Buying property "subject to" vs. Adding someone to the mortgage/deed

[Michael Sand]

Hello,

I'm in a situation where my brother is looking to get rid of his house entirely, and I am looking to acquire it from him. The house is particularly appealing to me due to the low mortgage rate that he got in 2020.

My question is whether I should buy his property "subject to" or add myself to the mortgage/deed. The mortgage is not transferrable, but we think that if I'm added to the mortgage and the deed, it will be effectively the same. This is of course assuming that I can trust my brother at his word... which I 100% do, that the house will become mine, even though he will still be on the deed and the mortgage.

What are the pros/cons of either strategy? From my understanding, the only real concern with taking the latter approach is if the other person on the mortgage/deed is someone that you could potentially not trust. Subject to seems to be more ideal to avoid any confusion over ownership, but it sounds like a pretty involved process that could cost time and money (whereas the other approach is free and simple).

Any insights/advice would be appreciated!

[Brad S.]

I am assuming the bank will add you to the mortgage and the deed, only if your brother is still on both. I would do that and have a separate agreement signed with your brother that he relinquishes any equitable interest in the house. Have an attorney draw up the agreement, but that doesn't get recorded, it just goes in your personal files. That seems like the best way to do it. You will still have to have record of the agreed upon transfer price for your tax basis, but talk with a cpa. 

Another way of doing it is your brother putting the property in a title-holding land trust and then transferring the equitable interest to you. The title only shows the name of the land trust and he can name it 123 main st or put it in his name, and the details of the trust agreement are not recorded, so it essentially shields the equitable interest title from appearing to have been transferred. So, the title will show the trust but the trust docs will show the agreement that you are sole owner. Now, this still technically violates the due-on-sale clause, but it isn't likely to arouse suspicion. 

Many years ago, there was someone that had a technique of doing this which didn't violate the due-on-sale. Basically, if I remember correctly, they would put it in a land trust, than have the trust agreement tfr 90% ownership interest to the buyer, while allowing the seller to keep 10%, but the agreement had that 10% revert back to the buyer upon a future sale, or something similar to that. 

But, as always, don't listen to any of us on the interwebs without doing thorough research and consulting with local professionals.