Quote from @Don Konipol:
Quote from @Jay Hinrichs:
Quote from @Don Konipol:
Quote from @Ken M.:
Quote from @Don Konipol:
Quote from @Ken M.:
Quote from @Don Konipol:
Quote from @Ken M.:
Quote from @Don Konipol:
Can a “subject to” transaction be done safely?
There’s been a LOT of “hostility” on BP toward subject to transactions. Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer. While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase. They further point out that many sellers are unaware of the consequences of selling subject to.
I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing. Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.
The possible negatives of subject to have been thoroughly discussed. The positives are from the buyers prospective
1- the ability to buy a property with little down payment
2- the ability to obtain financing at below market rate
3 -not needing to qualify for convention/institutional financing
4- not having another debt on your PFS
5 - not needing to pay points and other fees to obtain a new mortgage
The positives for the seller are
1- can possibly sell a property in which they have negative equity without bringing cash to the closing table
2 -expand the pool of potential buyers
3 -possibly obtain a higher price/ quicker sale
4 - can utilize a wrap to potentially earn the “differential” on interest rate
5 -May be able to save the Realtors commission
All this being established, here’s the BIG question: Can a subject to transaction be done where both parties are reasonably protected? Let us know what you think!
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These are very important points for each side of a creative finance transaction.
A lot of SubTo transactions don't take these considerations into account when filling out their future loan applications. Omitting this information may be mortgage fraud. When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.
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I would modify #4 "4- not having another debt on your PFS" . Actually, on the loan application 1003's that I've seen,
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Uniform Residential Loan Application 1003
Section 3: Financial Information — Real Estate. This section asks you to list all properties you currently own and what you owe on them.
and includes a full page of boxes to fill in such as
Property Value
Status: Sold, Pending Sale, or Retained
Intended Occupancy: Investment, Primary Residence, Second Home, Other
Monthly Insurance, Taxes,
Association Dues, etc. if not included in Monthly Mortgage Payment
For 2-4 Unit Primary or Investment Property
Monthly Rental Income
Creditor Name Account Number
Monthly Mortgage
Payment Unpaid Balance To be paid off at or before closing
Type: FHA, VA, Conventional, USDA-RD, Other
Credit Limit (if applicable)
It doesn't specifically ask who's name the loan is in. If you are taking the tax write off, you are acknowledging you are paying the debt. If you aren't making the payment, you don't get the tax write off and are subject to fraud for equity skimming.
Here’s where you make a slight error.
“Section 3: Financial Information — Real Estate. This section asks you to listall properties you currently own and what you owe on them”
What YOU owe on them. Unless you’ve signed some additional liability vis a vis the seller, YOU as the buyer of a property SUBJECT TO a mortgage on the property do not personally OWE anything.
“When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.”
No, when buying a property Subject to, the buyer is specifically NOT personally taking over responsibility for the debt. That would be ASSUMING the debt. This is merely purchasing a property that is encumbered. And, no, the courts do NOT see it that way. Case law is well established differentiation between a loan assumption, and a subject to purchase.
Fraud can be charged if the purchaser has not fully disclosed intent and circumstance to the seller, as well as the other way around. However, we need to be clear that with a subject to transaction the debt is secured by the property; most often personal liability via a guarantee rests and remains with the seller/original borrower, the property buyer has no responsibility for the debt and no personal liability UNLESS he modified this status by contract agreement with the seller; in which case he may be liable to the seller only.
No problem. It's a distinction without a difference, according to the federal court judge I litigated under.
Would you also say the seller has no right to sue the buyer if the payments aren't made? Would you also say equity skimming can't occur because buyer never accepted responsibility for the loan? Would you also say the original contract has no enforceable power on the buyer without the signature of the buyer?
I don't want to put words in your mouth, so I will just say those were issues as part of federal litigation. You have likely heard of Fidelity National Title Group, who sent 4 attorneys to litigate, because it was a Subject To case that would change Title liability.
As always, facts are case specific.
“Would you also say the seller has no right to sue the buyer if the payments aren't made?”
Anybody has “the right” to sue anybody else about just about anything. Winning a judgement and having it upheld under appeal is different. A lot depends on the contract between the buyer and seller; whether full disclosure was made; and whether the seller is able to utilize consumer law or whether both parties are real estate investor/professionals.
“ Would you also say equity skimming can't occur because buyer never accepted responsibility for the loan?”
