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. 

[Wale Lawal]

@Patrick K.

Subject to is far from the only financing option made available to today’s investors; it’s merely a complement to every other strategy out there. If, for nothing else, the more financial strategies you have at your disposal, the more likely you will be to use one to land your next deal.

Subject to strategies are an alternative to traditional financing, which could come in handy when the right situation presents itself. That’s an important distinction to make, as subject to financing is a niche strategy — there are a time and a place to use it. Here’s a look at some of the most obvious pros and cons of subject to financing to give you an idea of whether or not it remains an option for your next acquisition:

Pros

• Cash Flow & Equity: Provided the right steps have been taken, the property can very easily award buyers with cash flow and the chance to build equity. You see, in a subject to, the buyer takes control of the home while the seller “owns” the loan. That means the benefits of real estate fall directly to the buyer once they take control.
• Lower Barrier To Entry: Subject to financing strategies allow buyers to acquire properties without committing to the large down payments we have grown accustomed to. The initial payment doesn’t need to be 20 percent, as one could expect if they wanted to acquire a loan without private mortgage insurance.
• No Credit Necessary: Sellers are not basing the transaction solely on the buyer’s credit history. That can mean one of several benefits: the buyer can follow through with a purchase without pristine credit history or free to leverage their credit in an additional purchase. If you so desired, you could still use your credit to acquire a traditional loan while simultaneously carrying out a subject to.

Cons

• The Deal Is Final: For better or for worse, subject to transactions are final. Provided everything goes well, that’s exactly what you’ll want, but there’s always the chance the market changes. In the event things take a turn, there’s no turning back. Over the course of subject to deals, you now have an ethical responsibility to the seller.
• The Loan May Be Called Due: There is a possibility that the lender could call the loan due if they realize the home has been transferred. In that case, they may require the loan to be paid in full within 30 days.
• Insurance Requirements: You will need to obtain a new insurance policy naming you or your company as the insured on the policy.
• Credit Risk: If you don’t make payments on time, you can hurt the seller’s credit, and risk foreclosure.

Buying subject to carries risks for homebuyers and may expose sellers to liability. Because of these potential risks, it is strongly recommended that you seek legal guidance on the required paperwork and risk adherence.

Read this article for more information https://www.fortunebuilders.co...

All the best!

[Account Closed]

Quote from @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 .

@Jay Hinrichs: Yep, you've been really good about posting on the "down side" of Subject To and I read your posts.

The challenge is that there is a ton of people on Youtube talking about how easy Subject To is, then when someone hears that a lot on youtube, then discovers Bigger Pockets and assumes Subject To is all rainbows and roses, we have to keep educating them to keep them out of trouble.

[Caroline Gerardo]

Depends on how you structure this. If seller transfers the deed to you the lender can foreclose at will. If you pay perfect and don't change the insurance the servicer might put you at bottom of pile of concern. Lenders gave low rate loans at 3 which they would rather churn and turn to profitable ones today at 7 so there is motivation to get paid off.

If there is an insurance claim and the deed and policy is in your name the lender gets the check(s) and you as new owner might get nothing. You won't have the right to negotiate with lender or cosign the check, you need to sue.  You can't speak to lender or adjuster. Legal costs on you. $

If title remains in seller's name and they  file bankruptcy (which often happens as they were desperate to sell/underwater/or near insolvent as the reason to do this). When they file BK ,lender gets notice (is listed in docket summary) which would be legal fees and you cannot make payments. You need an attorney for this to be given notice. $

If you stop making payments and deed is in your name, lender wrecks the credit of the seller. You can bid at the auction but the reason for not making payments is likely that the property is not worth the loan payoff so you won't bid. Legal fees and junk added to payoff. You pocket the rents (greedy) and ruin the credit of the seller. 

If you don't properly disclose to seller when you structure this there are states where there are several laws to protect the seller (no protection for you.) DIY on a house with no equity may end up with black suits visiting your house, especially if seller is elderly or protected person. Guru selling this plan is making money on you buying books and seminars they probably did one. The HOA has the right to not disclose or cooperate with you if you aren't on title. All the tax liens, Lis pendency of the seller if you aren't on title get added on the subject. You need an attorney to cover your liability. $$

Just because a dude says this is the way to make a zillion dollars doesn't make it real. Making money isn't easy.

[Jay Hinrichs]

Quote from @Account Closed:

Quote from @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 .

@Jay Hinrichs: Yep, you've been really good about posting on the "down side" of Subject To and I read your posts.

The challenge is that there is a ton of people on Youtube talking about how easy Subject To is, then when someone hears that a lot on youtube, then discovers Bigger Pockets and assumes Subject To is all rainbows and roses, we have to keep educating them to keep them out of trouble.

