Property sold subject to (through a title company)??

Question

Wondering if this is common and what we should be wary of as the note holder...

- We originated a note on a property (in Brazil, IN; Clay County in case that matters).  We went through a local title company for the closing.  The mortgage note and deed are recorded.  Our mortgage has a due on sale clause.

- Our borrower performed for a year before falling behind. They are currently about 8 months behind.

- Yesterday we received a call from a company that purchased the property from our borrower.  The seller was calling to see about bringing the note current.  We confirmed that they purchased the property through another title company and a deed in their name has been recorded.

- We contacted their title company and asked how they could issue a new deed without bringing the underlying mortgage note current, or notifying the mortgage holder that a transaction was taking place. The response from the lawyer was "We were retained to make a title transfer only, which we did, subject to all liens of record. Your lien remains in the same position as prior to the transfer and you still have all remedies available to you per your loan documents."

We're familiar with the subject to purchase strategy but have never come across a title company that would participate in the transaction. Is this common or appropriate for a title company?

The current 'owners' are a SFR rental company that appears to want to bring the note current.  Assuming they do so within the next 2 weeks, we're inclined to let them keep operating under the existing mortgage and not exercise the due on sale clause.  We do plan to sell the note once it's performing again.  Any words of warning should we let them keep paying the note?  Would it hamper our ability to sell the note?

Thanks in advance.

Peter Walther · Answer

Why would you not want an additional guarantor of the debt?  While the house is security, at the time of foreclosure it might not be worth the amount of the debt in which case the Borrower and guarantor if any may be personally liable for the deficit.

As I mentioned in my original post while the mortgage is still a lien it's priority might change, that's why I recommended getting an endorsement to the title policy.

I'd check with an IN attorney to be sure that failing to exercise the due on sale provision couldn't result in a possible successful defense of waiver to its later use.

Ned Carey · Answer

Your rights under your mortgage have not changed at all.  you are in a better position now than you were since the former owner was in default. It wouldn't concern me in the least.

I am sure the title company had your mortgage as an exception to the title insurance.

You  might look at your loan documents. Is this considered a default? If it is, is there a default interest rate that the loan changes too? You can potentially use this situation as a negotiating tool, or simply be happy you now have a performing note.

Peter Walther · Answer

I agree with the prior posts that a title company does not have an obligation to see to the payoff of your mortgage.  I do disagree about possible problems with your scenario.

First, if you do decide to not call the Note due, I, as some of the other posters noted, would require the Grantee to assume and guarantee the debt.  I would also contact the title agent that issued the title policy and ask for an endorsement to change the effective date of the policy through the recording of assumption agreement.  If you don't there may be a possibility of a subordinate lien holder claiming the change of the Borrower caused a novation and therefore, they are now in a superior position.  I'm not saying it's a winning argument, but with an endorsement the problem should be covered under the title policy.  I suggest you check with a good IN real estate attorney for advice.

In addition, in my experience a commercial borrower such as the new owner pays a high interest rate because of the increased risk.  I assume your Borrowers are individuals who lived in the property and owner occupants generally pay a lower interest rate.  I'd also be concerned that the Grantee took title without checking with you first.  Do you know what the buyer paid for the property?  Does it seem reasonable?  Does it appear they have any skin in the game or did they buy it for the cost of recording the deed?  You wrote the Note is currently eight months behind, personally, I'd have started the foreclosure by now.  I've seen far to many subject to buyers never make a payment but collect rent while the property is being foreclosed on since they don't have any liability for the debt.  Just a few concerns I'd have.

Adam Walter · Answer

Interesting situation.  I'm in Ohio and I wouldn't have a problem finding a title company to handle the transaction.  I just purchased a property subject to 5 years of back taxes and a $42,000 judgement lien and went through a title company.

In your situation, it seems that having the rental company catch up the payments would be in your best interest.  I think trying to sell a note where the note holder and property owner don't match would create red flags and probably decrease the value of the note.  Would it be beneficial to redo the note in the rental company's name?  What are the pluses and minuses to doing a new loan?

Marco Bario · Answer

@Bryan Hartlen -

I wouldn't modify the loan or allow an assumption by the new property titleholder.

The ultimate guarantor on any loan secured by real estate is the property. Your lien is attached to the property until it's released no matter who is on title.

So long as you're covered by equity, you're in good position. You could exercise your due on sale provision at any time you wish.

The payor needs to keep property taxes and HOA assessments (if applicable) current, and name you as loss payee on the hazard policy. Also, enforce the requirement which should be in your loan docs stating they provide current proof of insurance.

Bryan Hartlen · Answer

Thanks Bob. We do have a due on sale clause and we know that selling notes requires a discount. We started with this asset as a non-performing note purchase and has transitioned through REO to performing seller financed note to non-performing and we expect performing again. That said, getting full face value through a refi would be preferred. But getting it current is the first priority - and they are in the process of bringing the account current.

Bob E. · Answer

@Bryan Hartlen  You have an interesting situation here.  If you note was drafted well it should include a due on sale clause.

A few things to consider, if you get the note performing again and then go to sell it any note buyers will likely want a discount.  With inflation at close to 8% and interest rates likely to go up this increases the likelihood of any buyer wanting a discount.  If you want to hold the note you likely have enough leverage to push them to sign a new note listing them as the responsible party.  If you want to sell the note any buyer will likely want the current owner as the responsible party on the loan.  If you find a buyer that does not want the current owner on the loan than they probably lack the experience to responsibly invest in this note and should be eliminated from consideration.

I would approach to buyer about refinancing you out of the property.  Make them buy the note for 100% of face value, much better than selling for a discount latter.

Factors that will affect your decision are the current LTV and rate on the note.

Bryan Hartlen · Answer

Thanks Marco.  Why wouldn't you modify or allow an assumption?  Our plan is to sell the note once it's performing and I would think that matching names on deed and note would make that a cleaner and higher valued sale (this is my opinion - so far haven't heard anyone confirm or correct this logic).  And even if we planned to hold the note; I would think that getting the new owner to assume or guarantee would make things cleaner if they went delinquent and we had to FC?

Peter Walther · Answer

If you search "assumption of mortgage form" you'll find various templets, some free others at a cost.

Property sold subject to (through a title company)??

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