How To Structure a Subject-To Transaction

34 Replies

Okay, when you do a subject-to transaction, do you have the seller secured in the transaction or do you leave them hanging out there?

How do you secure the seller who takes back no equity?

You give them a deed of trust or duplicate interest stated in the security agreement, covering the note and deed or trust or mortgage that is assumed. A statement such as "This security agreement is to secure that interest in and to that original note and deed of trust dated xx, MMMM, YYYY, filed of record on the xx day of MMMM, YYYY in Book xx at Page xxxx, in connection with the sale made by and between the grantor and grantee hereof on the xx day of MMMM, YYYY, whereby grantor assumed that certain obligation hereby secured. This is a duplicate security interest and not an additional lien secured above the amounts outstanding of that obligation described."

Blah, blah, blah, legal description, terms of the security agreement.

If the buyer fails to pay the underlying mortgage the seller can take it back.

When a seller sells subject to, they can advance that underlying obligation to be assumed as a secured interest, in a wrap with excess equity you would include the original amount and combine the second amount or secure the first and file the second.

This was just brought to my attention.

So, how do you do it? How do they do the docs in a Sub-2 in your neck of the woods??? :)

@Bill Gulley, I thought you had the answers to all financial questions. : )

Interesting question, I look forward to reading the responses.

I've never thought about this, but don't think that structure would work...who is granting the "duplicate security interest" and in what? Neither party has a legal interest to grant in the original note or security deed held by the original lender.

I don't think the seller necessarily needs to be "secured," though. Why can't you just include language in the sale agreement that ownership reverts to the subject-to seller in the event of a default, similar to a land contract?

Originally posted by @Account Closed :
I've never thought about this, but don't think that structure would work...who is granting the "duplicate security interest" and in what? Neither party has a legal interest to grant in the original note or security deed held by the original lender.

I don't think the seller necessarily needs to be "secured," though. Why can't you just include language in the sale agreement that ownership reverts to the subject-to seller in the event of a default, similar to a land contract?

Adam, good catch and it is done as a land contract, but there is no deed exchanged or a quit claim deed escrowed in the event of default as used in a CFD. The DOT perfects that interest with the right to proceed, where I mentioned the "agreement made in that disclosure, that can be an agreement secured or a note secured. The only thing is clarifying that it wraps the underlying mortgage and is not in addition to it. Sorry, I should have caught that but was more involved with the example.

We have had instances of default and the seller is notified, they have the opportunity to bring the loan current. Then they can make demand and proceed. The lender is in first position, there is also the due on sale, just saying it's an issue.

A buyer really can not assume the underlying mortgage, nor can a borrower assign it, it does take another obligation, financing agreement or note which is the obligation secured. The seller needs to provide the financing that matches or covers the underlying mortgage. My intent above was to point out that it didn't constitute additional funds.

I'd never do a Sub-2 unsecured, it's not a true installment sale requiring the obligation to be paid before conveying title, with title conveyed the only way to perfect any security interest is with a lien that I know of. The buyer may encumber the property, cause liens to be attached, have slow payments effecting credit, default, I'd want the right to protect against such issues.

Unless you have another solution. I've not heard of a sale agreement that survived settlement where a deed was conveyed that gave a seller the opportunity to secure property in the event of default. Any ideas to perfecting the interests of the seller?

BTW, not getting off topic, but, since CFDs are dead, I've thought of incorporating the terms of a DOT to cure problems of default instead of holding a quit claim deed that circumvents foreclosure laws. The CFD contains a note. Don't know if that is being done. :)

Tried to update, it took it as a quote, sorry about that, edited below:)

Originally posted by ME
Okay, when you do a subject-to transaction, do you have the seller secured in the transaction or do you leave them hanging out there?
How do you secure the seller who takes back no equity?

You give them a deed of trust or duplicate interest stated in the security agreement, covering the note and deed or trust or mortgage that is assumed. A statement such as "This security agreement is to secure that interest in and to that original note and deed of trust dated xx, MMMM, YYYY, filed of record on the xx day of MMMM, YYYY in Book xx at Page xxxx, in connection with the sale made by and between the grantor and grantee hereof on the xx day of MMMM, YYYY, whereby grantor assumed that certain obligation hereby secured. This is a duplicate security interest and not an additional lien secured above the amounts outstanding of that obligation described."

