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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.
Do you have a cite for that case? I'd like to take a look at it.
@Peter Walther
: You've handled a lot of these, Do you concur or do you have a different experience than "
If the Warranty deed is not recorded then the title has not transferred and the original seller still owns it."Seems the property Morby bought out of foreclosure is in Lake Havasu AZ & falls under
https://www.azleg.gov/ars/33/00412.htm B. Unrecorded instruments, as between the parties and their heirs, and as to all subsequent purchasers with notice thereof, or without valuable consideration,
shall be valid and binding. I get that but if you used that logic all these lenders that have their borrowers sign a quit claim at closing to be held in case they default/ or DIL and instruct title to hold it.. same thing they made a loan and now 2 minutes later they have the property back because this deed was signed.. Make for complicated transactions thats for sure.. NO equity no bueno.. long term rentals NO good either.
In MN if you try to get a rental license and your nowhere to be found on record of ownership and there is a different owner on record, there gonna catch n flag that requiring the "actual" property owner has to complete all licensing requirements.
And then there is the next level of doing a lease with a tenant. A lease is a conveyance of property use rights. Rights only an owner can convey, not your neighbor, not your Sunday bowling league buddy, only the property owner.
So then say you go doing all this work around efforts. Get a rental license, get it rented. Tenant moves out and ya hit em with say $2k assessed damages at move out.
Tenant says "F-u man, you don't even own the property, I looked it up, your renting somebody else's house". You threaten em with whatever, collections or small claims court, whatever.
So next tenant goes to a FREE tenants rights/advocacy group, who is all too happy to jump all over it. Next they report you to the Atty Gen. office claiming your doing fraud.
And it's a whole mess now. Court hearings galore, just a mess. Good luck wading through that feces storm.
See, this whole SubTo thing in residential is always just this daisy-chain of work arounds for this, work arounds for that, hide this, hide that...... Vs you could have just done a C4D and gotten the exact same deal results, had it recorded, avoided all the BS.
In residential, can anyone give me a good reason where SubTo is BETTER than a C4D? Something it does that a C4D can't? Serious question.
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In residential, can anyone give me a good reason where SubTo is BETTER than a C4D? Something it does that a C4D can't? Serious question.
Subto highly benefits the buyer. A guru can sell the concept of "no money needed", "no risk", "big returns" easily and make a LOT of money. ;-)
Keep in mind, there are legitimate investors, who have lots of experience and plenty of money that do SubTo legally and ethically.
That's not a reason, nor any detail, you only give an opinion that SubTo benefits the buyer, and no anything of it vs C4D.
Then talk about how SubTo is good for the Guru slingling how-to courses.
Aaaaaa ok, what the hell does a Guru's ability to sell more courses have to do with the actual viability of the transaction themselves?
You say "no money down" for SubTo. That's been pretty well fleshed out as the idiots path, persons with diddly squat for $ buying SubTo.
But more over, you can 100% buy on C4D with $1.00 down.
Both have cost of processing the transaction paperwork so that's a wash.
Next, to call SubTo "no risk" is the pinnacle of ridiculous BS statements. Seriously, you couldn't have meant that. That's like saying stop lights are GREEN, red light means go, it's just total blatant BS.
As for making "big returns", that is deal dependent. A person can make "big returns" in any/every strategy in existence, as well as making "big losses" and everywhere in between.
Yet again, NOBODY can point out 1 single logical or legit reasoning of anything SubTo does positively that can't be done via C4D........
So I ask, why do SubTo then? EVER. If we have C4D readily available that achieves all the same things, BUT without all the negatives SubTo brings with it.
WHY?.......
I am begging someone please give me just 1 logical legit reasoning, not opinion but a actual factual reasoning. I am coming at this with scientific method trying to find this answer and I can't. It seems nobody can either.
C4D does everything positive a SubTo can and without all the negatives; PROVE ME WRONG.
James,
The way you describe contract for deed in your closing sounds very attractive. I have bought one property on a contract for deed years ago and got the seller to agree to change it for a deed and mortgage/deed of trust. One of my concerns is how and what would be the remedy if the buyer finished paying and something happened to the seller before the seller could sign off on the deed. I’m in Texas so I would not be able to use a C4D here, but if I ever ventured out into other areas it would be good to know.
When I ask "Professor Google" about this it says C4D is NOT illegal in TX, just strictly regulated. Because it can be predatory. Which yeah, it totally could be so makes sense.
And in the little bit of looking I did, it seems it's all rather simple standard stuff. At least by my take. Thinks that basically read to don't use C4D to F-people.
So yeah, dig deeper into that, looks that is IS an option for ya.
Jim not following here I know of course what a C4D is was super common in Or and WA in the day.. but if you have an already existing mortgage and you are not retiring it what does the C4D do for you than a wrap or All inclusive Deed of trust . C4D is just another DT or Mort the only difference is title does not transfer but you still have to foreclosue it out if it defaults ???
