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
- Brooklyn, NY · Member since 2023 · 12 posts · 2 votes3y
Quote from @Andrew Lebed:
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?"
PS. Please do not take my comments above to suggest we should throw a pity party for new investors. I am aware that the real estate market has not always been a pretty place, and that sunny skies and favorable winds are not owed to anyone simply because they dedicated some time to read a few books on the subject.
My point is only this: as the real estate market changes, we need to be open to new strategies while acknowledging their *actual* risks. That's how this community stays relevant.
Not by telling rookies that there are BRRRR deals out there if they just stay the course; only to see them give up after the rental property calculator comes up red for the 300th time with the message: "Agents can help you find a deal that better aligns with your goals." I don't know about your guys' experience, but agents have not been all that helpful when I've offered them 60% of their asking price so I can still budget 17.5% for vacancy/repairs/cap ex.
- 3yBo TullyPro MemberMember since 2021 · 14 posts · 5 votes
Quote from @Andrew Lebed:
Quote from @Andrew Lebed:
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?"
PS. Please do not take my comments above to suggest we should throw a pity party for new investors. I am aware that the real estate market has not always been a pretty place, and that sunny skies and favorable winds are not owed to anyone simply because they dedicated some time to read a few books on the subject.
My point is only this: as the real estate market changes, we need to be open to new strategies while acknowledging their *actual* risks. That's how this community stays relevant.
Not by telling rookies that there are BRRRR deals out there if they just stay the course; only to see them give up after the rental property calculator comes up red for the 300th time with the message: "Agents can help you find a deal that better aligns with your goals." I don't know about your guys' experience, but agents have not been all that helpful when I've offered them 60% of their asking price so I can still budget 17.5% for vacancy/repairs/cap ex.
Thanks for adding these points to further the discussion. I think a lot of new investors can relate with the investor you described above. I think discussions like this are important because I want to believe even novice investors like myself can educate themselves enough to execute deals with creative financing. Personally, through reading multiple forums on subject-to, I have discovered multiple new obstacles and possible solutions to problems surrounding deals of this nature that I didn't encounter in Pace's book, discussions with other investors, or industry professionals.
I agree that subject-to is not a strategy that should be employed for new investors with minimal experience AND minimal resources. I'm curious to hear the BP community's thoughts on a novice investor pursuing a subject-to deal when they could qualify for a conventional loan to buy the property, have multiple exit strategies, and have the personal finances to pay off the original note in the case the due on sale clause is exercised. When experience is lacking but financial resources are available, does that change the narrative around a novice investor pursuing a subject-to deal?
I appreciate the discussion and look forward to anyone providing their thoughts.
- Brooklyn, NY · Member since 2023 · 12 posts · 2 votes3y
Quote from @Bo Tully:
Quote from @Andrew Lebed:
Quote from @Andrew Lebed:
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?"
PS. Please do not take my comments above to suggest we should throw a pity party for new investors. I am aware that the real estate market has not always been a pretty place, and that sunny skies and favorable winds are not owed to anyone simply because they dedicated some time to read a few books on the subject.
My point is only this: as the real estate market changes, we need to be open to new strategies while acknowledging their *actual* risks. That's how this community stays relevant.
Not by telling rookies that there are BRRRR deals out there if they just stay the course; only to see them give up after the rental property calculator comes up red for the 300th time with the message: "Agents can help you find a deal that better aligns with your goals." I don't know about your guys' experience, but agents have not been all that helpful when I've offered them 60% of their asking price so I can still budget 17.5% for vacancy/repairs/cap ex.
Thanks for adding these points to further the discussion. I think a lot of new investors can relate with the investor you described above. I think discussions like this are important because I want to believe even novice investors like myself can educate themselves enough to execute deals with creative financing. Personally, through reading multiple forums on subject-to, I have discovered multiple new obstacles and possible solutions to problems surrounding deals of this nature that I didn't encounter in Pace's book, discussions with other investors, or industry professionals.
I agree that subject-to is not a strategy that should be employed for new investors with minimal experience AND minimal resources. I'm curious to hear the BP community's thoughts on a novice investor pursuing a subject-to deal when they could qualify for a conventional loan to buy the property, have multiple exit strategies, and have the personal finances to pay off the original note in the case the due on sale clause is exercised. When experience is lacking but financial resources are available, does that change the narrative around a novice investor pursuing a subject-to deal?
I appreciate the discussion and look forward to anyone providing their thoughts.
Bo,
I would imagine that most of the posters above would say that the real problem they have with sub-to is that unlike in conventional loan situations where the major risks (botched rehab, eviction, vacancy) are solely on the buyer of a property, in a sub-to situation you are exposing both the buyer AND the seller to those risks, as the seller remains attached to the mortgage.
I think in your situation, where you have the financial ability to shield the seller from the effects of a property-gone-wrong, there is much less of a potential ethical issue, and thus, I think most of the posters above would shrug and say, "up to you if you want to take the risks." Then again, I think they would still caution you, because even the most well-informed novices are likely to make quite a few mistakes in our first few go-rounds, and in most real estate investors' eyes, sub-to is an additional risk.
To me, however, it seems that (experience or no experience) the sub-to transaction you are describing (where you are able to shield the seller) seems LESS risky than any of the conventional deals i'm seeing because at least you will be able to positively cash flow, as opposed to being in the red every month, hoping that down the line at some unspecified time that A) you'll be able to refinance at a rate that makes your investment worth it, and B) that your house will still be worth enough to do such a refinance at that point.
More experienced people, please correct me if I am wrong.
- 3yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
@Andrew Lebed theoretically you could do that, but that may open the door to fraudulent activity.
It's best to take LEGAL steps that will not alert the lender to the transfer of ownership. In over 30 years of investing, have never heard of a Subject-To deal being called due by a lender.
Logical Property Management4.9453 Reviews - Brooklyn, NY · Member since 2023 · 12 posts · 2 votes3y
Quote from @Michael Smythe:
@Andrew Lebed theoretically you could do that, but that may open the door to fraudulent activity.
It's best to take LEGAL steps that will not alert the lender to the transfer of ownership. In over 30 years of investing, have never heard of a Subject-To deal being called due by a lender.
Thank you Michael. This executory contract move seems to be the party line in the sub-to community about how to handle a due on sale clause situation, but (as a deeply skeptical person) it's always good to hear the opinion of someone outside of that bubble.
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