Quit claim deeds, title insurance and the ‘due on sale’ clause…

2 Replies

Hello gang,

I would like hear what experienced investors (particularly experienced wholesalers) have to say about quit claim deeds.

It is my understanding that quit claim deeds provide a means of offering a motivated seller with an alternate solution in scenarios where is little to no equity.

As wholesaler, I could put the property under contract subject-to the existing mortgage and then turn around and assign that contract to an end-buyer.

My specific questions are:

1) Is there ANY way to avoid triggering the DUE ON SALE clause, or would working with the seller to put the property in a trust the only way to avoid the bank foreclosing on the property?

I know that the likelihood of the lender calling the note due is minimal, nevertheless it IS possible. Its my understanding some lenders actually audit their portfolios periodically to check for changes in the chain of title.

2) How can I avoid cancellation of the title insurance coverage policy when using a quit claim deed? Is there some workaround or legal loophole one can use to keep the policy from going null and void or can a new policy be taken out?

3) what happens at the end of the subject-to purchase term of say for example five years? Would I (or the end buyer I assign my contract to) have to sale the property in hopes that it has appreciated in value and pay off the note? This would of course cause for the property to drop off the original seller’s credit…

I’d appreciate any feedback you can give. thx. J

First of all a Quit Claim Deed is a way of conveying title without any express warranties regarding the condition of the title. There could be a dozen other owners and/or liens on the property that you have no idea about. The person executing the deed could possibly have no interest in the property to convey! I could execute a Quit Claim Deed for your house. It just says "I convey any interest I have in this property to this person." When I was in the title insurance industry we put very little faith in a QCD alone. We always verified where it came from and what exact interest it conveyed. When dealing with title one should always deal in Warranty Deeds or their equivalent. A Warranty Deed actually has a bit more bite to it in regards to how clear the title is.

1) In regards to the DOS clause there's really no way to totally avoid triggering it unless you just plain don't file the deed with the county. When the deed is filed the mortgage holder can then see the borrower is no longer in title to the property. How soon they find this out will depend on how often they check title. Most often this occurs when they sell the loan to another company. Also, just to clarify...calling the note as a result of the Due On Sale clause is not the same as a foreclosure.

2) I kind of touched on this above. If you have title insurance the insurance company will typically issue a Warranty Deed rather than a Quit Claim as they have verified the chain of title back at least 20 years (sometimes 40 or more) so they feel confident enough to provide a Warranty of Title (i.e., an Owners Policy). If you're asking about the seller's  original title policy from when they purchased the property then that coverage is typically non-transferable and will terminate when they convey out of the property. You can always purchase a new owner's policy when you purchase the property (and I would highly suggest doing so). If you end up getting the policy from the same underwriting company you can often get a discounted re-issue rate.

3) If you're picking up the property Sub-To and indicate you will make these payments for a certain period I would make sure you either have cash to pay off that balance by the end of the period or refinance it into your own name if you plan on keeping it. Selling the property is also always an option.

Hope that helps. I"m sure other more experienced folks will fill in any gaps in what I've provided above.

Hey Jim!

You have no idea how helpful this was. Thanks for being so thorough. I know it was more like three questions wrapped into one...

As far as the 'due on sale' clause is concerned, the reason I mentioned the term "foreclosure" is because, isn't that what the lender would do if they were to call the note due and the party on title is unable to come up with the funds necessary to pay off the note in time? If this is not the case, what recourse would the lender have at their disposal to take back control of the property? Would you recommend putting the property in a trust? (And yes, I do understand you're not an attorney and this is not legal advice.) just an opinion. one that I would still value greatly...

I understand what you're saying about the guarantee deed having more 'bite' as opposed to a quit claim deed. Is a 'guarantee deed' even an option when it comes to purchasing a property 'subject-to' though? If so, is the procedure any different, or is just a mere matter of choice, paperwork and/or price?

Gotcha on the insurance stuff. Its nice to know that in a worse case scenario, you can always take out a new title policy. Thanks for letting me know that this will be easier when working with a guarantee deed.

Thanks a million Jim! Much appreciated. 

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