Blah, blah, blah, legal description, terms of the security agreement.

If the buyer fails to pay the underlying mortgage the seller can take it back.

When a seller sells subject to, they can advance that underlying obligation to be assumed as a secured interest, in a wrap with excess equity you would include the original amount and combine the second amount or secure the first and file the second.

This was just brought to my attention.

So, how do you do it? How do they do the docs in a Sub-2 in your neck of the woods??? :)

Edited: Omission here, before blah, blah, blah there is a note or financing agreement described, the previous is simply to say the note secured is not an additional amount above the underlying note but the same dollars as a wrap arrangement. See the following posts.

Hey @Bill Gulley I don't know if I can be much help. First my contract for deeds NEVER contained a note. The sole recourse was return of the property and extinguishment of the contract, as you say, normally by a quitclaim deed. In order to protect a Seller of a subject to property I would think it would have to contain a subordination clause that would allow the Seller to step in and pay the mortgage in case of default and make the Buyer indemnify the Seller if he does so. I would think you could do this because you probably could not sell subject to and comply with Dodd/frank, so violating it to get the property back might not be that big of a deal. I suppose it is possible to do a subject to and not violate the new laws but it would be tough.

The subordination clause would be similar to what banks have, to be able to buy insurance or pay taxes, make repairs, etc to protect their interest. I have not done one since Dodd/Frank so I am just thinking out loud not talking with any experience or authority.

I don't secure the seller with any recorded instrument in a sub2. There's a signed agreement that says what they are doing (selling sub2 existing debt, and often with additional liens) and what I'm going to do and by what date (reinstatement, make payments, pay in full, etc.). The agreement is binding. They can sue me if I don't perform. Interestingly, in my last two sub2 deals the mortgage was the least of the seller's concerns. They cared way more about income tax liens and HOA liens. And property taxes, even though property taxes attach to the property, lots of sellers are scared of governments and believe the county will come after them. Even after I explain that is not the case. I always pay them anyway, so I make that part of the agreement to make the seller feel better.

Hi bill, You guys keep talking about secured positions and wraps but I don't see that as a subject to deal. In a situation where the owner is behind on payments and you want to assume the the note I could see bringing it current and taking poccession that way. And as far as assigning it, Due on Sale clause is the crux of the argument but that can be an issue as well in a wrap. So if you want to clarify a bit more on that it would be welcome.

I have done many Subject to deals for short sales. Around fifty. Here is my position and what I need to make it secure for me.

Purchase and sale aggreement (that price will change once the Bank and I have agreed on a price)

Special Warranty Deed (signed over to me)

Power of attorney (Everything that has to do with the property)

Authorization to Release Information

Cover your Assetts Aggreement (spelling out exactly what I will and will not be doing) That must be understood by both parties. I will not bring it current or take over the loan in any way.

While I will take over payments, or a wrap around, it must make sense financially of course.

My understanding of a Subject to deal is the deal subject to the existing mortgage, liens and or encumbrances. In my view a Subject to deal is one where the seller must give up certain provisions for subsequent short sale ie the five things above. Yes it would reconvey to the seller if no agreement could be reached. I have not used them in any other instance.


Originally posted by @Jerry W. :
Hey @Bill Gulley I don't know if I can be much help. First my contract for deeds NEVER contained a note. The sole recourse was return of the property and extinguishment of the contract, as you say, normally by a quitclaim deed. In order to protect a Seller of a subject to property I would think it would have to contain a subordination clause that would allow the Seller to step in and pay the mortgage in case of default and make the Buyer indemnify the Seller if he does so. I would think you could do this because you probably could not sell subject to and comply with Dodd/frank, so violating it to get the property back might not be that big of a deal. I suppose it is possible to do a subject to and not violate the new laws but it would be tough.
The subordination clause would be similar to what banks have, to be able to buy insurance or pay taxes, make repairs, etc to protect their interest. I have not done one since Dodd/Frank so I am just thinking out loud not talking with any experience or authority.

