WHo is responsible when Due on Sale is called?

15 Replies

Buyer purchases subject-to and bank calls sale.  Is it the responsibility of the buyer to pay the balance of the mortgage or the seller? If the buyer can't pay, does it then become the sellers responsibility? Can the seller buy it back and continue with mortgage? If no one can pay it off, I assume it will be on the seller's credit history?  

Thanks

Eric

It is the Buyer's ethical responsibility. However I believe that it would fall on the Seller's credit if they were unable to pay it off. 

I have heard in rare instances when the title changes that the bank will contact the seller giving them an ultimatum to switch the title back. While I don't know how often that occurs... 

@Eric Armstrong

  this is the extreme risk the seller takes doing subject too... they have deed the property away.. and are on the hook for the loan.. any foreclosure would go against them.

Plus if its in a state like Texas the bank could get  a deficiency judgment as well against the seller.

The buyer of the property although  maybe morally responsible or even contractually but if they have no assets for do not have the money to pay an mortgage whose Alienation clause has been invoked.. really does not matter seller is on the hook..

And if the people they sold to won't just willingly deed it back they can't even control the asset.. since they no longer own it.

Sub too while nice for a buyer is incredibly Risky for a seller ... unless very detailed safeguards are put into place.. which of course are rarely done... most sellers just figure this out when they get a late notice and freak out. !!!  :)

If a buyer has limited capital they are not doing anyone any favors buying sub too.. the risk is just to great to the Poor seller.

As @Jay Hinrichs said, this is what can happen when people do things they don't understand, whether they be buyer, seller or investor flipping the contract. 

If the bank were to take the property back, watch how quick an attorney will drag in everyone into a lawsuit, including an investor who thought he/she was just along for a quick check. 

@Guy Gimenez

  we saw investors and some RE agents get nailed for this in Oregon... took sub too... and riped the rents and stranded the sellers thinking they were hot stuff.. AG took It on went to DA and RE commission licenses lost and severe penalties and one I know went to jail.

This is why I consider subject-to a predatory acquisition strategy.

Take away the only asset the seller has (House)

While leaving the seller stuck with all the liability (Mortgage)

@James Wise

  very dangerous in the hands of newbies and or undercapitalized not to mention plane crooks...

@Guy Gimenez

  and on top of that in Texas the bank could get a deficiency judgment even on a owner occ purchase money DT  that's correct right ?  I know I have done them on my flake borrowers in MS>. got the asset and a judgment  shocks the Heck out of them.. LOL.

So in essence in Texas

1. sell house have no control

2. loan gets called house is lost because you have no control  credit trashed.

3. BAnk gets a deficancy judgment and chase the owner who probably took title in personal name like 99% of conventional loans are and they now have lost the home ruined their credit and gotten a judgment filed against them...

So can't really see the risk reward in this for a seller..

Yep, it struck me as crazy the first time, and every time since, that I have heard about it.  Some crooks doing seminars in Orange County claimed that the banks never call the loans, but that is obviously false.     

Yes sir...but as a practical matter the lender seldom does, however, the option does remains for the lender to do so. Honestly, I can't wait until some young attorney wants to make a name for himself / herself and starts throwing out lawsuits at all these new investors who went to a weekend class and were led to believe they were now investors.

Gotta love these folks who say, "Got my first sub-to deal" or "got my first wholesale deal...can anyone tell me what forms to use and how to fill them out?" 

Trouble is on the horizon and unfortunately it will be remedied via additional state and federal regulations put on all of us.

Originally posted by @Jay Hinrichs :

@James Wise

  very dangerous in the hands of newbies and or undercapitalized not to mention plane crooks...

@Guy Gimenez

  and on top of that in Texas the bank could get a deficiency judgment even on a owner occ purchase money DT  that's correct right ?  I know I have done them on my flake borrowers in MS>. got the asset and a judgment  shocks the Heck out of them.. LOL.

So in essence in Texas

1. sell house have no control

2. loan gets called house is lost because you have no control  credit trashed.

3. BAnk gets a deficancy judgment and chase the owner who probably took title in personal name like 99% of conventional loans are and they now have lost the home ruined their credit and gotten a judgment filed against them...

So can't really see the risk reward in this for a seller..

@Guy Gimenez

  The reason I recall the dual action statues in Texas is back in the mid 80's when things were not so hot in Texas I was getting clients that were moving to CA... and remember them talking about having to hold on to their houses because the banks had threaten to sue for deficiency... Also a syndicator I worked for in the mid 80's got into some huge lawsuits over failed multi family and ended up with big judgements... so I know they go after debtors there or at least they did.

