regarding subject to financing.

[Patrick K.]

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

[Eliott Elias]

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

[Winston Covington]

Hi Patrick, when you purchase a property “ subject to “ taking over the Seller’s loan…it is your responsibility to make timely payments to the bank as well as for your property taxes and insurance. If you fail to make your monthly house payments to the bank on time, that reflects on the Seller’s credit. That will hurt their Fico score and could easily affect their ability to obtain credit for anything well into the future. If you were to default to the point where the Bank had to foreclose, any equity still owed to the Seller would go to them as a lien holder. Any other equity would go towards the expenses due and you as the former deed holder would get the balance of the equity depending on the price paid at the foreclosure sale. * Note * In a foreclosure due to your default…your lack of being responsible for the monthly payments would leave a negative entry on the Seller’s credit report for 10 years.

[Account Closed]

Quote from @Patrick K.:

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

Here is what Pace or anybody else doesn't tell you:

Using Subject To, to Get "Free" Properties

https://www.biggerpockets.com/forums/311/topics/1060320-using-subject-to-to-get-free-properties-a-quick-guideline

[Scott E.]

@Account Closed links to a great discussion.

I also posted a thread asking a very similar question the other day linked here

The bottom line is that subject-to is a legitimate strategy that every investor should understand. But it nowhere near as easy and rosy of a strategy as the gurus make it seem to be.

[Scott E.]

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

Not true. Everything about this is wrong. Elliot are you a robot or a real person? I see you around the forums every day and most of your posts are either misguided or full of hot air. I'm not trying to be the forum police here but it's annoying to see somebody consistently offering bad advice on posts.

[Tom Gimer]

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

[Patrick K.]

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

[Marty Boardman]

Quote from @Patrick K.:

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

As others have pointed out Patrick the original seller does not get the house back if the buyer defaults. The investor has equitable title to the property. If the bank foreclosures the investor receives any surplus funds and the original seller gets nothing (well, they do get a foreclosure on their credit report).

There are really only two types of sellers that are agreeable to subject-to deals:

1. Sellers with no equity

2. Sellers in foreclosure

I've done hundreds of subject-to deals with both. 

When the housing market crashed in 2008 I defaulted on numerous subject-to deals. Values dropped by 55% in my area (Phoenix) and there was no way I could sell these properties. Fortunately, I escaped any legal trouble because I worked out arrangements with the original sellers and gave them their houses back. Others didn't want them back and were okay with a foreclosure. After all, they were headed that direction before I stepped in to buy their house in the first place.

In 2023 and beyond, I think acquiring houses subject-to is a smart strategy, especially if you plan to fix and flip because you don't need to keep the mortgage in the original seller's name for very long.

As for acquiring rentals, subject-to is also preferable as long as you can count on at least $300 + in cash flow (and have reserves for 6 months). But I would advise you have a plan in place to pay off the existing mortgage in 2-3 years because eventually the original seller will become unhappy with having a loan in their name and no house to show for it.

Finally, there's a lot of irrational fear out there about the due on sale clause and the lender calling the note. I've never seen this happen. Banks are in the business of collecting loan payments, not calling mortgages. If you're paying on time they don't care if Santa Claus owns the house.

Good luck Patrick!

[Tom Gimer]

Quote from @Patrick K.:

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

When the buyer defaults, the seller's credit is trashed, the lender forecloses, and the buyer loses the property. Does it end there? Perhaps.

[Patrick K.]

Quote from @Tom Gimer:

Quote from @Patrick K.:

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

When the buyer defaults, the seller's credit is trashed, the lender forecloses, and the buyer loses the property. Does it end there? Perhaps.

 I don't see how sellers would be comfortable leaving their credit score at the mercy of someone else they barely know, for the life time of the mortgage which could be 20+ years to come. 

[Tom Gimer]

Quote from @Patrick K.:

Quote from @Tom Gimer:

Quote from @Patrick K.:

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

When the buyer defaults, the seller's credit is trashed, the lender forecloses, and the buyer loses the property. Does it end there? Perhaps.

 I don't see how sellers would be comfortable leaving their credit score at the mercy of someone else they barely know, for the life time of the mortgage which could be 20+ years to come. 

Buyer and seller should be in agreement on the exit... for example rehab, resell within X months. A fully informed seller can enforce this via a junior lien. 

