Subject-to property now in foreclosure - opportunity?

Question

I found a condo that was sold by 'John' to 'Bob' in 1998. Bob bought the condo subject-to the existing financing. The loan is still in John's name, deed is now in Bob's name. Bob also took out a HELOC on the property in 2002. Now the 1st loan is in foreclosure with the auction in about three months.

Nothing was mailed to John; all notices were mailed to the subject property. I found current contact info for John. The warranty deed says "[Bob] agrees to assume and pay deed of trust dated..." Bob broke that agreement. Does John have any way to take back the property?

Is there any opportunity here for an investor? The condo is worth about $180k as-is and the balance on John's loan is about $100k (about 50% ARV). And if John could get the property back and bring his loan current and sell it to an investor, what would happen to the HELOC on the property in Bob's name?

Account Closed · Answer

Sorry for the grantor/grantee name reversal.

Does John (original seller) have any rights to foreclose?  In a typical subject-to deal, there would be a contract or agreement, and the seller's only remedy would be to sue for performance or for loss from his buyer's failure to perform.  The seller doesn't have anything to "foreclose" on.

Unless.....there was an all inclusive deed of trust of other mortgage doc executed between the seller and the buyer.  For example:  John sold the property for $125K, with an underlying $100K loan and carried back the additional $25K by wrapping it with a note and deed of trust or mortgage.  In that case, John is holding a note in second position.  Failure to keep up the payments on a senior lien or failure to meet the terms of the 2nd, would put John in a position to foreclose to recover the property.  That would put the HELOC in 3rd.

Just my take on it.

Account Closed · Answer

I've never seen a HELOC or junior lien made to an owner that took a property subject-to, but I guess it could happen.  I would think a lender when making a junior lien would have looked at the senior lien to make sure it was the same borrower as on their application.  They essentially fronted money (in second position!) to someone who had no liability on the first.  That seems dumb.

Even if John deeds the property back to Bob, the HELOC remains a secured lien against the property (regardless of whose name is it's in.) How much is owed on the HELOC?

Jeremy Wells · Answer

Guys like Bob give investors a bad name.

Jeremy Wells · Answer

The HELOC is from US Bank for $47k. This is not a made-up scenario; I agree that it was a dumb thing for the bank to do, but big inefficient banks overlook things.

If the HELOC would stay with the property even after the 1st mortgage was cured, then there's probably nothing to pursue, other than a courtesy call to John since I've already gone this far.

Any chance that US Bank would admit their incompetence and cancel their junior lien, knowing they probably won't get much of anything anyway if it goes to auction?

Steve Babiak · Answer

Agreed, except K. Marie Poe has the grantor and grantee reversed; it would be Bob granting the deed back to John who was the first owner.  And the only way for that HELOC (lien) to go away is to have a more senior position foreclose.  If a more senior lien position forecloses, the HELOC lien is extinguished, but the obligation for Bob to make the HELOC payments survives.

The question remains: Does John have any rights to foreclose on Bob, due to Bob's failure to make payments?  I guess that depends on their agreement terms.