, saving, house-hacking, and taking a hands-on approach to old-school real estate investing. This is outlined in detail in Set for Life, and is something I talk about every week, twice a week on BiggerPockets Money.
I view my job here at BiggerPockets as having an opinion, and being a voice in our community, but allowing and encouraging all the different approaches to real estate investing to be heard. That's what makes BiggerPockets awesome. It's not "Scott Trench's secrets and formula to building wealth with real estate". It's a platform and community that has millions of voices.
Specific to "heavily promoting" subject-to gurus. Out of 35 titles, we have two titles on creative financing or getting into real estate with little or no money (outside of books covering house-hacking, which is different):
- The Book on Investing in Real Estate with No and Low Money Down by Brandon Turner
- "Wealth Without Cash" by Pace Morby
I believe your commentary is around how Wealth Without Cash is proving exceptionally popular. As only two titles out of nearly 40 cover this topic, the "heavy promotion" has to do with the recent launch of this title, and not an ongoing emphasis from BiggerPockets on promoting creative finance above and beyond the fundamental "normal" real estate investing that we cover with the vast, vast majority of our content. Likely less than 1% of BiggerPockets content in 2023 alone (that we produce) discusses subject-to specifically, and less than 5% covers any topic related to creative finance. But, I acknowledge that those topics DO get a disproportionate amount of attention - they are clearly scratching an itch for some portion of real estate investors.
The book offers a variety of creative finance strategies, is easy to read, and has generally glowing reviews. In my interactions with him on BiggerPockets, I have not heard Pace endorse Subject-To for someone with no money no job, and no assets. Where the book discusses subject-to financing, it does so by correctly, in my view, calling it an advanced strategy. When he discusses his personal subject-to deals, he does so from the standpoint of an advanced multimillionaire real estate investor.
That this book is a huge seller is a function of the interest that our community has in the subject, information, and Pace as an author. If you'd asked me two years ago, I'd have thought that this book would have had a similar level of interest to Brandon Turner's No and Low Money Down book, and the two books cover similar topics.
But, to answer your question - absolutely I feel conflicted. Because the book has been so popular, I believe that novice investors are feeling that some creative finance activities - subject-to specifically - are more common than many might believe, and are good practice for folks without substantial means. I personally do not believe either to be the case. I think subject to is a niche. I think that subject to is likely to be irresponsible for most non-millionaire novice investors. I'd instead point these people to assumable mortgages, for example, where they take on the debt as their own, legally, and as an established part of the specific loan products (VA and FHA) that have protocols in place to enable assumption.
I believe that many investors are now confusing the concept of "wealth without cash" or "Low and No Money Down" as meaning that all the advanced creative financing strategies apply to investors who are literally broke. Instead, they often apply to advanced investors who could buy the property with all cash, but instead choose to use no cash of their own.
I think that there's nothing at odds with talking about subject-to, and helping people understand it. The book offers a reasonable introduction to the topic. And, there's nothing wrong with an author like Pace promoting the book and his ideas well. Our platform exists for these ideas to be talked about. Using OPM has been a topic in real estate since time immemorial.
And, just as I feel that way, I also feel that it is important for me to express my personal opinion and say that subject-to is a tool that should be used in select circumstances. It is not a tool that should be a primary lever for someone without the means to otherwise buy property. It's an advanced tool, and it's use case will be rare. Sellers need to be careful, and carelessness on the part of investors who really should have no business using subject-to bring risk on the industry.
That's why I posted my thoughts on this thread in the first place. I hope investors are generally aware of Subject-To as one great tool in a real estate investor's arsenal, and use it effectively and sparingly when select situations call for it to be used.
- Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes3y
@Scott Trench Wow... thank you for taking the time to write such a well thought out response. It sounds like we both feel similarly about the matter. Hopefully it was clear that my original comment came from a place of caring about this community, and caring about new investors.
I can't help but look back at the 24 year old version of myself who was so heavily influenced by this very forum 12 years ago. And had I gotten wound up in some of these more obscure and niche strategies, I may never have ended up where I am today. In fact I probably would have given up.
After having now done dozens of deals including house hacks, flips, new construction, short term rentals, long term rentals, wholesaling, office, and medical, I can confidently agree that buying real estate with a subject-to structure is just as you said - "an advanced tool where it's use case will be rare." I hope new investors understand that.
Great discussion. Really appreciate your time. And thanks for keeping the BP spirit alive.
- Brooklyn, NY · Member since 2023 · 12 posts · 2 votes3y
Hey all,
I'm coming to this thread a little late, but I'm hoping not too late to give another perspective here.
In the above discussion, I see a false dichotomy of sub-to investors: those who are already multimillionaires who have the resources to withstand a sub to "due on sale clause" situation on their own financial merits, and those who have nothing: no job, no savings, no credit, and no experience who are driven by the YouTube promise of sub-to rags to riches.
Allow me to introduce another investor to the discussion. A beginning investor who has read Set for Life, The Book on Rental Property Investing, Buy Rehab Rent Refinance Repeat, and Long Distance Real Estate Investing. He (or she) has also read Rich Dad Poor Dad, The Richest Man in Babylon, The Automatic Millionaire, and The Millionaire Next Door. They are also a regular listener of The Bigger Pockets Money Podcast, On the Market, and Real Estate Rookie.