Anything other arrangement such as LTR and the seller must be getting a significant cash payment and also have no future plans to use credit or it just doesn't make sense.

[Eliott Elias]

Quote from @Scott E.:

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

Not true. Everything about this is wrong. Elliot are you a robot or a real person? I see you around the forums every day and most of your posts are either misguided or full of hot air. I'm not trying to be the forum police here but it's annoying to see somebody consistently offering bad advice on posts.

 How so? Be more specific and offer some real value to the people here.

[Eliott Elias]

Quote from @Scott E.:

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

Not true. Everything about this is wrong. Elliot are you a robot or a real person? I see you around the forums every day and most of your posts are either misguided or full of hot air. I'm not trying to be the forum police here but it's annoying to see somebody consistently offering bad advice on posts.

 Looks like i have my very own hater, welcome to the club.

[Whit B.]

Quote from @Eliott Elias:

Quote from @Scott E.:

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

Not true. Everything about this is wrong. Elliot are you a robot or a real person? I see you around the forums every day and most of your posts are either misguided or full of hot air. I'm not trying to be the forum police here but it's annoying to see somebody consistently offering bad advice on posts.

 How so? Be more specific and offer some real value to the people here.

Elliot the owner does not foreclose on the investor. The bank forecloses on the original owner because they’ve stopped receiving payments. He’s right, you’re spreading misinformation on this particular post. The investor runs zero risk of ever being foreclosed on in a sub to deal. They are not a named party to the loan. 

[Patrick K.]

Quote from @Marty Boardman:

Quote from @Patrick K.:

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

As others have pointed out Patrick the original seller does not get the house back if the buyer defaults. The investor has equitable title to the property. If the bank foreclosures the investor receives any surplus funds and the original seller gets nothing (well, they do get a foreclosure on their credit report).

There are really only two types of sellers that are agreeable to subject-to deals:

1. Sellers with no equity

2. Sellers in foreclosure

I've done hundreds of subject-to deals with both. 

When the housing market crashed in 2008 I defaulted on numerous subject-to deals. Values dropped by 55% in my area (Phoenix) and there was no way I could sell these properties. Fortunately, I escaped any legal trouble because I worked out arrangements with the original sellers and gave them their houses back. Others didn't want them back and were okay with a foreclosure. After all, they were headed that direction before I stepped in to buy their house in the first place.

In 2023 and beyond, I think acquiring houses subject-to is a smart strategy, especially if you plan to fix and flip because you don't need to keep the mortgage in the original seller's name for very long.

As for acquiring rentals, subject-to is also preferable as long as you can count on at least $300 + in cash flow (and have reserves for 6 months). But I would advise you have a plan in place to pay off the existing mortgage in 2-3 years because eventually the original seller will become unhappy with having a loan in their name and no house to show for it.

Finally, there's a lot of irrational fear out there about the due on sale clause and the lender calling the note. I've never seen this happen. Banks are in the business of collecting loan payments, not calling mortgages. If you're paying on time they don't care if Santa Claus owns the house.

Good luck Patrick!

 Hi Marty, 

Thank you for the information. What was the worst that could happen to the investor if default happens? from what I understand. the bank forclose on the proeprty whose mortgage is with the previous seller. and their credit report got dented. but you are fine other than losing the house?

Also as for your comment regarding pay off the existing mortgage in 2-3 years. I think with some improvement on the house. I can refinance out the old mortgage and still with no cash down. However I might not be incentivized to do so depends on the rate. What can the seller do if they don't "like" the situation? 

thank you for your time.

[Tom Gimer]

There is more incorrect info in this thread.

The current owner of record -- the investor/buyer -- as legal title holder would need to be a defendant in the foreclosure. The foreclosing lender would run title to determine exactly who needs to be noticed of the sale and would discover that the property has transferred. So in addition to loss of the property, the investor may end up dealing with a foreclosure judgment.

[Marty Boardman]

Quote from @Patrick K.:

Quote from @Marty Boardman:

Quote from @Patrick K.:

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

As others have pointed out Patrick the original seller does not get the house back if the buyer defaults. The investor has equitable title to the property. If the bank foreclosures the investor receives any surplus funds and the original seller gets nothing (well, they do get a foreclosure on their credit report).

