Thoughts on “subject to” deal making

[Don Konipol]

There’s a lot of negativity out there concerning the risks (especially to the seller) of subject to deals.  To sum up the risks to the seller; the seller remains liable on a note which is secured by real estate they no longer own; the property sale has violated the due on sale clause of the mortgage or deed of trust and the note can be accelerated by the lender; the seller’s credit capacity is impaired because he has debt with no offsetting property equity.  The risk to the buyer can be summed up as : violation of sue on sale can lead to note being accelerated:; assuming buyer is an investor and seller a homeowner the buyer will probably be named in a lawsuit should either the note be called or default occur.  

Although there are safeguards that can, and should be set up, this merely modifies the risks, it doesn’t eliminate them.  So my thought on this is that I wouldn’t (personal preference) engage in a subject to transaction with anyone other than an experienced investor on the other side of the transaction.  I feel that if both parties understand the risks; if real estate investing is their business, if both parties are sophisticated and experienced investors, and both decide the risks are worth taking, then subject to can be a workable tactic.  The one exception would be a transaction where the seller IS a homeowner where the loan amount is small enough that I could cover a payoff should it become necessary out of my liquid assets. 

I’d like to hear how other investors feel about using “subject to” as the advantages of (1) no qualifying, (2) lower interest rates and (3) no financing costs seem like enough to turn a marginal deal into a worthwhile investment. 

[Marc Winter]

The points you covered in this post are spot on.  If there is no complete disclosure to the seller of the risks involved, a disaster is just waiting to happen.  That said, we have seen the following work:

An attorney prepares a land trust (intervivos revocable trust) for the subject property and after the deed into trust is recorded, the trustee (the seller) will quit their trustee position, and the beneficiaries (usually the seller) name a new trustee (the buyer) and transfer their beneficial interest to the buyer.

By using the trust, one legally avoids the due-on-sale clause. 

A major point to this scenario:  the attorney prepares a document explaining the transaction and risks involved in detail and has the seller sign, and notarize the document. 

That document is no guarantee that things won't go sideways, however, it should help prevent backlash if/when they do.

I'm not advocating this practice but among experienced investors and sophisticated sellers, we have seen it work.  I am not an attorney so do not take this as legal advice.

[Don Konipol]

Quote from @Marc Winter:

The points you covered in this post are spot on.  If there is no complete disclosure to the seller of the risks involved, a disaster is just waiting to happen.  That said, we have seen the following work:

An attorney prepares a land trust (intervivos revocable trust) for the subject property and after the deed into trust is recorded, the trustee (the seller) will quit their trustee position, and the beneficiaries (usually the seller) name a new trustee (the buyer) and transfer their beneficial interest to the buyer.

By using the trust, one legally avoids the due-on-sale clause. 

A major point to this scenario:  the attorney prepares a document explaining the transaction and risks involved in detail and has the seller sign, and notarize the document. 

That document is no guarantee that things won't go sideways, however, it should help prevent backlash if/when they do.

I'm not advocating this practice but among experienced investors and sophisticated sellers, we have seen it work.  I am not an attorney so do not take this as legal advice.

Actually, this is not correct.
The way most “due on sale” provisions are worded, “any” transfer of deed is a violation.  However, Federal law (St. Germain Act) prohibits ENFORCEMENT of due on sale under 3 circumstances.  1. Title transferred to divorced spouse 2. Title transferred to heirs upon death 3. Title transferred to a living trust of which debtor is beneficiary.  If the beneficiary is changed, the prohibition against enforcement of due on sale ceases.  Same if debtor moves out of house.  All the above references owner occupied residences, Federal law has no prohibitions concerning due on sale in non residence situations. 

[Chris Seveney]

Quote from @Don Konipol:

There’s a lot of negativity out there concerning the risks (especially to the seller) of subject to deals.  To sum up the risks to the seller; the seller remains liable on a note which is secured by real estate they no longer own; the property sale has violated the due on sale clause of the mortgage or deed of trust and the note can be accelerated by the lender; the seller’s credit capacity is impaired because he has debt with no offsetting property equity.  The risk to the buyer can be summed up as : violation of sue on sale can lead to note being accelerated:; assuming buyer is an investor and seller a homeowner the buyer will probably be named in a lawsuit should either the note be called or default occur.  

