Subject To and Mortgage Wrapper
Natalia LadzinskaPro Member
Investor · Current: Dallas TX (remote & usually in: TX FL IL WI) · Member since 2024 · 3 posts · 2 votesSubject To and Mortgage Wrapper
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T. Alan CeshkerPro Member
Attorney · 3409 Executive Center Drive Ste 110 Austin, Texas 78731 · Member since 2020 · 99 posts · 92 votesQuote from @Natalia Ladzinska:
Hi - it is my first time purchasing a property on a Subject To basis. The exit strategy is a Mortgage Wrapper. Can anyone share their expertise when it comes to the home insurance, creation of a land trust, or other general advice? Thank you!
Insurance - needs to be done correctly -- therefore you need someone who know how to get insurance in place for a wrap - reach out if you want a referral
Trust - these are useful for guarding against a due on sale issue -- same here -- needs to be done correctly by an attorney
General advise - use a loan servicing company -- check the escrow account at time of acquisition -- consider partnering with someone who knows what they are doing until you learn all
9 Replies
- Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1y
Quote from @Natalia Ladzinska:
Hi - it is my first time purchasing a property on a Subject To basis. The exit strategy is a Mortgage Wrapper. Can anyone share their expertise when it comes to the home insurance, creation of a land trust, or other general advice? Thank you!
Well, if I understand what you mean, you plan on buying using Subject To (taking over the mortgage) and then selling the property using a Wrap (which means you have a mortgage with the buyer who makes monthly payments to you, then you make a payment to the bank)
Very dangerous for a new investor.
1. If the person you sell to stops making their payment to you, you still have to make your payment to the bank or they property goes into foreclosure and you are in a heap of trouble.
2. Since you will no longer own the property, you are forced to do a foreclosure on your buyer if they stop paying. That means costs, court action and questions from the attorneys.
3.You must disclose you are doing that, in writing, and get the seller's signature that it's okay with then to do it, or you have no defense in court.
4. If the person you buy from, or the person you sell to, files for bankruptcy, you are now in bankruptcy court with them with lots of questions to answer to the judge.
5. If you don't follow Dodd-Frank, you could wind up in court.
6. In a Subject To, there is a paragraph called Due on Sale. It's generally Paragraph 18 or 19. It says they can call the loan due (you then have 30 days to pay it off entirely) or they will foreclose. No, deeding it back to the guy you bought from does not work. Read the Due On Slae. That also is a violation. A contract for deed is a violation. Any executory contract is a violation. Any INTENT to change ownership is a violation. If the lender finds out (say the original seller wants his name off the loan, so he contacts the lender, the lender finds out he no longer owns the property, so they invoke the Due on Sale clause.
You can't sell the property to pay off the underlying loan because you no longer own the property. You can't sell what you don't own. The guy that bought from you has no reason to sell, he hasn't violated the terms of your Wrap. When the house goes into foreclosure, he sues you for breaking the Wrap. A court case costs about $25,000 in legal fees and a year and a half to prosecute and you lose because you have no defense. And in the current climate you may avoid jail time if you did everything absolutely correctly, but maybe not.
7. Demand your money back from whoever you paid for this ridiculous idea or set aside cash reserves to pay off the underlying loan on a moments notice.
This is not the entire list of reasons, but I've said enough. Have whoever you paid to teach you that, post a response here as to why that is not the most absurd approach for a new investor. Here are some more:
Using Subject To, to Get "Free" Properties - A Quick Guidelinehttps://www.biggerpockets.com/forums/311/topics/1188416-usin...
I'll give you the court cases if you are interested.
Have a nice day.
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
never heard it called a wrapper before.
Goggle
all inclusive Deed of Trust California document and read it.. this is the proto type wrap instrument created in the late 70s and we used it well over 200 times.
- Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1y
Quote from @Jay Hinrichs:
never heard it called a wrapper before.
Goggle
all inclusive Deed of Trust California document and read it.. this is the proto type wrap instrument created in the late 70s and we used it well over 200 times.
That doesn't solve the problem of the DOS. Since ownership is passing from Party A to Party B by "Subject To", then ownership to Party C by Deed of Trust (AIDT), ownership has passed out of control of Party B but not the debt of the "Subject To".
