LaVale, MD · Member since 2009 · 34 posts · 3 votes
To the experts here,
Perhaps asking for legal advice is inappropriate in this forum but if I could get an off-the-record opinion I would be deeply appreciative.
The scenario is this, if I were to locate a property owner who is in the process of being foreclosed on, offer pay off their overdue payments, take over their loan payments, and hand them some money to move with, am I opening myself up for any risk?
This arrangement would be made through an attorney and the title for the home would be held by the lawyer until such time as the loan was paid off when it would be deeded over to me.
The intent is to save the closing costs associated with a loan and hopefully pick up a loan where the bulk of my payment would be going towards the principal. This also means that this deal would be done privately without the lender's knowledge.
As Justin referred to, with a Subject To deal the biggest risk is the Due On Sale Clause. If title is transferred the DOS Clause allows the bank to accelerate the note and foreclose on the property.
As Justin referenced the biggest risk comes when you change the insurance over. One way to mitigate that is to add your name to the insurance without taking the original owner's name off. You would be responsible for paying it, but then the original owners name would still be on the policy. You would have to get the original owner to sign off on any insurance proceeds but it won't alert the bank to the title transfer.
I would also echo Justin here that you must get the property deeded to you at the onset of the deal. The risk without having a recorded deed is just not worth it.
Sounds like you are doing a sub2 transaction without the getting the deed immediately, which is not good for you.
Before you make any type of payments to the homeowners or to the banks. Get the deed in your name. Otherwise, there is nothing to have the homeowner say "thanks for bringing me current, but we are no longer interested in selling."
I'm not sure of your exit strategy, so explain that further. Also, do some searches on subject to investing and due on sale clause.
The bank will find out that title transfered when you put the insurance in your name. But, you brought the bank current so why would they exercise the due on sale clause? Its a risk, but a minimal one in my opinion.
As Justin referred to, with a Subject To deal the biggest risk is the Due On Sale Clause. If title is transferred the DOS Clause allows the bank to accelerate the note and foreclose on the property.
As Justin referenced the biggest risk comes when you change the insurance over. One way to mitigate that is to add your name to the insurance without taking the original owner's name off. You would be responsible for paying it, but then the original owners name would still be on the policy. You would have to get the original owner to sign off on any insurance proceeds but it won't alert the bank to the title transfer.
I would also echo Justin here that you must get the property deeded to you at the onset of the deal. The risk without having a recorded deed is just not worth it.
I certainly wouldn't be sending the mortgage payments to the ex-owners, that would be asking for it. I don't understand how get the property deed could get put in my name if the bank holds the deed until the final payoff.
I do understand that the bank has a right to ask for full payment when property they hold the note on is sold and I am guessing that the best way to make this deal go through is to make sure that the bank is unaware that any transaction has taken place.
With respect to an exit strategy, this would be a primary residence, even though if the technique works I might consider adding in a few investment properties as well.
I'll read up on the Subject To deal mechanism and see if I can't come back with a few more educated questions.
I don't know Maryland law, but the bank does not hold the deed, they hold the deed of trust and promissory note (or equivalent). The homeowners hold the warranty deed (or equivalent).
You want the warranty deed, and you'll make payments directly to the bank on the promissory note. Make sense?
If the bank was holding the deed, this would be a land contract. That's possible, but extremely unlike if the lender is a bank. The owner holds the deed, and gives the bank a mortgage or deed of trust (different names for essentially the same thing) and a promissory note. The owner can give anyone else a deed that transfers ownership.
You buy the house from the owner, subject to the existing note. A title company can do that, although many won't.
Get a limited power of attorney from the seller. That will allow you to deal with anything that comes up down the line without dealing with the seller.
I like Ryan's idea of adding your name on the insurance. You MUST have insurance or you put yourself at huge risk. If you have the POA, and need to make a claim, you can use the POA to deal with the claim yourself.
I think the risk of the bank calling the note due right now is low. They're busy with foreclosures, and interest rates are low. However, they will eventually catch up, and I think its possible rates will skyrocket at some point in the future, since the government is racking up bigger and bigger debts. If that happens, they will get agressive about enforcing these clauses. That's exactly why they're in there to begin with.
There must be some reason you don't just go get a new loan yourself. Work on resolving that reason and getting yourself in a position to refinance as soon as possible.
I don't know Maryland law, but the bank does not hold the deed, they hold the deed of trust and promissory note (or equivalent). The homeowners hold the warranty deed (or equivalent).
You want the warranty deed, and you'll make payments directly to the bank on the promissory note. Make sense?
Justin,
Your advice jives perfectly with my reading. Yes, it makes sense now.
Wow, thanks, I really appreciate the time you put into this message.
In order to maintain continuity, I opted for the in-line method.
Originally posted by Jon Holdman:
If the bank was holding the deed, this would be a land contract. That's possible, but extremely unlike if the lender is a bank. The owner holds the deed, and gives the bank a mortgage or deed of trust (different names for essentially the same thing) and a promissory note. The owner can give anyone else a deed that transfers ownership.
You buy the house from the owner, subject to the existing note. A title company can do that, although many won't.
I read elsewhere when I was trying to catch up that title companies can be used to do this as a service. Are you saying that they don't necessarily offer this service?
Originally posted by Jon Holdman:
Get a limited power of attorney from the seller. That will allow you to deal with anything that comes up down the line without dealing with the seller.
I ran across this suggestion elsewhere and I am assuming this is something that a RE attorney can put together for me.
