Subject 2 Beginner

[Matthew Kline]

I am a local investor in Fort Wayne, Indiana and surrounding counties. I have found a property I would love to attempt to go down the subject 2 path and try it out. I talked to my agent and she pointed me to a lender that could get me more information on buying a property sub 2. I called him up and he asked me what I think subject 2 is. “Basically it’s assuming the mortgage that is already on the property” he politely let me know that if the deed were to be signed over then I could start making payments but the selling party will always have to be involved until it is payed off and it can be foreclosed on. I asked why it would be foreclosed, and what I took away from what he said was that you can’t pay someone else’s mortgage. So he makes it sound like it’s illegal/not possible to obtain a property via sub 2. Anyone in my area who has done sub 2 or knows anything about sub 2 would be a huge help. Im not sure if I have some information wrong or what but if sub 2 is an option then I would love to go that way. Please let me know if you know anything or need any more info to help. Thanks!

[Andrew Bang]

Sounds like the lender you spoke to is trying to scare you.  If you buy a property sub2 than that lender loses out on a loan and a commission.   Pace Morby is the king of subto right now.   Watch his podcast he just put out thru Biggerpockets, lots of good info on how to by a property subject to the existing debt.

[Wesley Whitehead]

Andrew is right.  What the lender is concerned about is that the mortage is getting paid.  Watched some of Pace videos and he mentioned something that of all the sub2 deals he did (and its a lot) only 10 lenders activated the due on sale clause.  After speaking with the lenders, none of those 10 ended up asking for the full loan amount and he continued with his current arrangement.  His podcast has great information.  

[Don Konipol]

Quote from @Matthew Kline:

I am a local investor in Fort Wayne, Indiana and surrounding counties. I have found a property I would love to attempt to go down the subject 2 path and try it out. I talked to my agent and she pointed me to a lender that could get me more information on buying a property sub 2. I called him up and he asked me what I think subject 2 is. “Basically it’s assuming the mortgage that is already on the property” he politely let me know that if the deed were to be signed over then I could start making payments but the selling party will always have to be involved until it is payed off and it can be foreclosed on. I asked why it would be foreclosed, and what I took away from what he said was that you can’t pay someone else’s mortgage. So he makes it sound like it’s illegal/not possible to obtain a property via sub 2. Anyone in my area who has done sub 2 or knows anything about sub 2 would be a huge help. Im not sure if I have some information wrong or what but if sub 2 is an option then I would love to go that way. Please let me know if you know anything or need any more info to help. Thanks!

Purchasing a property subject to an existing loan means that although ownership by way of a warranty deed transfers to the buying party, the loan in place remains in place.  The ramifications of such are many; however the main concerns are (1) the party selling the real estate is not released from any existing obligations or liability in regards to that loan (2) the note remains in the name of the existing person or entity.  If a “due on sale” clause exists, and it does on almost all residential loans, the the note holder has the right to accelerate the note after transfer of title or transfer of any significant fee Simple interest.  Once the note holder accelerates the note a demand letter is generated demanding that the note be paid off in full; if it isn’t or if a satisfactory solution is not agreed to then a foreclosure filing will take place.
People buying and selling properties subject to are banking on the fact that historically lenders have not shown any major initiative to enforce due on sale clauses.  However, this has only been tested during a long term decline in interest rates, as mortgages written before 1981 did not contain this clause.  When a loan Carrie’s an interest rate higher than the rate new loans are being made for there’s no incentive for a note holder to call a note due if payments are being made current.  The opposite is true when new mortgage rates are higher than the rate on the existing loan in question.  Additionally, note holders are now able, through data base technology, cost effectively track title transfers in most jurisdictions.  This combination may change how “safe” subject to transfers are from note holders enforcement of due on sale clause in the future.  Saying it was always this way so it will stay this way in the future has proven to be false in most arenas 
What proponents of subject to usually fail to address are the risks to both buyers and sellers.  The seller remains liable on a mortgage note secured by a property he does not own.  So, if the buyer defaults, or the loan is called, he is legally obligated to pay off the loan, but does not own the property to sell.  Sometimes the sale is structured so that the seller has some interest enabling him to foreclose on the subject property, but even so foreclosure could be a lengthy and expensive process, and meanwhile back property taxes, insurance, and fix up expenses still need to be paid.  
The buyer is at risk to the extent of his down payment, capital expenditures and can be sued by the seller.

There are numerous safeguards that can be put in place to lessen risk, often to a tolerable level,  for both parties.  Being aware of the risks, and utilizing the safeguards will ensure a much higher probability of a successful transaction.  To purchase or sell a property utilizing subject to financing is not a black and white question; it depends on the circumstances and on the risk tolerance of the parties involved.