Although there are safeguards that can, and should be set up, this merely modifies the risks, it doesn’t eliminate them.  So my thought on this is that I wouldn’t (personal preference) engage in a subject to transaction with anyone other than an experienced investor on the other side of the transaction.  I feel that if both parties understand the risks; if real estate investing is their business, if both parties are sophisticated and experienced investors, and both decide the risks are worth taking, then subject to can be a workable tactic.  The one exception would be a transaction where the seller IS a homeowner where the loan amount is small enough that I could cover a payoff should it become necessary out of my liquid assets. 

I’d like to hear how other investors feel about using “subject to” as the advantages of (1) no qualifying, (2) lower interest rates and (3) no financing costs seem like enough to turn a marginal deal into a worthwhile investment. 

 If I was the seller, I would never do it. Why? Because I would not sleep at night knowing I have a mortgage on a property that someone else is responsible for paying. I do not see a premium of a few thousand dollars or even $20k worth it to me. For others, it might be different but where i am at in my life, not worth the risk

As a buyer, I would buy subject 2 and have done it once. It was a seller who could no longer afford the property. I did explain to them their options they had (such as sell it on the market, keep it and file BK, get a loan mod, and credit counselors out there who could potentially assist). The owner/borrower just did not want the property anymore and was like - just take over the payments - so I did. What I also did though was give the borrower a PFS and information that showed I could pay this loan and had the ability to pay the loan whether it was generating income or generating no income. 

[Don Konipol]

@Account Closed

“Long, boring post perhaps,”

NOT at all, your post is quite fascinating, and VERY IMPORTANT. These “mentors” suggest methods that are DANGEROUS in the hands of the inexperienced, unknowledgeable, and under capitalized.  Their 
students” either learn only the basics, not the “nut and bolts” necessary for successful deal conclusion, or learn a dangerous and sometimes legally cloudy methodology.  This is NOT 1981! Subject to is not a “do it yourself” undertaking.  Thank you for your expertise! 

[William Naber]

Lot's of good information.  Placing the sub-to property in a trust is standard practice now.  The comment above about the commentor never doing this, that's because he hasn't been in enough pain on a property to need to do this.  Sub-to offers the seller the ability to walk away AND get their asking price.  If you had the choice between 60cents on the dollar or asking price with subto, what would you do then?

[William Naber]

@Ken M. If litigation was enough to make someone not do something then none of us would ever do business. Just curious, what side of the litigation were you on the buyer, borrower or lender? If so many people are considering it a "don't do" and multiple realtors are calling it illegal then why is it on the HUD and why are there specific portions of IRS regulations around how to do it properly? Just saying. Also, when done properly, the buyer takes out an insurance policy that states if the due on sale clause is called, then the insurance company will pay the mortgage company and originate and hold a loan on the existing terms. So, when done properly who loses? In many cases subto and seller finance are the only ways people with 1099 income can buy a house. In my opinion, the haters against creative are on the side of the bankers and not the buyers. The last I saw the numbers its something like 60% of mortgage rejections are because of 1099 income instead of W2 income.

[William Naber]

@Account Closed I would love to buy you dinner and hear that story!

[Jay Hinrichs]

Quote from @Don Konipol:

Quote from @Marc Winter:

The points you covered in this post are spot on.  If there is no complete disclosure to the seller of the risks involved, a disaster is just waiting to happen.  That said, we have seen the following work:

An attorney prepares a land trust (intervivos revocable trust) for the subject property and after the deed into trust is recorded, the trustee (the seller) will quit their trustee position, and the beneficiaries (usually the seller) name a new trustee (the buyer) and transfer their beneficial interest to the buyer.

By using the trust, one legally avoids the due-on-sale clause. 

A major point to this scenario:  the attorney prepares a document explaining the transaction and risks involved in detail and has the seller sign, and notarize the document. 

That document is no guarantee that things won't go sideways, however, it should help prevent backlash if/when they do.

I'm not advocating this practice but among experienced investors and sophisticated sellers, we have seen it work.  I am not an attorney so do not take this as legal advice.

Actually, this is not correct.
The way most “due on sale” provisions are worded, “any” transfer of deed is a violation.  However, Federal law (St. Germain Act) prohibits ENFORCEMENT of due on sale under 3 circumstances.  1. Title transferred to divorced spouse 2. Title transferred to heirs upon death 3. Title transferred to a living trust of which debtor is beneficiary.  If the beneficiary is changed, the prohibition against enforcement of due on sale ceases.  Same if debtor moves out of house.  All the above references owner occupied residences, Federal law has no prohibitions concerning due on sale in non residence situations. 

Exactly Don that is clearly alienation of title and at the lenders sole discretion they could accelerate the note and demand full payoff. Its just spending a lot of money on something that wont work if its brought to light.