No more did I send a PM for your input I got this mention, LOL

The CFD has financing terms agreed, wraps existing financing or not, but basic note terms are there, amount, interest, payment and amortization. CFDs can be more specific incorporating a note, in the body or attached which is what I meant.

S-2s were done with DOTs back to the 80s early 90s, I used them and serviced them without issue.

I'd say the subordination is clever thinking, but how do we cure the title issue of it being in the seller's name?

My servicing business was very similar to your thoughts, had the right to continue advancing payments to the note holder under another agreement and proceed to foreclosure of the assigned note and DOT. The seller is a note holder so a similar agreement could be worked out, but in the servicing arena we could foreclose under the DOT, just using a subordination I'm not seeing the perfection of the security agreement or assume getting the defaulting buyer off title.(?)

A CFD is an installment sale where title is not conveyed so under default an installment agreement terminates, no problem. The Sub-2 has conveyed title. :)

@Patrick Henderson,

You have to shuffle through all the hype on subject 2. You said you done 50 so you must be doing something right.

Joe Gore

@Bill Gulley

very simply look at the All inclusive Deed of trust that was created circa early 80's in CA.. it covers what your describing in one document. We did hundreds of these from 82 on ward... Its a great document. And protects the Seller by giving recorded notice that any default the seller must be notified.

Originally posted by @Jay Hinrichs :
@Bill Gulley

very simply look at the All inclusive Deed of trust that was created circa early 80's in CA.. it covers what your describing in one document. We did hundreds of these from 82 on ward... Its a great document. And protects the Seller by giving recorded notice that any default the seller must be notified.

Basically the same critter, AR, MO, KS, (and IL I don't believe) had a Special DOT, just wrote it out explaining the obligation secured. We never serviced anything out of CA.

This, the seller can foreclose and notice would be given as any other lien holder. :)

Originally posted by @Patrick Henderson:
Hi bill, You guys keep talking about secured positions and wraps but I don't see that as a subject to deal. In a situation where the owner is behind on payments and you want to assume the the note I could see bringing it current and taking poccession that way. And as far as assigning it, Due on Sale clause is the crux of the argument but that can be an issue as well in a wrap. So if you want to clarify a bit more on that it would be welcome.
I have done many Subject to deals for short sales. Around fifty. Here is my position and what I need to make it secure for me.

Purchase and sale aggreement (that price will change once the Bank and I have agreed on a price)

Special Warranty Deed (signed over to me)

Power of attorney (Everything that has to do with the property)

Authorization to Release Information

Cover your Assetts Aggreement (spelling out exactly what I will and will not be doing) That must be understood by both parties. I will not bring it current or take over the loan in any way.

While I will take over payments, or a wrap around, it must make sense financially of course.

My understanding of a Subject to deal is the deal subject to the existing mortgage, liens and or encumbrances. In my view a Subject to deal is one where the seller must give up certain provisions for subsequent short sale ie the five things above. Yes it would reconvey to the seller if no agreement could be reached. I have not used them in any other instance.


Patrick: your short sale strategy is VERY interesting to me. In the past 2 years I've taken a couple of properties sub2 the existing debt and then negotiated payoffs with the lender as the owner, with no short sale. No listing, no hardship documentation, no arms length affidavit, etc. So I wouldn't call that a short sale, just a discounted payoff. I did need authorizations to release info to work with the lenders. I'll be be getting power of attorney's as well on the next one.

Recently I bought a property with 60% equity, by getting the deed and reinstating. That's my idea of a straight sub2 deal.

What's your reasoning for getting a deed while you negotiate a short sale? And what happens when you and the lender don't come to a mutually agreeable price. What's your exit on these? Are you acquiring them for rentals? Or rehabs?

Kristine Marie Poe

In recent years CA OR Wa has passed legislation preventing equity skimming or buying sub too ... and if one buys sub too and resells within a certain amount of time they are limited to a % profit which is not much the balance has to go to the Trustor... Now this law is probably violated more than any other.. but it is there. And for me who is a RE broker and NMLS Mortagage Banker I could no longer do sub too unless it was Pro bono as the laws precluded us from taking more than a most fee for helping these unfortunate folks out.