Party B has an obligation to make sure that Party A's loan is paid & defended/protected for the life of the loan (the remaining 25 years?). Just because they "sold" the property doesn't release then from the legal consequences of the "Subject To".
In the event of a DOS call on Party A, Party B who no longer owns the property, but does have consequences on the "Subject To"/DOS, can not sell the property to meet the payoff demand "You can't sell that which you don't own", and can't refinance the property to meet the pay off demand. Party C has been paying on time so Party B can't foreclose. There isn't enough time in a foreclosure process anyway to cure a DOS through foreclosing on an AIDT.
Party B is stuck. They owe the amount of the loan and either have to cash out the loan quickly (which very, very few investors which do "Subject To" (commonly called "SubTo" by the "community") have access to. Their "guru" will not bail them out. They are on their own.
They then face a very serious lawsuit. This type of lawsuit is probably $25,000 in legal fees, a year and a half in court (where the prosecutor will probably lift the skirt of every transaction this person has been associated with). Fraud being one of the more serious charges and easiest to prove. - 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ken M.:
Quote from @Jay Hinrichs:
never heard it called a wrapper before.
Goggle
all inclusive Deed of Trust California document and read it.. this is the proto type wrap instrument created in the late 70s and we used it well over 200 times.
That doesn't solve the problem of the DOS. Since ownership is passing from Party A to Party B by "Subject To", then ownership to Party C by Deed of Trust (AIDT), ownership has passed out of control of Party B but not the debt of the "Subject To".
Party B has an obligation to make sure that Party A's loan is paid & defended/protected for the life of the loan (the remaining 25 years?). Just because they "sold" the property doesn't release then from the legal consequences of the "Subject To".
In the event of a DOS call on Party A, Party B who no longer owns the property, but does have consequences on the "Subject To"/DOS, can not sell the property to meet the payoff demand "You can't sell that which you don't own", and can't refinance the property to meet the pay off demand. Party C has been paying on time so Party B can't foreclose. There isn't enough time in a foreclosure process anyway to cure a DOS through foreclosing on an AIDT.
Party B is stuck. They owe the amount of the loan and either have to cash out the loan quickly (which very, very few investors which do "Subject To" (commonly called "SubTo" by the "community") have access to. Their "guru" will not bail them out. They are on their own.
They then face a very serious lawsuit. This type of lawsuit is probably $25,000 in legal fees, a year and a half in court (where the prosecutor will probably lift the skirt of every transaction this person has been associated with). Fraud being one of the more serious charges and easiest to prove.
Ken what it does ( AITD) is clearly state everyone's responsibilities up front in the document. And the buyer on the wrap KNOWS going into the deal if the loan is called they will need to pay it off and foreclose out the middle mans position.
So for laymen who are not familiar with how this works its really quite simple.
original owner has a loan.. they sell sub to to a buyer that buyer then sells on a Wrap using a AITD. The AITD gives the End buyer the right to cure and foreclose out the person/entity they bought it from if the sub to ( middle man cant pay off the mortgage as thats their only remedy to protect their position because as you note they are not on title anymore and cant refi). The end buyer will have plenty of time to refi or cure keep in mind by federal law there has to be a 90 notice before a foreclosure can even start then it takes minimum of 6 months and in most state 9 to 24 months to foreclose so plenty of time for end buyer to cure.
Now original seller in the meantime gets their credit trashed.. So as I always mention you have to pretty much be insolvent or a fool to sell on a sub to.. or have the cash to pay it off day one if there is a DOS.. but of course sellers are talked into these by slick talking investors and don't really know the dangers they are putting themselves into.
So buyer on the wrap also can just start making payments directly to lender and foreclose out middle mans position since they defaulted.. U know bad guys who just rip rents or payments with no intention of ever paying on Sub to loan. So there is a remedy but like I always say these deals can be a can of worms and really not appropriate for investors who buy on a wrap that do not have ability to refi or cash out in the case of a DOS situation.. Same with the middle man only worse for them.. If they dont have the cash to pay off a DOS on the sub to they are going to lose their position in the deal which could be costly or maybe its small money who knows.. - Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1y
Quote from @Jay Hinrichs:
Quote from @Ken M.:
Quote from @Jay Hinrichs:
never heard it called a wrapper before.