Can you explain the mechanics.
I think in majority part it's really about simplicity.
With just an hour or so of conversation people readily understand and grasp all the details and facets of C4D, be it buyer or sellers.
The process of processing one and closing is also rather simple and streamlined.
All the various questions of "what if this, what if that" are readily answered, clearly stated, known and comprehended by all parties.
We have to keep in mind that these are not savvy persons most times, there blue collar average every day people, complexity is complex. And complex things are scarry in terms of a transaction the size of a home.
Those other options exist but there even far less known, much harder to grasp for people, and when people ask around on it many say "oh yeah, contract for deed, oh yeah I've heard of that before my parents/grandparents did...." and that is a very reassuring thing for people to hear it's known and been long experienced by others from "back in the day".
If go full-Monty on a default, yeah would have to follow that but at least here in MN it is a simplified process. It does not carry the exact same full extent for foreclosure as say Wells Fargo with a conforming mortgage has to go through. There is no 6mnth right of recission. Because all these things for default are in the contract and it's not a default and foreclosure on a mortgage, it's on a contract FOR a deed, not a mortgage instrument itself.
The law views it more like a delayed closing than a mortgage note. If that makes sense.
In all the years I've dealt with these I have never personally had one gone that road of default. And I've only known 1 that all but did. In that one, my friend filled the legal paperwork and got all that going and in 11th hour the buyer surrendered property back, vacated and paid up all outstanding monies, cancelling the contract mutually. And in that one, my friend did it to himself, he took a $5k down payment on a flipping duplex. Security deposits were more then $5k. So yeah, he set that one up for failure from get-go.
Generally speaking the #1 "problem" I've seen is near end of term buyers get approved for mortgage, approved for a lot more then what they need, start looking at home on the market at that higher approval level, then say they changed their mind and bought a different place so asking if seller would just donate back the $ they paid on this one.
Which is a no, a solid no. And they move on. Never had a 1 go to court or anything like that. They accept it as a cost of there decision.
The mechanics here in MN on default is actually a lot more like the process for a tenant who's in default and getting them out. Which if a tenant fights, can be a heck of a process. I actually have seen harder longer times to get a tenant out for default than on C4D.
Again, this is all with the preface of a C4D done correctly and legally.
James the issue is Sub to is a completely different transaction than C$D . One your taking title . the other your not C4D you have an interest but no deed until you pay it off.. And generally were i have seen them used is with free and clear prop not prop with an existing mortgage/trust deed.. And seller carry back on land for the most part.
Yeah I get that one difference with deed transferring or not.
But that doesn't matter for a buyer, if deed moves or not. When I or my clients go to acquire a property, and really I think all should view it this way, we don't care about "ownership", we care about USERSHIP and Control.
Look, think of it this way:
Larry Landowner has 1oo acres of land to sell, he's ready to retire and is closing up shop on farming. This land is great land for development. Larry want's $1million dollars which is fair.
Bob the buyer has a buddy Dan the developer who he knows can readily get this done for him, OR would even be all too happy to buy it for $1.5, but Bob is thinking he'd almost rather keep it through it all vs flip it. But who knows.
Now Bob has a choice.
If Bob is focused on needing that title "owner" it's gonna cost him $1million dollars. Sure he could get financing and that's going to increase the cost now isn't it.
OR.....
Bob get's an Option on it for the full price, throwing $20k at Larry saying Bob's gotta make it happen in next 12 mnths. That $20k is Larrys no matter what happens, buy's it, doesnt, that $ is gone.
Does the "ownership" matter?
With the purchase option Bob has total control doesn't he.
If I use a C4D on a purchase I have all the use and control of a property. I can sell it, rent it out, I can do all the same things with it, and make the same $ regardless if deed passed or not.
AND I DONT have the issues of ticking off anyone holding a mortgage by transferring a deed which SubTo can, has, does and will do.
Now, a person can argue I can't go out and get 2nd, 3rd, 4th, 5th financing on that property without satisfying that held mortgage. Yup, 100% correct, I can't go out and do STUPID super HIGH RISK over-leveraging. I call that a good thing.
And if that additional financing is NOT over-leveraging than it is readily going to satisfy the held existing financing thus executing on the C4D and now I financed out of the C4D and have that ownership.
OR let's say I'm Nick-no-money and I buy on C4D where a 1st mortgage is held by seller and I want to get reno funds to fix it up which would be a 2nd on it. I simply negotiate that WITH seller and get sellers approval, in which seller would be a signor to it all because THERE AWARE and nothing is shady under the table stuff and the C4D has all this calculated into it.
So you see, as I mentioned I don't know anything SubTo does that I can't do with C4D BETTER, simpler, with less negative potentials.