Originally posted by @Patrick Henderson:
Hi bill, You guys keep talking about secured positions and wraps but I don't see that as a subject to deal. In a situation where the owner is behind on payments and you want to assume the the note I could see bringing it current and taking poccession that way. And as far as assigning it, Due on Sale clause is the crux of the argument but that can be an issue as well in a wrap. So if you want to clarify a bit more on that it would be welcome.
I have done many Subject to deals for short sales. Around fifty. Here is my position and what I need to make it secure for me.

Purchase and sale aggreement (that price will change once the Bank and I have agreed on a price)

Special Warranty Deed (signed over to me)

Power of attorney (Everything that has to do with the property)

Authorization to Release Information

Cover your Assetts Aggreement (spelling out exactly what I will and will not be doing) That must be understood by both parties. I will not bring it current or take over the loan in any way.

While I will take over payments, or a wrap around, it must make sense financially of course.

My understanding of a Subject to deal is the deal subject to the existing mortgage, liens and or encumbrances. In my view a Subject to deal is one where the seller must give up certain provisions for subsequent short sale ie the five things above. Yes it would reconvey to the seller if no agreement could be reached. I have not used them in any other instance.


Sorry, missed your post earlier. And I have not done a Sub-2 in connection with a short sale! I'd think the bank wouldn't receive the advantages of doing a short sale, the books, if a Sub-2 were done, the loan isn't paid off and being written down would be a yoke around the lender's neck, financially.

Yes, this doesn't address the due on sale issues, the only question is if you're going to take the risk do you secure that interest.

Disclosure is key, but it still doesn't keep you out of trouble, ruin a seller's credit and find out....LOL

Yes, there are authorizations to obtain loan information, insurance assignments, Special Warranty Deed conveying subject to, disclosure to seller on pitfalls, note/DOT, HUD-1, Tax report, notice of intention to sell to the lender......probably forgot something but I didn't need a POA. There were other contracts for servicing and assignments as well, not an investor issue. :)

@Account Closed Your thoughts from up there? Sorry didn't mention you before :)

Originally posted by @Jay Hinrichs :
@K. Marie Poe

In recent years CA OR Wa has passed legislation preventing equity skimming or buying sub too ... and if one buys sub too and resells within a certain amount of time they are limited to a % profit which is not much the balance has to go to the Trustor... Now this law is probably violated more than any other.. but it is there. And for me who is a RE broker and NMLS Mortagage Banker I could no longer do sub too unless it was Pro bono as the laws precluded us from taking more than a most fee for helping these unfortunate folks out.

I've read the CA equity skimming law many times. I don't remember anything in it related to profit limitations. The law specifically addresses the 1st year after acquiring the property and that rents need to be applied to the mortgage, otherwise it's considered equity skimming, even when there is no equity. There are exemptions, including the one where you can use the rent money for medical expenses . (For reals.) Also, you have to do five such skimming deals before you you're considered an equity skimmer. It's a stupid law. But I will go read it again since it applies to sub2 deals.

Kristine Marie Poe

Just and FYI it was a big deal here in Oregon and Washington.. I amassed most of my rental from 2000 t0 2009 on sub too's and had a much to large profile to be under the radar and when the new laws came into effect we stopped Sub too's cold turkey... I do believe sub too to be one of the best stratigeies out there as long as it complies to state law

Originally posted by @Account Closed :
I don't secure the seller with any recorded instrument in a sub2. There's a signed agreement that says what they are doing (selling sub2 existing debt, and often with additional liens) and what I'm going to do and by what date (reinstatement, make payments, pay in full, etc.). The agreement is binding. They can sue me if I don't perform. Interestingly, in my last two sub2 deals the mortgage was the least of the seller's concerns. They cared way more about income tax liens and HOA liens. And property taxes, even though property taxes attach to the property, lots of sellers are scared of governments and believe the county will come after them. Even after I explain that is not the case. I always pay them anyway, so I make that part of the agreement to make the seller feel better.

Sorry I missed your post too, you guys are sneaking in. LOL

Yes, you're the buyer, you might be motivated to deed it back, after working on a property you may not be so willing. The security is certainly for the seller, not the buyer.

