Sub2 = Class2 Felony in IL?

Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes

Recent changes to the Illinois Mortgage Rescue Fraud Act (see https://www.ilga.gov/ftp/Public%20Acts/104/104-0553.htm and https://ilga.gov/Legislation/ILCS/Articles?ActID=2795&Ch...) seem to make purchasing sub2 illegal. Assuming anyway that the mortgage is delinquent more than 30 days or in forecourse and the investor "solicits" the homeowner. Which would seemingly apply to nearly all investor related transactions. Specifically, Section 50(b)(10) states that all liens must be extinguished or the investor must assume "all liability" for the lien being foreclosed without without violating the terms of the mortgage. Simply ignoring the due-on-sale clause is now considered criminal mortgage rescue fraud. A Class 2 Felony. Anyone else have a different take?

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Chris SeveneyBusiness Member

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

1mo

Maryland has similar law and severe penalties for contacting people in foreclosure as they consider it predatory.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
1mo
have not read the link but take you at your word the description is accurate.. it was bound to happen especially when Morby went wide and deep on sub to and unleashed thousands of not ready for prime time investors / students into this model.. I have done a lot of sub too in the past and would do it today on the right situations.. I suspect a lot of bad actors created very messy situations for naive home owners that got totally fubared and went loud with what happened to them.
Now if this is ONLY if the mortgage is in foreclosure then its going to be a limited set of circumstances and many states have enacted foreclosure rescue laws in teh last 20 plus years.. Oregon and Washington did it in 08 for instance.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
1mo
Yes, it is unfortunate. When done properly, they really can be a good, and even the best, option for people in certain circumstances. But, the only thing that really surprises me here is the severity of the penalty. I remember someone said on this board years ago there is not due-on-sale jail. Well, now, apparently there is!
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
1mo
Just do an assumption which releases the homeowner of any liability, I have closed two of those for clients in the last year. Not every deal allows it but if have the capital to fill the gap there are many opportunities.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
1mo
@Henry Lazerow My understanding is that conventional loans cannot be assumed and FHA, VA, and USDA only by individuals who intend to occupy. Am I missing something?
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- Glen OlsonPro Member
  Member since 2022 · 7 posts · 16 votes
  4w
  This is not correct. VA loans can be assumed by non-owner occupied buyers. The person assuming the loan does not need to be a veteran either, despite what some lenders might think. The point of clarification is that the eligibility for the VA loan must remain with the original buyer if the purchaser is not going to occupy the home. That means that if they have an outstanding loan balance of $300,000 even though a new person assumes the loan, that $300K goes against the seller's total VA eligibility. Eligibility amount varies by county but standard is currently $832,750 total. In this scenario, the seller would only be able to use $532,750 more VA eligibility to buy their next home.
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
1mo
Nope I have been realtor on VA and FHA non owner occupant assumptions. It's allowed. You may need talk to management though, for one deal they said no and then later said your right that is allowed and it closed. The lenders do not make much on assumptions so getting them to go along is a pain.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
1mo
Interesting. I guess it really is just all who you know.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
1mo
Maryland has similar law and severe penalties for contacting people in foreclosure as they consider it predatory.
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- Jamie Parker
  Real Estate Investor · Memphis, TN · Member since 2016 · 404 posts · 131 votes
  4w
  So contacting homeowners in foreclosure is predatory even if the bank is made whole and the seller gets some cash out of the deal?
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
4w
Quote from @Rick H.:
Recent changes to the Illinois Mortgage Rescue Fraud Act (see https://www.ilga.gov/ftp/Public%20Acts/104/104-0553.htm and https://ilga.gov/Legislation/ILCS/Articles?ActID=2795&Ch...) seem to make purchasing sub2 illegal. Assuming anyway that the mortgage is delinquent more than 30 days or in forecourse and the investor "solicits" the homeowner. Which would seemingly apply to nearly all investor related transactions. Specifically, Section 50(b)(10) states that all liens must be extinguished or the investor must assume "all liability" for the lien being foreclosed without without violating the terms of the mortgage. Simply ignoring the due-on-sale clause is now considered criminal mortgage rescue fraud. A Class 2 Felony. Anyone else have a different take?

Washington State has had a law on the books that it's a felony to approach someone who may or thinks they may get into foreclosure unless they are a lawyer or a real estate agent or mortgage lender. I don't have it memorized, I 've posted it before, but it was a couple years before Morby said he had the attorney general of California's approval. (Yikes!) Yep. He said that. The video is still up at Youtube. What he in reality had was a guy from one of the districts of California for an interview and twisted it as he so often does.

Anyway, foreclosures, subject to, crossing the freeway at rush hour, "ya gotta know what yer doin'"
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
4w
I like lease option contracts because they can be similar to subject to, but the deed doesn't transfer so it doesn't trigger a lot of these issues.