As you probably know on there are 12 states that a purchase money deed of trust for owner occ.. there is no ability to get a defiancy... CA OR WA NV AZ come to mind.

Someone reading this thread might think there is a consensus against subject to deals.  I disagree.  "Subject to" is a godsend, and has allowed me to acquire many more deals than if all my deals had been all cash.  Here is the key:

1.  Full disclosure to seller.  S/he has to understand risk they are taking.  In California, that risk is to their credit.  There is little to no risk of deficiency judgment.  But still, credit risk is significant.

2.  Ability to pay loan if called.  I have the ability to pay/refinance the loan if called.  I really don't want to, which is why I leave loans in place even when interest rate is above market.  But I can and would pay if loan was called.  Ultimately, whether a reasonably sophisticated seller is willing to leave the debt in place is a judgment call on whether the buyer can/will pay loan if necessary.  So convincing them you would pay or refinance often is key to getting the deal.   And it should go without saying that it would be immoral to convince them you can and would pay, if in fact that is untrue.

@Leonard L. - that is the big difference. You have both the willingness and access to the capital needed to pay the loan should it be called. I believe the point @Jay Hinrichs and the others are making is that it's a dangerous area where many get involved despite a lack of ability to pay the loan if it gets called. These are the ones who end up really screwing the seller if things go south.

Originally posted by @Leonard L. :

Someone reading this thread might think there is a consensus against subject to deals.  I disagree.  "Subject to" is a godsend, and has allowed me to acquire many more deals than if all my deals had been all cash.  Here is the key:

1.  Full disclosure to seller.  S/he has to understand risk they are taking.  In California, that risk is to their credit.  There is little to no risk of deficiency judgment.  But still, credit risk is significant.

2.  Ability to pay loan if called.  I have the ability to pay/refinance the loan if called.  I really don't want to, which is why I leave loans in place even when interest rate is above market.  But I can and would pay if loan was called.  Ultimately, whether a reasonably sophisticated seller is willing to leave the debt in place is a judgment call on whether the buyer can/will pay loan if necessary.  So convincing them you would pay or refinance often is key to getting the deal.   And it should go without saying that it would be immoral to convince them you can and would pay, if in fact that is untrue.

I'm not planning to do sub to, but want to do lease option and owner finance type deals if they present themselves. I also have the ability to refinance if there was a DOS called. Can anyone give an opinion or have experience in doing a refinance when called, is the bank calling the note open to refinancing? I'm assuming banks will view it as a purchase and require a 20% minimum down or do they look at it from a LTV perspective? How difficult to go to a new bank? I want to have a general idea on how much reserves to hold in case this ever happens, would never leave a seller holding the bag and I want to sleep at night.

Who is first legally obligated? Those who signed the note. But, you as a buyer probably had an agreement to pay the underlying obligation, if you as the buyer can't bail the seller out, count on them hitting you up for your breach of contract. Then, on top of that, your failure caused harm by destroying the borrower's credit, that can be worth much more than a house. You can disclose all you like, but the bank looks to their borrower and the seller will look to the buyer. Oh, the buyer rented the place? Your tenant will also be looking at their landlord for costs as well. 

Sub-2s have a place, short term, fix and flip, or fix, lease and refi or be able to write a check. These are not for newbies to buy and hold without the ability to take out that loan.

Protect the King! The seller is the King, you may need to fall on your sword but that is a better fate than allowing the King to go down. :)

@Bill Gulley

  The other scenario were this would be acceptable is if the seller was already down the tubes... credit crushed does not care etc etc underwater property.. and has a full disclosure signed by both buyer and seller that if it does not work for the new buyer that the new buyer has a very high likely hood of default.

Were this got tricky in our market was the NO equity sub too's by shysters who then ripped the rents for a year or more.. kind of like the HOA play in FLA... FBI came looking for some of these dudes and some of them end up in State prison...

Anyway.... still won't stop the undercapitalized dreamers  LOL

Yes @Jay Hinrichs , ever notice how some of the girls like the bad boys, same with newbies I think. Some just love being sold by the gurus. RE is just an abstract thing, like "The Game of War" you can get rich at. 

Big difference between late payments and a foreclosure, you can't write enough disclaimers to cover doing the wrong thing. :)

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