Let's now go further and say that they spent the past 5 years digging themselves out of credit card debt, and through sacrifice and overtime shifts have saved up nearly 100k to finally make it past the first couple of chapters of Set For Life, and are now ready to invest in real estate. They desire nothing more than to finally take action.
Except, unlike many of you who came to this point somewhere in the last 10 years...they get to this point in March of 2023. They face highly inflated real estate prices (the product of the 3% and lower interest rates that drove the boom that made many of you wealthy), and even with their credit score in the mid 800's, can hope for no better than 7% interest rates from virtually any bank.
They realize that the rent to price ratio in their metro has shifted completely against ownership. They look beyond, willing to take a risk on being a novice in a remote market, perhaps somewhere in the sunbelt, but the 11% they have been told to budget for property management makes any hope of cash flowing anywhere NEAR positive virtually impossible, and with the fed showing no sign of lowering interest rates, this investor realizes that the door to real estate investing has likely been shut on them for the foreseeable future.
Let's go further. This investor so badly wants to get involved that they sign up for both the summer Rookie Bootcamp with Ashley Kehr (because, who knows, maybe they missed something) and the Creative Finance Bootcamp with Pace Morby.
Their experience in both would be very different. In the rookie bootcamp, they would hear the classic BP curriculum: house hacking, BRRRR strategy, wholesale-to-Fix and flip. All strategies that (aside from house hacking in very select markets), if we are honest, no longer work the way they did the past decade. The young investor would notice that right after the lesson on "property analysis," his/her accountability group would simply fell apart, and participation on the community boards immediately died. Everybody realized that the party was over.
Meanwhile, in the Creative Finance bootcamp, there was plenty of reason to remain optimistic. Seller financing - while much less common than conventional deals - was possible. And sub to - with all of its risks - allowed him/her to recapture the very same interest rates that most of you had powering your real estate journeys all along. There was still a place to be successful in this market, regardless of where they found themselves in the real estate cycle.
Are there risks in the sub to strategy? Yes. Absolutely. And frankly, the due on sale clause is probably the least of them (as there are ways to mitigate this very unlikely risk through the use of Executory Contracts). As stated above, much larger are the risks posed to the seller: mismanagement of the property (or an unfortunate eviction as described above), underestimation of initial renovation costs/holding time leading to trouble, the inability for the seller to secure a new loan because the sub to loan is still on their DTI, and abandonment by the buyer of their responsibilities to the seller's loan.
But there is a risk to everything in this business. For the buyer and the seller. And as long as the seller is informed of these substantial risks, and decides that these risks are worth escaping foreclosure (in some cases), or watching as their properties wither for 100 days on the MLS because nobody is willing to pay the price that they want or need, then in my humble opinion, that is fine.
I am not an expert in this field. I am only a self educated novice who makes mistakes and learns every single day. But for those who would shake their head at those of us just starting out who would consider utilizing sub-to strategies in order to get their foot in the door, I don't think you are understanding the headwinds we are facing, and the very appropriate viewpoint that there is a way to take advantage of different strategies depending on where you find yourself in the real estate cycle.
Scott, I very much appreciated your measured comments above about how BP is an open forum for ALL ideas in real estate. Not just ideas that the staff (or anybody else) personally endorses. I have greatly enjoyed learning about these topics, and whether or not I decide to use them, I am a wiser, more knowledgable, and more creative investor because of them. If anything, the inclusion of these topics (in appropriate depth) on BP's website, books, and bootcamps makes them LESS dangerous because they become things that are studied, as opposed to just 4 minute clips on YouTube.
For those who disagree, I am *genuinely* curious what advice you would give to this and many other informed - but still novice - investors who want to take action? Im hoping it's not, "sorry about your luck with the timing, maybe you should try the stock market?"
- 3yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
Fraud implies criminal activity, which Subject-To is not if done correctly.
Transferring ownership of a property with a mortgage on it, MAY be a violation of the mortgage contract, but that is not fraud and no one will be prosecuted. The lender's only recourse if to accelerate the mortgage or call it due. Basically, they can start the foreclosure process forcing the buyer to either refi, pay the note off or let the property go.
Logical Property Management4.9454 Reviews - Brooklyn, NY · Member since 2023 · 12 posts · 2 votes3yMichael, when the loan is called due, is there a window of time when the property could be deeded back to the original owner, and an executory contract (or an agreement for transfer of title at a later time) be put in place that would allow the continuation of the buyers/sellers arrangement…albeit without some of the tax benefits (mainly, depreciation) for the buyer?
Quote from @Michael Smythe:
Fraud implies criminal activity, which Subject-To is not if done correctly.
Transferring ownership of a property with a mortgage on it, MAY be a violation of the mortgage contract, but that is not fraud and no one will be prosecuted. The lender's only recourse if to accelerate the mortgage or call it due. Basically, they can start the foreclosure process forcing the buyer to either refi, pay the note off or let the property go.
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