Goggle
all inclusive Deed of Trust California document and read it.. this is the proto type wrap instrument created in the late 70s and we used it well over 200 times.
That doesn't solve the problem of the DOS. Since ownership is passing from Party A to Party B by "Subject To", then ownership to Party C by Deed of Trust (AIDT), ownership has passed out of control of Party B but not the debt of the "Subject To".
Party B has an obligation to make sure that Party A's loan is paid & defended/protected for the life of the loan (the remaining 25 years?). Just because they "sold" the property doesn't release then from the legal consequences of the "Subject To".
In the event of a DOS call on Party A, Party B who no longer owns the property, but does have consequences on the "Subject To"/DOS, can not sell the property to meet the payoff demand "You can't sell that which you don't own", and can't refinance the property to meet the pay off demand. Party C has been paying on time so Party B can't foreclose. There isn't enough time in a foreclosure process anyway to cure a DOS through foreclosing on an AIDT.
Party B is stuck. They owe the amount of the loan and either have to cash out the loan quickly (which very, very few investors which do "Subject To" (commonly called "SubTo" by the "community") have access to. Their "guru" will not bail them out. They are on their own.
They then face a very serious lawsuit. This type of lawsuit is probably $25,000 in legal fees, a year and a half in court (where the prosecutor will probably lift the skirt of every transaction this person has been associated with). Fraud being one of the more serious charges and easiest to prove.
Ken what it does ( AITD) is clearly state everyone's responsibilities up front in the document. And the buyer on the wrap KNOWS going into the deal if the loan is called they will need to pay it off and foreclose out the middle mans position.
So for laymen who are not familiar with how this works its really quite simple.
original owner has a loan.. they sell sub to to a buyer that buyer then sells on a Wrap using a AITD. The AITD gives the End buyer the right to cure and foreclose out the person/entity they bought it from if the sub to ( middle man cant pay off the mortgage as thats their only remedy to protect their position because as you note they are not on title anymore and cant refi). The end buyer will have plenty of time to refi or cure keep in mind by federal law there has to be a 90 notice before a foreclosure can even start then it takes minimum of 6 months and in most state 9 to 24 months to foreclose so plenty of time for end buyer to cure.
Now original seller in the meantime gets their credit trashed.. So as I always mention you have to pretty much be insolvent or a fool to sell on a sub to.. or have the cash to pay it off day one if there is a DOS.. but of course sellers are talked into these by slick talking investors and don't really know the dangers they are putting themselves into.
So buyer on the wrap also can just start making payments directly to lender and foreclose out middle mans position since they defaulted.. U know bad guys who just rip rents or payments with no intention of ever paying on Sub to loan. So there is a remedy but like I always say these deals can be a can of worms and really not appropriate for investors who buy on a wrap that do not have ability to refi or cash out in the case of a DOS situation.. Same with the middle man only worse for them.. If they dont have the cash to pay off a DOS on the sub to they are going to lose their position in the deal which could be costly or maybe its small money who knows..My concern is that :
The end buyer will have plenty of time to refi or cure keep in mind by federal law there has to be a 90 notice before a foreclosure can even start then it takes minimum of 6 months and in most state 9 to 24 months to foreclose so plenty of time for end buyer to cure.
As soon as the person who bought SubTo misses payments, the lender starts reporting lates on the credit of the innocent original note holder. No one else gets lates. If the problem isn't solved by the time the lender files a foreclosure notice, which is pretty quick in Texas and other places, slow process in some others, that foreclosure shows up on the credit report too. It is when the foreclosure notice is filed, not completed that the credit gets trashed.
My contention is that people who otherwise can't get a who loan are the ones who do Wraps and Seller Financing with AITD which means they can't get financing to pay off a DOS. It's very likely the property was sold at an inflated price anyway and the appraisal won't justify a loan amount to pay off the Note. In addition, these are typically properties that don't meet FHA or VA requirements, so time and money are need to make the repairs/upgrades. There just are much better ways to get a better deal.
I agree with your statement: "
So there is a remedy but like I always say these deals can be a can of worms and really not appropriate for investors who buy on a wrap that do not have ability to refi or cash out in the case of a DOS situation.. Same with the middle man only worse for them
This is just from practical experience. Inexperienced investors should best avoid this complex of a deal.The original post was "
Hi - it is my first time purchasing a property on a Subject To basis. The exit strategy is a Mortgage Wrapper
Clearly headed for serious trouble. - 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ken M.:
Quote from @Jay Hinrichs:
Quote from @Ken M.:
Quote from @Jay Hinrichs:
never heard it called a wrapper before.
