So called “Subject To” investing in real estate is one of the most powerful ways to buy properties from homeowners using little or no investor capital. This process calls for the investor to assume the homeowner’s mortgage payments but not the liability of the mortgage. But as simple as it sounds, it can become very complicated if not done properly.
Virtually all mortgages contain a Due on Sale Clause that stipulates that if the property that is collateralized by the mortgage is sold or the title is transferred in any way, the mortgage principal and accrued interest is due and payable immediately or within a specific time period, i.e., 90 days. This clause would seem to preclude a homeowner from selling his home to an investor and allowing his mortgage to stay in place. However, in practicality, this is civil contract law and therefore there is no criminal violation to deter the investor.
However, the issue that often arises is the homeowner is not fully disclosed as to the risk of his allowing the sale of his property with his mortgage staying attached to the property. Here are the most basic of these concerns:
If the investor stops making mortgage payments the homeowner may go into foreclosure.
If the homeowner goes into foreclosure because of the investor, the homeowner can’t evict or foreclose on the investor.
The homeowner’s credit can be destroyed if the investor makes the mortgage payments late every month but no foreclosure is necessary by the lender.
If the investor rents the property, the former homeowner is not entitled to any rent, can’t evict a tenant, has no control to even get the lender to foreclose – if the mortgage payments are being made.
The former owner can’t do a short sale or a deed in lieu of foreclosure because he is no longer the owner of the property.
In the event of a market decline, the former owner’s property may go upside-down and he will be helpless to sell the property and pay off his mortgage – which he will be responsible for until it is paid off or foreclosed out.
The benefits to the homeowner are the rapid sale of his property which takes the headache and worry off his mind. Actually, quite a few homeowners allow the sale with their mortgage remaining in place. Mostly they do this because of the expectation of the investor rehabbing and reselling the property in a reasonable period.
The gigantic advantage to the investor is that he needs very little or no money to buy the property. He may even have the seller take back a second mortgage known as seller financing so that the investor will have no money in the transaction. While this practice may sound illegal or impossible to a reader, in fact, it is a standard method of buying properties.
The problem for the investor occurs when he starts making late mortgage payments or no payments at all. The integrity that the homeowner counted on for his making the payments is lost. The former homeowner usually calls the lender and says to foreclose because he no longer owns his home. In more than 10,000 actual cases of using subject to mortgage assumptions, I have only seen one lender try to accelerate the loan.
Actually what the lender did was to stop sending the monthly statement to the investor so he would not know how much to pay on the variable interest rate loan that changed monthly. The investor just continued to make the previous monthly payments and added $100 each time to cover any fluctuations in the amount due. He sold the property shortly thereafter and paid off the loan balance and the seller’s second mortgage.
To overcome the potential risk to an investor doing a subject to mortgage assumption, it is imperative that he disclose in writing to the seller that any or all of the above “problems” I mentioned above could happen. If you think the owner will not sell, you may be right but if he is motivated, he will sell. It is only morally reasonable and also good business practices that a seller should know what extended liability he may have. The benefit to the investor is that this disclosure will help forgo a lawsuit if something goes wrong later. Remember, an ounce of prevention is worth a thousand pounds of attorney’s fees.
Dave Dinkel has over 35 years experience in real estate investing which has given him a unique perspective into the real estate market. In case you haven’t seen it yet, take a minute to see 15Ways to Make Money in Real Estate investing with No Money http://www.15wayswithnomoney.com.
If you need to sell your home quickly, even if it is upside down, here is an answer – Sell Your Home in Days at Full Market Value http://www.fsbopowersellingsystem.com.
Tampa Capital Partners thanks Dave Dinkel for this informative article.
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