I’d say that the prosecutor would have a harder time proving his case. Equity skimming requires an INTENT to defraud. If the buyer is losing money on his investment, and walks away without gain, then by definition there is no “equity skimming”. Any transaction can be the basis for illegal or unethical behavior. Subject to transaction are neither, they neutral. It’s the participants actions or inactions that will determine how they are perceived.
“Would you also say the original contract has no enforceable power on the buyer without the signature of the buyer? ”
If by “original contract” you’re speaking of the seller’s mortgage or deed of trust with the lender, then yes, the buyer is not a party to that contract. What he is a party to is his contract with the seller, which depending on exactly what is included, can find the buyer liable to the seller for an action in relations to the existing note. And that’s why it important for both parties to be represented by legal counsel.
Look, I’ve done too many successful subject to and wrap transactions as both buyer and seller to believe that Subject to” transactions are somehow inherently bad. What is bad is having the gurus collect money from armies of inexperienced, unknowledgeable and under capitalized wanna be investors who then seduce desperate home sellers (who have no idea what they’ve agreed to) into selling their homes without understanding the consequences. And in these circumstances the chance of the buyer being sued for a default is rather high. But the lawsuit will be based on the buyer’s interaction with the seller, not on a mortgage document or any legal documents to which he is not a party.
The reason the “distinction” is important to me is that, as I’ve previously recounted in past posts, I’ve entered into many profitable subject to deals. However, I’ve developed some rules for when I utilize a subject to or wrap transactions as both. These are MY rules; I’d like to hear about others who have had successful (or not very successful) subject to /wrap transactions
1. I insist on the counter party in the transaction having legal representation. Not just stating they acknowledge their right to counsel, but actually retaining and being represented by counsel. I am represented by counsel in EVERY real property transaction I engage in, so that includes myself.
2. I will NOT deal with a homeowner or consumer; the deal must be investor to investor. Period
3. If I’m the buyer the seller must acknowledge, in writing that they understand I have no liability on the note and that they retain liability. Additionally they must acknowledge that this may affect their ability to obtain future financing.
4. Whichever party makes the note payments must provide evidence of such payment to the other party in a timely manner.
5. Insurance must be in place on the property, with the seller as additional insured.
6. The buyer must place and maintain a “reasonable” amount in an interest reserve to be used if a monetary default occurs.
These don’t GUARANTEE success, but provide a much better chance.
Ken, if the bottom line is you think subject to deals are or can be “dangerous” then I agree!
Good discussion. But, Agreeing to disagree.
Courts will surprise you on how they interpret "facts" and the implications.
Oddly, the seller committed perjury in front of a federal judge on a couple of occasions and suffered no consequences. Law is like jello, very squishy.
Always enjoy your posts, Ken. Even if we sometimes disagree LOL. More importantly, I often learn something!
So true my Dad started a company in CA in 1980 called Cal Wrap the all inclusive DT had just come out and we only wrapped PRIVATE MORTGAGES never bank mortgages. There was so much seller carry in those days.. When I was on my own and started to buy sub to in 90s and 2000 we took title sub too and it was all foreclosure rescue and all of them had significant day one equity other wise we would not fool with it. The intention and the bizz model was fix and flip and sell which we did we never held these longer than about 18 months. We did have a few called and we simply cut a check to retire the mortgage. But doing this we ran into a lot of crooks who once they realized they were not personally responsible for the debt just ripped rents and never paid on the underlying thereby totally fubaring the sellers.. And I rescued another small group that thought it was OK to buy these with NO equity or negative equity like we see people doing today they did about 35 of them .. then sold on lease options and those started defaulting left and right and you had a big mess.. they went broke and were lucky to not get criminally charged as the sellers of these got thier credit destroyed.
So in my mind this is only an advanced way of buying and not at all appropriate for the general public or starter investors who think I dont need much money..
in my mind for short term hold and control I like it but to buy with zero equity to me is not all that smart unless its areas that are historic high appreciation markets.
Jay, agree with you 100%. Amongst knowledgable, experienced investors the disagreement concerning sub to is between those who believe it’s too dangerous to be a legit strategy and those who while agreeing to the dangers think when handled by experienced, knowledgable, well capitalized investors it can be a strategy with benefits to both sides.
In previous threads I noticed that the vast majority of posters who believed subject to transactions were blankety bad identified as real estate brokers. Perhaps this view is influenced by the fact that the broker as middleman or agent is cut out from the vast majority of subject to transactions. If so, that’s a bias that should be recognized and stated; just as I state my bias of historically completed successful subject to transactions on both the buy and sell side.