Goggle
all inclusive Deed of Trust California document and read it.. this is the proto type wrap instrument created in the late 70s and we used it well over 200 times.
That doesn't solve the problem of the DOS. Since ownership is passing from Party A to Party B by "Subject To", then ownership to Party C by Deed of Trust (AIDT), ownership has passed out of control of Party B but not the debt of the "Subject To".
Party B has an obligation to make sure that Party A's loan is paid & defended/protected for the life of the loan (the remaining 25 years?). Just because they "sold" the property doesn't release then from the legal consequences of the "Subject To".
In the event of a DOS call on Party A, Party B who no longer owns the property, but does have consequences on the "Subject To"/DOS, can not sell the property to meet the payoff demand "You can't sell that which you don't own", and can't refinance the property to meet the pay off demand. Party C has been paying on time so Party B can't foreclose. There isn't enough time in a foreclosure process anyway to cure a DOS through foreclosing on an AIDT.
Party B is stuck. They owe the amount of the loan and either have to cash out the loan quickly (which very, very few investors which do "Subject To" (commonly called "SubTo" by the "community") have access to. Their "guru" will not bail them out. They are on their own.
They then face a very serious lawsuit. This type of lawsuit is probably $25,000 in legal fees, a year and a half in court (where the prosecutor will probably lift the skirt of every transaction this person has been associated with). Fraud being one of the more serious charges and easiest to prove.
Ken what it does ( AITD) is clearly state everyone's responsibilities up front in the document. And the buyer on the wrap KNOWS going into the deal if the loan is called they will need to pay it off and foreclose out the middle mans position.
So for laymen who are not familiar with how this works its really quite simple.
original owner has a loan.. they sell sub to to a buyer that buyer then sells on a Wrap using a AITD. The AITD gives the End buyer the right to cure and foreclose out the person/entity they bought it from if the sub to ( middle man cant pay off the mortgage as thats their only remedy to protect their position because as you note they are not on title anymore and cant refi). The end buyer will have plenty of time to refi or cure keep in mind by federal law there has to be a 90 notice before a foreclosure can even start then it takes minimum of 6 months and in most state 9 to 24 months to foreclose so plenty of time for end buyer to cure.
Now original seller in the meantime gets their credit trashed.. So as I always mention you have to pretty much be insolvent or a fool to sell on a sub to.. or have the cash to pay it off day one if there is a DOS.. but of course sellers are talked into these by slick talking investors and don't really know the dangers they are putting themselves into.
So buyer on the wrap also can just start making payments directly to lender and foreclose out middle mans position since they defaulted.. U know bad guys who just rip rents or payments with no intention of ever paying on Sub to loan. So there is a remedy but like I always say these deals can be a can of worms and really not appropriate for investors who buy on a wrap that do not have ability to refi or cash out in the case of a DOS situation.. Same with the middle man only worse for them.. If they dont have the cash to pay off a DOS on the sub to they are going to lose their position in the deal which could be costly or maybe its small money who knows..My concern is that :
The end buyer will have plenty of time to refi or cure keep in mind by federal law there has to be a 90 notice before a foreclosure can even start then it takes minimum of 6 months and in most state 9 to 24 months to foreclose so plenty of time for end buyer to cure.
As soon as the person who bought SubTo misses payments, the lender starts reporting lates on the credit of the innocent original note holder. No one else gets lates. If the problem isn't solved by the time the lender files a foreclosure notice, which is pretty quick in Texas and other places, slow process in some others, that foreclosure shows up on the credit report too. It is when the foreclosure notice is filed, not completed that the credit gets trashed.
My contention is that people who otherwise can't get a who loan are the ones who do Wraps and Seller Financing with AITD which means they can't get financing to pay off a DOS. It's very likely the property was sold at an inflated price anyway and the appraisal won't justify a loan amount to pay off the Note. In addition, these are typically properties that don't meet FHA or VA requirements, so time and money are need to make the repairs/upgrades. There just are much better ways to get a better deal.