Like all business properly capitalized honest investors can do this strategy no problem.. under capitalized less than honest investors create havoc for the seller many times and legal issues for themselves.. there is already comments about.. about  ( dont worry about the loan its not in your name) blah blah blah.. its this attitude that leaves sellers in a real mess when things to inverted turtle..

[Kearsten M Higgs]

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!

 Marty,

In your experience of buying subject to, what have been some of the ways you've overcome the owners objection to allowing the mortgage to still be in their name and get the subject-to in place?

As an individual not comfortable with other people paying my bills I struggle to be an individual who might allow another person to take over payments and have the unknown idea of an unforseen even happening and my personal credit becoming ruined.

[Marty Boardman]

Quote from @Kearsten M Higgs:

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!

 Marty,

In your experience of buying subject to, what have been some of the ways you've overcome the owners objection to allowing the mortgage to still be in their name and get the subject-to in place?

As an individual not comfortable with other people paying my bills I struggle to be an individual who might allow another person to take over payments and have the unknown idea of an unforseen even happening and my personal credit becoming ruined.

Sellers in foreclosure typically have NO issue with me taking over their loan payments. After all, they weren't making them, that's how they go into the situation they're in now.

All they care about is 1) how much cash will I give them at closing 2) how much time do they get to move out 3) how much cash will they get when they move out.

After I bring their loan current and make 2-3 payments their credit score increases, anywhere from 60-100 points. If I do get any objections I tell them this, it's a huge benefit of going the sub-to route.

[William Jenkins]

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

[Marty Boardman]

Quote from @William Jenkins:

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

The bankers I know love collecting interest payments, regardless of the rate, not calling performing notes.

Here's why...

Think about the amount of manpower it would take for a lender to cross-reference tax records against their entire loan portfolio to verify the original borrower is no longer on title. 

It would be a monumental undertaking. Especially when you consider how many people transfer title from their names to their LLCs, trusts, etc. The only way a lender can really know for sure if the original borrower no longer has an equitable interest in the property is to pull a title report, which costs time and money.

And for what? To call what is likely a small percentage of performing notes?

That, and there is no guarantee if the lender does call the note that the current owner is getting a new loan at the higher rate with them, so why go through all of this?

The only time I've heard of notes getting called is when the borrower tips off the bank that they sold the house and are no longer on title.

I suppose the landscape could change as you have suggested, but seems unlikely to me. If I'm wrong I'll just get a new loan if the note gets called.

[Jay Hinrichs]

Quote from @William Jenkins:

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

issue is the banks sold them to servicing companies or to China.. Banks by and large do not keep anything but portfolio loans and they will call those if they feel threatened.

[Jay Hinrichs]

Quote from @Marty Boardman:

Quote from @William Jenkins:

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

The bankers I know love collecting interest payments, regardless of the rate, not calling performing notes.

Here's why...

Think about the amount of manpower it would take for a lender to cross-reference tax records against their entire loan portfolio to verify the original borrower is no longer on title. 

It would be a monumental undertaking. Especially when you consider how many people transfer title from their names to their LLCs, trusts, etc. The only way a lender can really know for sure if the original borrower no longer has an equitable interest in the property is to pull a title report, which costs time and money.

And for what? To call what is likely a small percentage of performing notes?

That, and there is no guarantee if the lender does call the note that the current owner is getting a new loan at the higher rate with them, so why go through all of this?

The only time I've heard of notes getting called is when the borrower tips off the bank that they sold the house and are no longer on title.

I suppose the landscape could change as you have suggested, but seems unlikely to me. If I'm wrong I'll just get a new loan if the note gets called.

I think its far easier for the big servicing companies that own these mortgages to check on status than you might think.. Just like tax reporting services for lenders.  There are companies that will do this.

[Caroline Gerardo]

 Servicers have data tools that run all the accounts and flag ones where insurance or title is not a match. This takes seconds and costs pennies to run the reports for hundreds of thousands of loans. This is NOT where a paper file is in a drawer and manually pulled. Anomalies are put on watch lists and reviewed for valuation. 

Have you ever made an insurance claim? Name the company who cut you a check in your name?

[Caroline Gerardo]

@Account Closed they charge for a class, get photos taken at the valet with someone else's luxury car or photoshop in a jet, write a twenty page book and become a zillionaire without even investing.

Nothing easy or cheap or cuts corners or cheats is going to be the road to fast fat money. 

[Marty Boardman]

Quote from @Caroline Gerardo:

 Servicers have data tools that run all the accounts and flag ones where insurance or title is not a match. This takes seconds and costs pennies to run the reports for hundreds of thousands of loans. This is NOT where a paper file is in a drawer and manually pulled. Anomalies are put on watch lists and reviewed for valuation. 