There are really only two types of sellers that are agreeable to subject-to deals:

1. Sellers with no equity

2. Sellers in foreclosure

I've done hundreds of subject-to deals with both. 

When the housing market crashed in 2008 I defaulted on numerous subject-to deals. Values dropped by 55% in my area (Phoenix) and there was no way I could sell these properties. Fortunately, I escaped any legal trouble because I worked out arrangements with the original sellers and gave them their houses back. Others didn't want them back and were okay with a foreclosure. After all, they were headed that direction before I stepped in to buy their house in the first place.

In 2023 and beyond, I think acquiring houses subject-to is a smart strategy, especially if you plan to fix and flip because you don't need to keep the mortgage in the original seller's name for very long.

As for acquiring rentals, subject-to is also preferable as long as you can count on at least $300 + in cash flow (and have reserves for 6 months). But I would advise you have a plan in place to pay off the existing mortgage in 2-3 years because eventually the original seller will become unhappy with having a loan in their name and no house to show for it.

Finally, there's a lot of irrational fear out there about the due on sale clause and the lender calling the note. I've never seen this happen. Banks are in the business of collecting loan payments, not calling mortgages. If you're paying on time they don't care if Santa Claus owns the house.

Good luck Patrick!

 Hi Marty, 

Thank you for the information. What was the worst that could happen to the investor if default happens? from what I understand. the bank forclose on the proeprty whose mortgage is with the previous seller. and their credit report got dented. but you are fine other than losing the house?

Also as for your comment regarding pay off the existing mortgage in 2-3 years. I think with some improvement on the house. I can refinance out the old mortgage and still with no cash down. However I might not be incentivized to do so depends on the rate. What can the seller do if they don't "like" the situation? 

thank you for your time.

I'm sure there are other worst case scenarios that could play out if the investor defaults. The previous owner could sue, for example. But if they don't then the only real loss is the property (and any money invested). 

@Tom Gimer I've never heard of a lender placing a judgment like this on the new owner. Not sure how this would work since the new owner didn't sign the mortgage/note or make a personal guarantee. In many states the lender can't even get a default judgment against the borrower if it was a purchase-money mortgage. In Arizona, for example, this can't be done. As long as the money borrowed is used to purchase the property, the lender is forbidden from obtaining a default judgment for any losses.

As for dealing with the previous seller Patrick, if you disclose your intent to keep the loan in their name for an unlimited period of time, there's really nothing they can do. You may not even need to disclose this at all. But if they become unhappy with the situation they could notify their lender that they no longer own the house. That would make it very difficult for you to make loan payments and/or pay the loan off.

[Tom Gimer]

@Marty Boardman I'm not talking about a judgment on the debt, which is the responsibility of the original borrower(s) alone. I'm talking about the foreclosure process through which the current owner is divested. This would not be public record in all states, but in many it would.

[V.G Jason]

Can someone explain how this subject to works? Don't mean the hijack the thread. But like a real step by step.

Say there's a house in Dogville, Texas, it's on the market for $500k. The current owner has a $375k mortgage on it, at 4%. We agree to a $480k sale price. Now, someone please walk me through this process, from downpayments to appraisals, inspections to attorneys, etc. 

[Tom Gimer]

Quote from @V.G Jason:

Can someone explain how this subject to works? Don't mean the hijack the thread. But like a real step by step.

Say there's a house in Dogville, Texas, it's on the market for $500k. The current owner has a $375k mortgage on it, at 4%. We agree to a $480k sale price. Now, someone please walk me through this process, from downpayments to appraisals, inspections to attorneys, etc. 

Absent some facts being added to the pattern that suggest this property should not be sold retail, I will defer on a walk-through.

[Jay Hinrichs]

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

the owner has no rights to foreclose unless the owner did a wrap or a second behind the first that is being bought sub to.. but those are not what those trying to do sub to are gunning for.. the old owner gets screwed in this scenerio and has no foreclosure rights so not sure maybe you meant something else.

[Jay Hinrichs]

Quote from @Scott E.:

Quote from @Eliott Elias:

If the investor stops making payments the owner will have to foreclose on the investor to deed back to their name. The investor probably want's to avoid that, but is a possibility. 

Not true. Everything about this is wrong. Elliot are you a robot or a real person? I see you around the forums every day and most of your posts are either misguided or full of hot air. I'm not trying to be the forum police here but it's annoying to see somebody consistently offering bad advice on posts.