Originally posted by Jon Holdman:
I like Ryan's idea of adding your name on the insurance. You MUST have insurance or you put yourself at huge risk. If you have the POA, and need to make a claim, you can use the POA to deal with the claim yourself.
Absolutely, insurance is a must. It wouldn't make sense to risk exposure like that for such a pittance. In my reading I have also picked up another tip to take out an additional insurance policy that covers the property while leaving the original policy in place, with the benefits for the original policy being directed to me, of course.
Originally posted by Jon Holdman:
I think the risk of the bank calling the note due right now is low. They're busy with foreclosures, and interest rates are low. However, they will eventually catch up, and I think its possible rates will skyrocket at some point in the future, since the government is racking up bigger and bigger debts. If that happens, they will get aggressive about enforcing these clauses. That's exactly why they're in there to begin with.
This is what having backup plans are all about. :-)
Originally posted by Jon Holdman:
There must be some reason you don't just go get a new loan yourself. Work on resolving that reason and getting yourself in a position to refinance as soon as possible.
There are a couple of reasons that I would prefer to not go the conventional route. The first is that the area I live in is floating in real estate that relatively inexpensive. This created a problem where the FHA will not touch any mortgage under $80K. As I am looking at nice homes in the $50K to $65K range, FHA backed mortgages are out of the question. In addition to that, every mortgage officer I talk to seems to want to add an aggravation fee to these mortgages due to their size.
The other issue, one that is arguably able to be fixed, is that I am self-employed (forever) and my income has taken a hit over the last two years. While paying the mortgage on a $65K home is easy enough (I pay more than that on a rental currently) being able to have President Obama pay 10% of the cost of the home sounds good to me right now and the prices here are irresistible.
In "the west" closings are always done by title companies. In "the east", closings are done by lawyers. Not sure where Maryland fits. Here in CO, you'd do this transaction with a title company. I know at least one that would do a subject to, but its just a local company. Some will look at it and say they don't want to do it. Some will say "what are you talking about" if you ask if they will do a subject to. If you explain they might do it.
Maryland has some funky RE laws. A good, investor friendly attorney would be helpful.
A couple of other alternatives would be to do a land contract, a wrap, or a lease option.
With a land contract, the seller retains owner ship. You have a contract with them to buy the house for specific terms. Once the contract is fufilled, you get the deed. You get possession right from the state. This is essentially how you buy a car. You get possession, but the lender holds the title until its paid off.
With a wrap, you get the deed. You and the seller create a new note between you and the seller. In this case, you'd just make it have exactly the same terms as the existing note, and you'd make the payments directly to the old lender.
Neither offer any real advantage other than one of these might be easier to get an attorney and title company to do.
Lease option is the least desirable. You get possession, but you're just a tenant. You have the option to buy in the future. You get possession, but nothing else. This won't qualify for the tax credit, the others do (though, see your accountant.)
The insurance is going to be the most likely way the lender will find out its been sold. They're not going to be doing searches of public records.
Get a "authorization to release information" from the seller and speak with the lender(s) to be sure you understand the loan terms and status.
"You must be the primary insured on the policy which means you must cancel the existing policy and start a new policy with you as the primary. Then, you can add the seller as a co-inured. If you keep the seller's existing policy and add yourself as a co-insured then when the house burns down you won't be covered". This is quoted from an insurance agent with Nationwide as I checked into this subject as well.
The problem with cancelling and starting a new policy is that the bank will know about it, as stated earlier in this post.
"You must be the primary insured on the policy which means you must cancel the existing policy and start a new policy with you as the primary. Then, you can add the seller as a co-inured. If you keep the seller's existing policy and add yourself as a co-insured then when the house burns down you won't be covered". This is quoted from an insurance agent with Nationwide as I checked into this subject as well.
The problem with cancelling and starting a new policy is that the bank will know about it, as stated earlier in this post.
Chris,
Thanks for your input. This is exactly why a second policy might be the smart way to go with the seller being contractually obligated to step out of the way should anything happen to the house which would require a claim.
The issue that I have not yet been able to resolve is how to protect myself in case the bank does execute the Due On Sale clause other than to already have financing in place.
However, the closing costs around here on a $50K loan have been quoted to me at upwards of $3,500. Throw in a housing inspection and an attorney and I'm approaching 10% of the sale price to get into the loan. Ouch.
Another method that was suggested was to use a hard money lender for 30 days while I process a Home Equity Loan - but I am unsure if that is going to be any more to my advantage.
I honestly do appreciate your help in this matter,
The issue of "subject to" deals doesn't seem to be a problem with some banks.
Recently I met a couple of bankers who were advertising that they do loans for investors who intend on selling their investment properties by offering seller financing. That, to me, is the same thing as "subject to" because you are selling the property to someone else who would be "assuming" your existing credit terms.
I've also met homeowners who had bought their house by "assuming" the loan of the previous owners. The bank agreed to the deal and put the paperwork in the new homeowner's name.
I may be way off here but it all sounds like the same thing to me.
Another friend of mine managed several banks for a number of years and I discussed "subject to" deals with him. He agreed that banks wouldn't be interested in accelerating the note on a paying customer.
I guess the main thing is to be forewarned so that you won't be surprised by the unlikely scenario of the bank calling the loan due.
After checking with two real estate attorneys here in Maryland I find that a Subject To contract would likely put me on the wrong side of Maryland's Protection of Homeowners in Foreclosure Act.
If you are interested, I also posed this question to FreeAdvice.com (good resource, by the way) and the answer can be read .
Talk about the law of unintended consequences! :roll: