SubTo and Due-on-Sale Clause

[Victoria Spagnolo]

I'm learning about SubTo agreements and I'm wondering - do you always risk the lender calling the mortgage due? How often does that actually happen?  Is there anything you can do preemptively to avoid any issues with the bank?  

Also, do you typically give the seller a "down payment" so he makes some money on the deal? How much? 

Thanks in advance! 

[Jay Hinrichs]

Quote from @Don Konipol:

Seems like the misunderstandings of the so called “subject to” transaction are never ending. 

Many investors seem to think that engaging in a subject to transaction in which the lender is not informed of the transfer of deed is wrong, well, because it SOUNDS like it’s wrong!  It must be CONCEALMENT!  It must be ILLEGAL!  It must be IMMORAL!

BS - it’s none of those things.  In 1982 lenders tried to have Congress pass legislation that would make it a criminal offense to knowingly violate the “due on sale clause”. Yet despite the great lobbying power of the various lender’s lobby’s, Congress wouldn’t even offer it a a bill. You know why?  Because legal scholars determined that any law interfering with an individuals right to sell his property is in violation of the Constitution.

I’ve been lending secured by real estate for over 45 years. There is absolutely nothing illegal, immoral or otherwise wrong with transacting a property utilizing a subject to approach, EVEN if the transaction is not recorded, even if the transaction is “concealed”.

The problems, legality, morality issues occur when one party to the transaction is not made aware of the ramifications of entering into this type of transaction.  So when an “operator” does a sub to deal with a homeowner who doesn’t understand their continuing liability for the note balance and their probable difficulty in qualifying for another mortgage that can be classified as taking advantage of a homeowner.  And when the “operator” is running an equity skimming scheme, or has no intention of “fixing” the situation if the note is called, then criminal acts may have been committed.  

I’ve done probably 15 transactions sib to on the buy side, and maybe another dozen on the sell side.  In every one  all parties were disclosed in writing, all parties were represented by legal counsel, and no major issues occurred in any of them.  

great points I just want to add that if anyone actually took the time to read a mortgage or Deed of Trust ( I know most dont read a 5 or 25 page document) they just sign it LOL. However in virtually every one of those instruments there is a section called:

EVENT OF DEFAULT !

this includes non payment of tax's  insurance  waste etc.. But the other one is alienation of title  IE transfering title.

The remedies spelled out in this document that no one ever reads is:

A. in the Event of a Default the lender has the right to accelerate the loan and call it all due and payable. NOT the obligation to do so.  

From my perspective the real heartburn here is beginners, undercapitalized, neferious investors doing these transactions without full disclosure to the owner of the property who signed on the Mortgage/Deed of trust and the accompanying Note. And when you have folks not ready for prime time come into title all sorts of bad stuff can happen and the original seller can get Fubared in a major way and have no idea the risk they are taking on.