There is another recent thread about Sub-2s that prompted this thread, I suppose most investors only see Sub-2s in this investing light, there are other acquisitions that can require taking title subject to other issues, not just an underlying mortgage. Sub-2 is a title strategy not a financing matter so much, but can be. :)

Originally posted by @Jay Hinrichs :
@K. Marie Poe

Just and FYI it was a big deal here in Oregon and Washington.. I amassed most of my rental from 2000 t0 2009 on sub too's and had a much to large profile to be under the radar and when the new laws came into effect we stopped Sub too's cold turkey... I do believe sub too to be one of the best stratigeies out there as long as it complies to state law

If you have any relevant info for CA I'd be grateful. I just re-read CA Civil Code of Procedures 890-894. It address rent skimming and makes no mention of profit limitations. Same with US Code 1709-2.

Kristine Marie Poe

there was a lady in Sacramento who taught a Sub 2 course in the day can't remember her name... I have not done any sub 2 in CA. In Oregon and Washington they passed laws about 08 or 09 on this activity.. And also to be specific its sub 2 when your seller is in Foreclosure.. If the note is not in foreclosure then the law does not apply.. Sorry I did not make that distinction in pre previous post.. In Or and Wa you must be a licensed foreclosure consultant to work with those in Foreclosure... Of course the law is broken everyday as investors either don't know the law or just ignore it.

When I re-read Bill Gulley's original post, I can't help asking what the primary concern is about.

As a buyer, I have a responsibility to perform as agreed.

For a seller who is concerned about a flakey buyer who buys sub-2 and takes possession, simple offset documents have already been described. In CA, a Performance Trust Deed is merely a deed of trust naming the seller as bene that references the performance of the contractual agreement, to be used in the event the buyer doesn't satisfy the terms.

I've never had a seller express their concern about my performance, so I've never offered such an risk offset instrument. I routinely use PTD's for other contractual purposes to reduce my risk, however.

I'm not in the habit of using AITD wraps however Jay Hinrich's post might be the cleanest way to alleviate a seller's concerns. If you happen to have a First Tuesday's venerable collection of forms, they provide two difference versions: one permits the underlying equity created by amortization to inure to the bene (former owner, in this case) and the other does not.

My investor buddy Bill Tan, who runs several real estate clubs in So Cal, has some great practical applications of wraps with tax benefits that make them very attractive which I had not considered in the past.

@Bill

Sorry, missed your post earlier. And I have not done a Sub-2 in connection with a short sale! I'd think the bank wouldn't receive the advantages of doing a short sale, the books, if a Sub-2 were done, the loan isn't paid off and being written down would be a yoke around the lender's neck, financially.

Yes, this doesn't address the due on sale issues, the only question is if you're going to take the risk do you secure that interest.

Disclosure is key, but it still doesn't keep you out of trouble, ruin a seller's credit and find out....LOL

Yes, there are authorizations to obtain loan information, insurance assignments, Special Warranty Deed conveying subject to, disclosure to seller on pitfalls, note/DOT, HUD-1, Tax report, notice of intention to sell to the lender......probably forgot something but I didn't need a POA. There were other contracts for servicing and assignments as well, not an investor issue. :)

I do not file the deed or any other instrument before the bank and I have agreed on a transaction. I don't want my or one of my entities name involved in any way with a default. I really don't know of any way to give any advantages to the bank when a seller has defaulted on their oblgations.Except to clear the books. I would be interested in hearing your thoughts on that, as well as how you utilize Sub-2.

What I do is secure my position with the seller so that if I do what I say I will. Then the rug can't be pulled out from under me once the seller finds out the negociated price and tells a friend and they complicate the deal. While the seller is already in a bad situation, Many people are hesitant to do wraps and options. They want it out of their name if they have to move out. I see only one way to help them at that point. A shortsale is better than a foreclosure. Not much but better.

As far as the sellers credit goes. I've done nothing that could ruin their credit or hurt it in any way. I do not prevent them from bringing the loan current, I take no responsibility towards or with their responsibilities except to secure with them my position for the negociation of a short sale. I do not take an assignment for the insurance because I have no equitable interest until I actually take possession at closing. I think that would be unethical. With HUD 1 or any other docs I leave that to title company.