I agree with your statement: "
So there is a remedy but like I always say these deals can be a can of worms and really not appropriate for investors who buy on a wrap that do not have ability to refi or cash out in the case of a DOS situation.. Same with the middle man only worse for them
This is just from practical experience. Inexperienced investors should best avoid this complex of a deal.The original post was "
Hi - it is my first time purchasing a property on a Subject To basis. The exit strategy is a Mortgage Wrapper
Clearly headed for serious trouble.
No argument from me. As I have stated numerous times Sellers are crazy to sell sub to if they value their credit or if they dont have the ability to make the payments and or pay off mortgage if it gets called to protect their credit.. but many of these deals are private financing as well.. Keep in mind when we did this in the 70s and 80s by the hundreds it was all private mortgages .. different ball game then.. when we did it in the 2000s those were mortgages reported to fico.. But I was the buyer and we were in a position to cash out any mortgage that would get called at anytime with cash. and it did happen a few times to us.. But I have to think with all these folks being taught how to do this by various folks your going to have all sorts of not ready for prime time investors do this and there is a going to be a lot of failures and the servicers or banks will start to monitor this far more than in the past.
- 1yT. Alan CeshkerPro MemberAttorney · 3409 Executive Center Drive Ste 110 Austin, Texas 78731 · Member since 2020 · 99 posts · 92 votesTo answer your questions:
Quote from @Natalia Ladzinska:
Hi - it is my first time purchasing a property on a Subject To basis. The exit strategy is a Mortgage Wrapper. Can anyone share their expertise when it comes to the home insurance, creation of a land trust, or other general advice? Thank you!
Insurance - needs to be done correctly -- therefore you need someone who know how to get insurance in place for a wrap - reach out if you want a referral
Trust - these are useful for guarding against a due on sale issue -- same here -- needs to be done correctly by an attorney
General advise - use a loan servicing company -- check the escrow account at time of acquisition -- consider partnering with someone who knows what they are doing until you learn all - Member since 2022 · 14 posts · 11 votes1y
This is one of my favorite strategies. But, it must be done properly or it can really come back to bite you. First, you are going to want to make sure you are using a servicing company. All payments from the borrower go to the servicing company and they then pay the sub to mortgage on your behalf.
Secondly, depending on what state you are in you will want a good title company to prepare the paperwork for you, or an attorney that specializes in this. I like selling these type of deals on a contract for deed because it is easier to handle and get the property back should the borrower default.
Land trusts can be very useful here as well. However, without getting too deep in the weeds would really need to know what all the particulars are of the deal and what it is that you are truly trying to accomplish.
- Member since 2025 · 116 posts · 52 votes1y
Natalia, congrats on diving into the SubTo/Mortgage Wrap strategy—it’s a powerful tool when executed correctly. Here are some key points to consider:
Home Insurance:
You’ll need to keep the original seller’s policy in place to avoid triggering the due-on-sale clause.
Add a new “Landlord Policy” or “Dwelling Policy” under your entity/trust with you as the insured and the seller as an additional insured. This way, you’re covered for liability and property damage while maintaining the existing mortgage policy.
Land Trust:
Setting up a land trust can provide anonymity and simplify the transfer process. The seller deeds the property to the trust, and you become the beneficiary.
Ensure the trust document specifies your rights and responsibilities clearly, especially regarding payment obligations and exit strategies.
Use a trustee who is either neutral or trusted to avoid conflicts.
Mortgage Wrapper:
You’ll effectively be creating a wraparound mortgage that mirrors the terms of the original loan but with a higher interest rate or additional fees to generate cash flow.
Ensure that the wrap document clearly outlines the payment structure, escrow handling, and default terms to protect both you and the seller.
Due-on-Sale Clause:
Technically, transferring title to a trust or executing a wrap can trigger the due-on-sale clause. While many lenders don’t actively enforce it, be prepared with a backup exit strategy in case they do.
Other Considerations:
Check state laws regarding wraps and land trusts—some states have specific requirements or restrictions.
Consider using a servicing company to handle payments to the underlying mortgage and the wrap. This provides a third-party verification of payment performance.
Have a real estate attorney review the trust and wrap documents to ensure they’re airtight.
Would you like a sample trust agreement or wrap mortgage template to review?
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