Deed Transferred Sub-To: Just received Tax Bill. Is this normal?

Question

Hi folks,

I've searched the forums but cant find the answer to this question: I bought a rehab Sub-to and we closed on July 9th 2015. The mortgage is current and the taxes have historically been paid by the mortgage company every year on September 1st. However, I received a property tax bill from the county today, billed to my LLC which owns the home, for the full amount of the taxes, due on or before September 1st, 2015.

I am assuming the mortgage company will still pay the tax bill and I just received this bill as standard procedure from the county simply making me aware of the bill?

Thanks in advance for your input.

J. Scott Lee

Jay Hinrichs · Answer

@Christopher Telles

I bought my sub 2's pre 08  and quit when the anti pre foreclosure and equity stripping laws were passed in Oregon and Washington.. I know CA has the same type of laws.

So I am not sure if attitudes have changed with the big lenders or servicing companies today on alienation clauses.  So what I experienced may not be typical for others. and 99% of mine also were me paying a big chunk to pull it out of foreclosure.

Bill Gulley · Answer

Often a point of confusion with new property buyers.

Look at your HUD-1, you were probably credited with taxes from the period the seller owned the property to the date of closing. The credit comes off the sale price and amounts you needed for settlement. After you are credited with those expenses, you have the obligation to pay the amounts credited to you. This is usual and customary practice.

To avoid this, put in your contract that taxes are to be paid by the seller to the buyer at settlement and not credited to the purchase price. You'll need more to close too, that also depends on the type of financing involved as lenders don't want to fund, say 80% of a tax bill. So, check with your lender. :)

Christopher Telles · Answer

"the risk that you would take in such an arrangement is complimentary to the risk that the seller is taking in trusting the buyer to protect his credit by actually paying the bills" and that's where we as investors have the option to walk away from a deal when our position in any investment isn't secured.

If the risk of a lender initiating its DOS clause and is of paramount concern in a Sub 2 then there are other methods to mitigate this risk.

I've bought property using a land contract of sale, that in itself has a lot of similar risks of a Sub 2 transaction remaining unrecorded, and have been researching Sub 2 transactions. There was a thread here on BP a week or two ago that had a lot of the experienced Sub 2 guys talking about Sub 2 and the risks of the DOS clause. The consensus was that Sub 2 should be use for short hold periods and that lenders aren't typically calling loans after a Sub 2 transaction is recorded.

I asked @Jay Hinrichs specifically what his experience has been with lenders calling Sub 2 loans. His response was that in 100+ Sub 2 transactions one loan had been called and it was because the seller walked into his mortgagors office and incidentally told them he sold the property.

Just because a seller is taking a risk in a Sub 2 sale doesn't mean investors need to take on a similar risk. If the buyer is ethical s/he will do what they've agreed to do pursuant to their contract. My viewpoint is that we as investors are helping a sellers by buying their properties. They have the freedom of choice of who to sell their property to and on what terms are acceptable to them. Sub 2 provides a selling option they are free to choose that sale option, or not.

Daniel Mohnkern · Answer

@Jeff L., I'm happy for you that the lender is being agreeable.  Although you don't have to worry about the risk because everything worked out for you, the risk that you would take in such an arrangement is complimentary to the risk that the seller is taking in trusting the buyer to protect his credit by actually paying the bills and by not leaving him with a destroyed investment to have to sell if you were to default.  Many sellers refuse to do such deals because of that risk.  I think I would be willing to invest some money in improvements to instill a little confidence in a seller who might otherwise not be willing to take the risk in me.

Jeff L. · Answer

@Daniel Mohnkern   By leaving everything in the name of the seller and not receiving the deed and putting 20k into rehab then you are taking a huge risk, even if you have a strong contract outlining the deal if the seller decided to take the renovated home and sell it quickly on the down low then I would be faced with litigation, attorniey fee's and a lot of time fighting to get this money back. That  is one risk I was/am not prepared to take. Considering the deed was transferred July 9th and this rehab will be on the market in 3 weeks, the DOS clause isn't that big of a threat to me, although it wouldn't be something I would want or  choose to happen. I'm on my 2nd Sub-to and would never do one without having the deed recorded in my LLC's name BEFORE spending a penny on rehab or mortgage payments.

I spoke with the mortgage company today when I paid the mortgage payment and they have no problems with the transfer and said for me to send them the tax bill.

Daniel Mohnkern · Answer

@Steve Babiak, you raise a good point.  It has been my understanding (having not yet purchased "sub to") that the ideal way to go about it is to have everything remain in the name of the seller so as to not make any waves.  The contract with the seller would stipulate such things as the buyer paying and managing everything without any things being recorded until the mortgage has been fully amortized.  The seller would still technically own the property until the buyer fulfilled his agreed to responsibilities. I.e.pay the mortgage, taxes, insurance, maintenance, utilities, etc., while depositing the income into his own accounts.   After fulfilling his responsibilities, the property would legally have to change hands as recorded.

In this situation, it appears the buyer already shot himself in the foot by transferring things legally from the get go.

Jeff L. · Answer

@Daniel Mohnkern @Steve Babiak

Since the tax bill is due Sept 1 and according to the tax records they have consistently paid the bill during the 1st week of September, I'm thinking that the mortgage company has already received a bill for the taxes well before now and is already aware of the due date and amount. I was thinking the county sent me this bill because I'm the new owner and wanted me to be aware that the tax bill hasn't been paid. I'll ask my closing attorney what he thinks. Because the tax bill is in the name of my LLC now, I'm sure asking the county to bill the mortgage company would still tip them off, but you never know. Thanks for the input!

Steve Babiak · Answer

So let's say the tax collector sends the bill to the mortgage servicing company. Then how does the mortgage servicer know which loan account holds the money, since the name on the bill is yours so different from any mortgagor's name and I doubt the tax collector will put your loan number in the bill?

Daniel Mohnkern · Answer

I have had my taxes paid through the mortgage is as well. Once in a blue moon, the tax collector Inadvertently sends the bill to me. In the past, I have called the tax office and let them know that they sent it to me rather than the lender.  They assured me that they would send it to the lender. My thought is that, if you were to do this, they may be able to send a copy to the lien holder for you. This may keep things a little more on the low down for you. Of course, I am not giving you any assurances.

Steve Babiak · Answer

I have had houses in some localities where the tax collector would send the bill to the mortgage company, and in other localities the tax collector will not send the bill to the mortgage company. So it just depends.

Deed Transferred Sub-To: Just received Tax Bill. Is this normal?

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