@ Marie

The reason for the deed is that my position cannot be subordinated with the deed in place. I have hours and hours of work to perform. I don't want to lose my position for the lack of a document.

If I have 60% to gain in a deal I almost always buy it straight up. Then my position is secure with no complications. I could see if you are taking over payments you may want a SUB 2 involved. Essantially any deal that does not eliminate the prior lenders interest is a SUB-2 in some form or another.

@ Adam

I have not done a SUB-2 since the Dood-Frank Act. I would be interested in any and all illucidation on that.

Originally posted by @Patrick Henderson:
Hi bill, You guys keep talking about secured positions and wraps but I don't see that as a subject to deal. In a situation where the owner is behind on payments and you want to assume the the note I could see bringing it current and taking poccession that way. And as far as assigning it, Due on Sale clause is the crux of the argument but that can be an issue as well in a wrap. So if you want to clarify a bit more on that it would be welcome.
I have done many Subject to deals for short sales. Around fifty. Here is my position and what I need to make it secure for me.

Purchase and sale aggreement (that price will change once the Bank and I have agreed on a price)

Special Warranty Deed (signed over to me)

Power of attorney (Everything that has to do with the property)

Authorization to Release Information

Cover your Assetts Aggreement (spelling out exactly what I will and will not be doing) That must be understood by both parties. I will not bring it current or take over the loan in any way.

While I will take over payments, or a wrap around, it must make sense financially of course.

My understanding of a Subject to deal is the deal subject to the existing mortgage, liens and or encumbrances. In my view a Subject to deal is one where the seller must give up certain provisions for subsequent short sale ie the five things above. Yes it would reconvey to the seller if no agreement could be reached. I have not used them in any other instance.


Do you mean you're entering into a Sub-2 contract to simply secure a position to ultimately change the contract later to do a short sale?

Here's the issue, or misconception or cloudy part, for me, perhaps others; that you have done 50 Sub-2 deals in short sales.

I have acquired discounted notes made by distressed borrowers, before short sale was ever formalized. That was selling short, but the principal was not forgiven to the borrower.

A formalized short sale as we know today is a write down of principal by a lender. There is a loss, however, how those losses are accounted for in banking/mortgage operations, the federal guidelines, when followed, allow the lender to escape surrounding negative issues, reserves for losses and recognition of losses, these allowances are the motivation for a lender to do a short sale.

To my knowledge the remaining loan amount must be paid off in connection with a short sale to be a short sale, the remaining balance is not retained on the books or in portfolio as it would be a loan that was not paid as agreed, charge offs effect reserve requirements so it is not a beneficial thing to allow a "bad loan" to remain on the books.

A Sub-2 transaction, as discussed here, is when a buyer unofficially assumes the payments of an underlying mortgage, the mortgage is not modified and it remains as a performing loan. Now, a borrower can get behind, but to do a Sub-2 the buyer will bring the loan current.

Additionally, most Sub-2 deals are accomplished without bringing attention to that note holder due primarily to the issue of the due on sale clause. Not getting into tactics over this matter, just saying most investors run and hide doing Sub-2 deals.

My thought is then, what you are doing, if you are allowed to do a Sub-2 transaction with a lender's consent, must be some other arrangement and not a short sale under those parameters.

I suppose we can get into other Sub-2 arrangements that have nothing to do with the assumption of an underlying mortgage, that was mentioned in another post yesterday, as a Sub-2 is a title matter, not a financing matter. But here, we are assuming the deal is about an unofficial assumption of an underlying mortgage.

Now, a bit to other comments. In the old days I purchased Sub-2 without any security arrangement for the seller, but as times changed and concerns became better known I used the security agreement. My sellers were never concerned, to my knowledge, of the ability to pay, that was always well covered, but not really the point. I've never been late on a mortgage and giving security interests in collateral isn't even an issue, it's given as evidence of fair dealing, appearing to be above board and as an assurance to any underlying mortgage holder that the interests in title may be taken in the event there ever was a foreclosure.

So, frankly, I have no idea what you're doing or if you even meant that you were assuming an underlying mortgage where there was a forgiveness of debt. I don't believe this has ever been mentioned on BP either, so if you can clear this up it would help readers. :)

Does anyone just have seller Quit Claim the property to you?  

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