 3 thumbs up on this comment of course not every post but the post on this thread is out to lunch for sure and completely wrong.

[Jay Hinrichs]

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

its why way back in our day we did these with wraps CA has a debt instrument called an All inclusive Deed of Trust it wraps the orginal mortgage it is a second in function my dad had a company called CA wrap back in the day and did hundreds of them.. its de ja vu all over again.. he did this during the Carter interest rate spikes just like sub too is now coming to light in a big way because of interest rate spikes..  But like most things you are going to have a ton of beginners listening to someone who is just out to sell guru programs and one size does not fit all in every state.. but one they get a BP pod cast its off to the races.

[Account Closed]

Quote from @Tom Gimer:

Quote from @Patrick K.:

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

When the buyer defaults, the seller's credit is trashed, the lender forecloses, and the buyer loses the property. Does it end there? Perhaps.

Just to add to what @Tom Gimer: points out, "When the buyer defaults": let's add that the seller can and sometimes does sue the buyer, and sometimes the seller is contacted by an advocacy group or an attorney and the attorney general is notified and if hanky panky is involved it can mean an investigation of bank fraud, wire fraud, violation of the Consumer Protection Act, violation of Dodd- Frank and some state specific charges. It's a very serious matter. Plenty of cases based on those points. Never, never, never miss a payment. If there is any question in your mind about making the payments, don't do the deal.

[Jay Hinrichs]

Quote from @Account Closed:

Quote from @Tom Gimer:

Quote from @Patrick K.:

Quote from @Tom Gimer:

@Patrick K. You are mistaken on this concept:

"... what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller."

The only way the seller is getting the property back is if they (1) recorded a mortgage/deed of trust in connection with the subject-to transaction, (2) properly foreclose on that lien, and (3) become the high bidder at the auction sale. The likelihood of all of these occurring is low in a typical subject-to transaction.

 Could you elaborate on the consequence if the buyer defaults on the loan payment?

When the buyer defaults, the seller's credit is trashed, the lender forecloses, and the buyer loses the property. Does it end there? Perhaps.

Just to add to what @Tom Gimer: points out, "When the buyer defaults": let's add that the seller can and sometimes does sue the buyer, and sometimes the seller is contacted by an advocacy group or an attorney and the attorney general is notified and if hanky panky is involved it can mean an investigation of bank fraud, wire fraud, violation of the Consumer Protection Act, violation of Dodd- Frank and some state specific charges. It's a very serious matter. Plenty of cases based on those points. Never, never, never miss a payment. If there is any question in your mind about making the payments, don't do the deal.

Mike I have posted about this more than a few times.  however to follow up with the dangers of undercapitlaized investors or companies deploying this strategy.

I ran into a small company that had gone to a guru event back in early 2000s and were sold on the sub too then lease option sand sandwich type deal and did not care about equity just about cash flow.  IE some delta between the lower rate and what they could rent the home for.. So they pick off a bunch of non equity homes  ( like what is going to happen in todays market  with many starting out that just want to land a deal and own doors.

so they do about 35 of these over the course of 18 months  average delta is 200 to 300 a month and of course the drip income folks think Hey no money down and most of these were the no money or very little down variety since they had no real equity. So they are making 6 to 8k a month positive. And of course they really dont have any real reserves they are using this money for rent and food etc.  

Next thing they know one LO tenant after another defaults and it does not take many to cause their world to go upside down.. when you figure the underlying payment was about 1k or so.. next thing you know 6 or 7 non pays and they have Zero or negative cash flow dont have the money to try to unwind the LO as those people figured they had equity and would not move.. Now they start defaulting on the payments that they took over.. The sellers who start getting late notices and of course they no longer own the property and most of these sellers dont have the dough to just start making payments on houses they no longer own.. And wa la the whole scheme fell down..  And of course the sellers did exactly what your describing got lawyers  filed complaints with the AG which ( as someone who went through that ) I can tell you is no fun at all.. So I meet them and stepped in and did my best to help them rectify.. I bought some of the properties that had gone up but they did not have time to effect a normal sale.. No means to refi and it was a big huge mess and put them out of business with a ton of stress and they scattered like the wind.. I took out the most aggressive folks that wanted to hang them so they did work out of it but it was the end of their career in owning real estate .