[Jay Hinrichs]

Quote from @Ken M.:

Quote from @William Naber:

@Ken M. If litigation was enough to make someone not do something then none of us would ever do business. Just curious, what side of the litigation were you on the buyer, borrower or lender? If so many people are considering it a "don't do" and multiple realtors are calling it illegal then why is it on the HUD and why are there specific portions of IRS regulations around how to do it properly? Just saying. Also, when done properly, the buyer takes out an insurance policy that states if the due on sale clause is called, then the insurance company will pay the mortgage company and originate and hold a loan on the existing terms. So, when done properly who loses? In many cases subto and seller finance are the only ways people with 1099 income can buy a house. In my opinion, the haters against creative are on the side of the bankers and not the buyers. The last I saw the numbers its something like 60% of mortgage rejections are because of 1099 income instead of W2 income.

I did the Subject to and was being sued. I won, but it was a long haul and expensive.
I still do Subject Tos and I teach how to do them properly.

Your comment: "Also, when done properly, the buyer takes out an insurance policy that states if the due on sale clause is called, then the insurance company will pay the mortgage company and originate and hold a loan on the existing terms"

Please tell me who offers such an insurance policy.

there is no such insurance being offered by a regulated insurance company it simply does not exist.

[Jay Hinrichs]

Don,

In my mind sub to is an advanced  strategy for very well capitalized and experienced investor. Training beginners that no trainer can really vette is going to lead to a lot of very bad outcomes for sellers. When we did this and we did a lot of is through pre foreclosure rescues before the laws changed in 08 basically making it illegal WA OR  .. My company had the ability to cash out a mortgage at a moments notice although to be fair if we had a run on the bank we could not have covered all of them. We had a handful throughout the 2000s and payoffs were maybe low of 150k is up to 500k.
We had an 8 figure LOC to buy distressed assets and sub 2  half of it completely unsecured so check book. But like any company such as us we tried to keep as much of it working as possible ..

So I have no doubt some of the folks that take training from Pace and from Mike and Ken have the ability to retire a loan without having to get a loan.. I also suspect many to most do not.

And if they have to get a new loan that can be time consuming and Boom.. the original seller gets their credit trashed waiting for the loan to get paid off .. Only way to keep the seller out of Credit score jeopardy is to pay the loan off basically at the first notices.. If not the bank starts the process that's the issue I see..

Then don't get me started on the bad actors who will learn this and will not give two shakes for the seller .. once they realize their credit is not on the line .. rip rents all sorts of bad stuff.
that's were i get the heartburn.. I have seen the get into title and rip the rents or get into title to a bunch of them then the tenants stop paying and now the investor does not have the cash to make the payments etc etc.

Thats my take on it.. Advanced strategy for very well capitalized companies and experienced investors leave mom and pop sellers alone :)

[Francisco Hernandez]

Quote from @Don Konipol:

There’s a lot of negativity out there concerning the risks (especially to the seller) of subject to deals.  To sum up the risks to the seller; the seller remains liable on a note which is secured by real estate they no longer own; the property sale has violated the due on sale clause of the mortgage or deed of trust and the note can be accelerated by the lender; the seller’s credit capacity is impaired because he has debt with no offsetting property equity.  The risk to the buyer can be summed up as : violation of sue on sale can lead to note being accelerated:; assuming buyer is an investor and seller a homeowner the buyer will probably be named in a lawsuit should either the note be called or default occur.  

Although there are safeguards that can, and should be set up, this merely modifies the risks, it doesn’t eliminate them.  So my thought on this is that I wouldn’t (personal preference) engage in a subject to transaction with anyone other than an experienced investor on the other side of the transaction.  I feel that if both parties understand the risks; if real estate investing is their business, if both parties are sophisticated and experienced investors, and both decide the risks are worth taking, then subject to can be a workable tactic.  The one exception would be a transaction where the seller IS a homeowner where the loan amount is small enough that I could cover a payoff should it become necessary out of my liquid assets. 

I’d like to hear how other investors feel about using “subject to” as the advantages of (1) no qualifying, (2) lower interest rates and (3) no financing costs seem like enough to turn a marginal deal into a worthwhile investment. 

 It's simply a way to help a seller when nothing else works. It doesn't work for everyone and it's definitely NOT for everyone. Cash deals work best and that is always and should be always the first option. But let's be honest, how many times have we seen sellers stick to their price all the way to foreclosure? Subject-to is the only way they can have what they want if the numbers make sense.