Have you ever made an insurance claim? Name the company who cut you a check in your name?

I leave the original owner's insurance in place (it's escrowed with the monthly payment anyway) and then pay for a separate policy in my LLC's name. Although I've been fortunate that I've never had to file a claim.

[Marty Boardman]

Quote from @Jay Hinrichs:

Quote from @Marty Boardman:

Quote from @William Jenkins:

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

The bankers I know love collecting interest payments, regardless of the rate, not calling performing notes.

Here's why...

Think about the amount of manpower it would take for a lender to cross-reference tax records against their entire loan portfolio to verify the original borrower is no longer on title. 

It would be a monumental undertaking. Especially when you consider how many people transfer title from their names to their LLCs, trusts, etc. The only way a lender can really know for sure if the original borrower no longer has an equitable interest in the property is to pull a title report, which costs time and money.

And for what? To call what is likely a small percentage of performing notes?

That, and there is no guarantee if the lender does call the note that the current owner is getting a new loan at the higher rate with them, so why go through all of this?

The only time I've heard of notes getting called is when the borrower tips off the bank that they sold the house and are no longer on title.

I suppose the landscape could change as you have suggested, but seems unlikely to me. If I'm wrong I'll just get a new loan if the note gets called.

I think its far easier for the big servicing companies that own these mortgages to check on status than you might think.. Just like tax reporting services for lenders.  There are companies that will do this.

Perhaps. I've never had it happen before and I've been doing sub-to deals since 2003. I did about a dozen last year, and a handful so far in 2024.

As investors we take risks, and when you consider them all, having a note called is on the low-end of the scale. If you're buying right then getting the loan refinanced shouldn't be an issue.

[Jay Hinrichs]

Quote from @Marty Boardman:

Quote from @Jay Hinrichs:

Quote from @Marty Boardman:

Quote from @William Jenkins:

@Marty Boardman.  

"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."

Certainly true in the past, but I'm not so sure going forward.  Banks really didn't have an incentive in the past as rates were generally going down.  A subject too loan generally had a higher interest rate than the prevailing rate (not all, but that was the general direction of the market). 

Now banks have plenty of incentive to seek out and call these loans due.  There are a lot of 30 year loans out there at 2-4% and banks would absolutely love to call those loans due and reissue at 7-8% (or simply own treasuries at 5%).  

The bankers I know love collecting interest payments, regardless of the rate, not calling performing notes.

Here's why...

Think about the amount of manpower it would take for a lender to cross-reference tax records against their entire loan portfolio to verify the original borrower is no longer on title. 

It would be a monumental undertaking. Especially when you consider how many people transfer title from their names to their LLCs, trusts, etc. The only way a lender can really know for sure if the original borrower no longer has an equitable interest in the property is to pull a title report, which costs time and money.

And for what? To call what is likely a small percentage of performing notes?

That, and there is no guarantee if the lender does call the note that the current owner is getting a new loan at the higher rate with them, so why go through all of this?

The only time I've heard of notes getting called is when the borrower tips off the bank that they sold the house and are no longer on title.

I suppose the landscape could change as you have suggested, but seems unlikely to me. If I'm wrong I'll just get a new loan if the note gets called.

I think its far easier for the big servicing companies that own these mortgages to check on status than you might think.. Just like tax reporting services for lenders.  There are companies that will do this.

Perhaps. I've never had it happen before and I've been doing sub-to deals since 2003. I did about a dozen last year, and a handful so far in 2024.

As investors we take risks, and when you consider them all, having a note called is on the low-end of the scale. If you're buying right then getting the loan refinanced shouldn't be an issue.

 my dad was doing sub to wraps in the 70s when I got into RE and I have done well over 200 of them personally.. until OR WA changed the laws dealing with pre foreclosures. So i get it. I had half a dozen called.. but we just paid them off .. I think the issue today is all the new folks that may not be as well capitilized as you are or we were/are. to deal with these transactions there is going to be some very messy deals coming down the pike. 

[Jay Hinrichs]

Quote from @Marty Boardman:

Quote from @Caroline Gerardo:

 Servicers have data tools that run all the accounts and flag ones where insurance or title is not a match. This takes seconds and costs pennies to run the reports for hundreds of thousands of loans. This is NOT where a paper file is in a drawer and manually pulled. Anomalies are put on watch lists and reviewed for valuation. 

Have you ever made an insurance claim? Name the company who cut you a check in your name?

I leave the original owner's insurance in place (it's escrowed with the monthly payment anyway) and then pay for a separate policy in my LLC's name. Although I've been fortunate that I've never had to file a claim.

thats how I did mine as well.. cost of doing bizz in sub to was double insurance for us.