Don, my general consensus of SubTo as "Bad" absolutely has everything to do with my positioning as a R.E. Broker. It's the fact that I am informed at a level far greater than the vast majority of R.E. Agent's, that I live in a world of compliance and contract law. And my vision is not of just theory but what is actually happening out in the trenches.
Just like any transaction there is ways to do them legally, correctly, and illegally and incorrectly.
It's pretty rare that I see or hear of a standard transaction being done in a an illegal or legally questionable manner. The vast majority of questionable areas are in the arena of disclosures, or lack there of.
C4D's is the next level. I have seen a much higher occurrence of issues here ranging from legally questionable to out right blatant illegal actions. Thankfully we don't usually see it at any scale, most often it seems to have been "a" person acting off assumption vs facts and get's "corrected" after not much time.
LWO is next step down the ladder into the sewers. These, Lease with purchase options, ugh.... I can't recount how often I hear buyers lament how they got burned in them. And it's because buyers operated from assumption, a lack of comprehension and education, and acted upon emotion vs knowledge. A common thread is the floating Purchase Option Price, perpetually remaining just outside of reach. Combined with rents well above market range because it's playing off emotional perception that it's "worth it" because there going to buy that home, some day..... some-day......
And we land at SubTo, the underbelly of the sewers where all the slim and sludge lies.
Now why do I say this? Can SubTo be done morally, ethically, correctly? Yeah, absolutely it can be. Unfortunately, I all but never see that. At least 98% of the marketing I see and receive for SubTo is blatantly predatory. When they hit me up, obviously doing 0 research because they threat me as Mr No-name Homeowner, I just go with it and play along to see how and where it goes.
NONE, not a single darn time has ANY of them done it legally/correctly. Every single one has, 100% of time, made out-right ILLEGAL promises and disclosures of how it all goes. Every single one of them has 100% of the time stated to conspiring to commit fraud of various types and kinds. When asked about DOS clause, 100% of them have said we will work together to keep it hush-hush and keep it "our little secret" because f-those dang evil banks and all there $-making from us average people...
THAT is my #1 issue with SubTo, the absolute avalanche of BAD actors out there pressing SubTo.
My #2 issue with SubTo is all the people there F'ing over with this horned-cow manure there pulling.
Unsuspecting wanna-b investors buying reassignments from them, having a ticking time bomb passed over. And the unsuspecting sellers who were misinformed and uninformed.
If 97% of the time people who took there care to a certain auto shop for repairs, that within months after leaving 97% of the autos repaired at that shop, the motors blew-up! Would you say "oh, well those are just the bad mechanics, there is many good ones too" or would you say this shop is BAD?
So what if I own an auto shop a few towns away, 97% is still 97%. It's NOT about trying to scalp more clients, it's about protecting my industry.
I would love nothing more than to see the metrics flip, to 97%+ of SubTo being done correctly, morally, ethically, LEGALLY.
But were not there, were not even in the parking lot of that ballpark, were miles away. And I fear it's a ticking timebomb similar to NINJa financing was. And back then just like now on SubTo any sounding the warning alarms were also called various names and ridiculed. Yeah, how'd all that work out again????
Kick in another inflation cycle like we had the past few years. Add in a recession with job layoffs. That kicks off defaults starting to rapidly rise. Kicks off rent rate compression from lack of renter affordability. Combine large inventories of MFH coming online. Which leads to various shady over-leveraged negative equity SubTo deals start imploding in mass AND the tsunami of calls to Atty G. offices from various sellers getting burned, the tsunami of court fillings of such...... It goes from 0 too "HOLLY SH!T" real fast.
THAT is the reality of it, and my issues with it all. It's loading a feces cannon.
It's one big gamble on the market trading sideways or up. Might as well be long call options in mass. Because the moment the market starts trading DOWN for any duration *BOOM* the whole damn thing explodes.
And the market trading DOWN is a VERY real potential.
Another significant inflationary cycle is not just very real but very PROBABLE.
It won't matter how much "equity" one has on paper if there isn't any dang buyers who can afford to buy at the, say 9%, 12%, 14% interest rate.
And before anyone calls me ridiculous on that inflation mention, remember I'm a Grandpa, I LIVED through 14% mortgage rates. YES it's VERY possible, it can happen and it HAS happened. I remember what all that was like and that environment come back now..... Oh-man, oh it would get so ugly so fast.......