For those well versed in both lease options and subject to, what issues could arise from just doing an option agreement that can't be mitigated in the option agreement itself? Let's exclude Texas from this conversation because they have different anti-lease option laws there.
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- Chris SeveneyBusiness Member
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  Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
  4w
  @Shiloh Lundahl - agree like the lease options a lot better. Much cleaner. One thing we do based on attorney feedback is make sure the lease and the option are two separate documents. Also have the lease allow us to sublease it
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
4w
The problem with doing a lease option, especially with someone experiencing financial difficulties, is that any judgment liens against them will attach to the property.
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- Jay HinrichsBusiness Member
  Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
  3w
  L Option really is not appropriate with a distressed buy.. as you not lots of things can go wrong.. but you can record the option so you jump in front of anything else but then you would have to litigate to keep your position which who is going to do that on the average sub to that a buyer usually has very little up front cash into.. L O like Shiloh is talking about is relevant for him as a SELLER not really a buyer at least in my mind.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
3w
@Jamie Parker In a few states it is illegal. In others, such as Illinois now, it is highly regulated. In addition to requiring that all liens be paid off, IL now also requires a contract that includes a right to cancel, that all transactions are handled by a title company, that the contract be for no less than 82% of fair market value, etc. And to your question, yes, there are bad actors out there looking to prey on people, but I would say a small minority, and selling the property to an investor can be the best option people have, especially if it needs a lot of repairs. It's not like people out there in these situations have a lot of other really good options.
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- Jamie Parker
  Real Estate Investor · Memphis, TN · Member since 2016 · 404 posts · 131 votes
  3w
  @Rick H.
  The additional regulation probably makes it a blue ocean for investors that understand how to "correctly" navigate the situation. 82% of fair market value makes could cause some investors to skip the sub-to and wait for the auction. I have never completed a Sub-To transaction. However, i have closed the gap in understanding who would benefit from a Sub-to scenario.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3w
Quote from @Rick H.:

Recent changes to the Illinois Mortgage Rescue Fraud Act (see https://www.ilga.gov/ftp/Public%20Acts/104/104-0553.htm and https://ilga.gov/Legislation/ILCS/Articles?ActID=2795&Ch...) seem to make purchasing sub2 illegal. Assuming anyway that the mortgage is delinquent more than 30 days or in forecourse and the investor "solicits" the homeowner. Which would seemingly apply to nearly all investor related transactions. Specifically, Section 50(b)(10) states that all liens must be extinguished or the investor must assume "all liability" for the lien being foreclosed without without violating the terms of the mortgage. Simply ignoring the due-on-sale clause is now considered criminal mortgage rescue fraud. A Class 2 Felony. Anyone else have a different take?
I know a lot (most) investors active on BP invest primarily if not exclusively in SFR; most service providers make their living primarily with SFR. And the best source of SFR to invest is motivated homeowners. But, (not an I told you so, just a fact) 23 years ago I made a decision that I would not transact with homeowners either on the buy side or the sell side, except concerning my personal use residences. And I haven’t regretted my decision since.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3w
Quote from @Rick H.:

Recent changes to the Illinois Mortgage Rescue Fraud Act (see https://www.ilga.gov/ftp/Public%20Acts/104/104-0553.htm and https://ilga.gov/Legislation/ILCS/Articles?ActID=2795&Ch...) seem to make purchasing sub2 illegal. Assuming anyway that the mortgage is delinquent more than 30 days or in forecourse and the investor "solicits" the homeowner. Which would seemingly apply to nearly all investor related transactions. Specifically, Section 50(b)(10) states that all liens must be extinguished or the investor must assume "all liability" for the lien being foreclosed without without violating the terms of the mortgage. Simply ignoring the due-on-sale clause is now considered criminal mortgage rescue fraud. A Class 2 Felony. Anyone else have a different take?
Criminalizing property ownership is Lenin’s first step in creating the perfect worker’s “paradise”.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
3w
Lenin? Is that the mayor of New York? I thought his name started with an M or something.
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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
2w
This is a useful distinction to draw out.
What you're describing in Illinois sounds like it targets a very specific subset of sub-to: distressed sellers in foreclosure or near-foreclosure who are being "rescued" by investors ignoring the due-on-sale clause. That's a different risk profile than a clean off-market sub-to from a seller who just wants out.
Most states have had foreclosure rescue statutes since 2008. Illinois is applying that same logic to the mortgage lien itself now, which makes sense when you think about the amount of press "creative finance" has gotten in the last three years. A lot of inexperienced investors got trained up and let loose with a model that has real legal and ethical landmines if you don't know what you're doing.
The cleaner move in most of those situations is a formal assumption anyway. FHA and VA loans are assumable by law, fully transparent to the lender, and don't trigger due-on-sale at all. If a seller has a distressed situation AND a government-backed loan, you can often get them relief without touching the legal gray zone at all. I do these in Colorado full-time.
For your specific question on the Illinois statute, I'd want to see how broadly "solicitation" is defined. If cold-calling or direct mail to a homeowner 31 days past due counts, that does sweep in a wide range of activity. Worth having a real estate attorney in IL pull that apart before doing anything there.
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Crystal SmithPro Member
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Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
2w
Quote from @Rick H.:
Recent changes to the Illinois Mortgage Rescue Fraud Act (see https://www.ilga.gov/ftp/Public%20Acts/104/104-0553.htm and https://ilga.gov/Legislation/ILCS/Articles?ActID=2795&Ch...) seem to make purchasing sub2 illegal. Assuming anyway that the mortgage is delinquent more than 30 days or in forecourse and the investor "solicits" the homeowner. Which would seemingly apply to nearly all investor related transactions. Specifically, Section 50(b)(10) states that all liens must be extinguished or the investor must assume "all liability" for the lien being foreclosed without without violating the terms of the mortgage. Simply ignoring the due-on-sale clause is now considered criminal mortgage rescue fraud. A Class 2 Felony. Anyone else have a different take?
@Rick H. Thanks for posting this. We did a Sub2 late last year & had no knowledge of this legislation. The property was not distresed & sub2 is not part of our main strategy, but we regularly make offers on properties in pre-foreclosure & we evaluate sub2 as an alternative offer. The part of this act that I think is arbitrary is determining what is 82% of the market value. How did they come up with 82%?
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
2w
@Crystal Smith The changes just went into effect in July, so anything from last year should be fine. I have no idea how they decided on 82%. Basically, what they did is broaden the scope of Mortgage Rescue Fraud Act, which had previously dealt only with paid consultants and those pitching leaseback repurchase agreements, to now include anyone who "solicits" an owner facing foreclosure or just more than 30 days past due. And it goes far beyond effectively banning Sub2. In addition to the 82% of fair market value minimum purchase requirement, there are a number of other requirements that apply to the contract, such as a mandatory 5 day right to cancel. This was all buried in the tax sale overhaul bill.
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Rick H.Pro Member
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Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
2w
@Ryan Thomson I am still unclear on this whole FHA assumption business. According to HUD, they can only be assumed by someone who would qualify for the loan in the first place, meaning an individual owner occupant, among other things. Maybe you are placing qualified people in these homes, I don't know. But, what constitutes a "solicitation" is a great question. It is not clearly defined. Courts have ruled that offers involving transaction related services or where there are fees involved, are effectively solicitations, but not simple offers to purchase a house for cash without these other elements.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
2w
Hi Ryan
You make some interesting points
To look at it a little differently, assuming a loan I have personal liability; buying subject to I don't (unless I sign a guarantee with the property owner). As an investor these are different risk profiles. At the very least I want a higher ROI if I take more risk, so that would be a lower price I'd be willing to pay for the property. Or alternatively, I may not be willing to take the risk of personal liability on the existing loan at all, in which case I'd pass on the deal if only an assumption and not a sub to was available.
If I’m the only buyer, or the buyer willing to pay the highest price, or the fastest to close buyer, or even an additional buyer creating more competition, and I back away because purchasing under sub to has become illegal, the seller either can’t sell or sells for a lower price. He does receive “protection” from the outcome of selling and the buyer defaulting, but in many cases the cost of this will be an inability to sell and foreclosure. These type “consequences” of governmental action are hard to understand and therefore usually totally ignored. It’s throwing the baby out with the bath water.
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- Jay HinrichsBusiness Member
  Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
  2w
  Don foreclosure sub to rescue was a big part of my business from 2002 til 2008 when the laws change did many probably well over 100 of them. But for me it was just a way to acquire flips without paying cash or tying up my bank lines.. I never bought them for long term hold 99% of them I exited within a year and the underlying mortgage was retired.
  The issue is many wont know the law and this will continue unabated however there is no doubt of the unintended consequences this creates more properties going to foreclosure sale and OREO status the owners whether they sell sub to or get foreclosed on have the same result they are out of their house and once your in foreclosure your credit is trashed. So no major benefit to them getting rescued vis a vi credit score etc.
  I think the real issue though is sellers who are not in trouble do not realize the risk of selling sub to bad actors get into title rip rents never pay mortgage and totally screw up the sellers credit.. I have seen this play out personally more times than I care to witness.. Bad actors knowing they are not personally responsible you know RE sociopaths no empathy all about them.. This is the major risk I see. Granted plenty of folks like my company that paid all these mortgages off and did not have a criminal intent. :)
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