Subject-to property purchase

[Eric Anderson]

Hello all! 

It's a long read and I appreciate your feedback.

I'm looking at doing a subject-to transaction, me, as the buyer.  I've got a verbal agreement for these terms: purchase property for $230,000, 0% down, 20 year amortization, record title, long term escrow and buyer pays all closing costs.  I've reached out to an attorney to write the contract.  My attorney is a younger guy and I don't think he has ever written a subject-to contract and doesn't understand the transaction process.  Although he is right on a few items, I think he is wrong on multiple.  First, he said I won't receive title, I did not ask to receive a title, I asked for recording of title.  Second, he talks about the lender changing their mailing address and me not being notified about that causing missed/late payments.  That would be covered under long term escrow.  In the contract I will have a due on sale clause that will require a signature outlining the risk for the seller.   The contract would also have a clause in there about the process for the foreclosure process (following state laws) if payments are missed.   

Here is his response in an email conversation:

So, as long as the mortgage is on the property, you won't be receiving the title, and if you aren't receiving the title you'll basically be renting to own. The problem with this is if you miss a payment, statute supports evicting you within 3 days (as if you were just an ordinary tenant). Taking subject to their mortgage is very high risk.
Since you are currently living there and plan to continue, another risk is that because you won't be receiving title, the property is technically not owner occupied, and that is something that potentially risks the mortgage being called.
There's also a risk that the lender could change their payment address but only sends notice to the legal owner and not you. In that case the mortgage could be called, you'd be in breach of contract, you could lose the property, the sellers could lose it in foreclosure, and then everyone loses out.
This deal isn't actually seller financed, it's an assumption of mortgage, and because of that we recommend getting financing to clear the mortgage first otherwise you risk some of the things happening that I mentioned above.
That being said, if you'd still like to move forward, we are going to need a complete copy of their entire mortgage loan agreement and review thoroughly to make sure we are drafting around those risks.
Let me know your thoughts and if you have any questions or concerns.


Thank you again, I your input is much appreciated!

Eric 

[Account Closed]

Quote from @Eric Anderson:

Hello all! 

It's a long read and I appreciate your feedback.

I'm looking at doing a subject-to transaction, me, as the buyer.  I've got a verbal agreement for these terms: purchase property for $230,000, 0% down, 20 year amortization, record title, long term escrow and buyer pays all closing costs.  I've reached out to an attorney to write the contract.  My attorney is a younger guy and I don't think he has ever written a subject-to contract and doesn't understand the transaction process.  Although he is right on a few items, I think he is wrong on multiple.  First, he said I won't receive title, I did not ask to receive a title, I asked for recording of title.  Second, he talks about the lender changing their mailing address and me not being notified about that causing missed/late payments.  That would be covered under long term escrow.  In the contract I will have a due on sale clause that will require a signature outlining the risk for the seller.   The contract would also have a clause in there about the process for the foreclosure process (following state laws) if payments are missed.   

Here is his response in an email conversation:

So, as long as the mortgage is on the property, you won't be receiving the title, and if you aren't receiving the title you'll basically be renting to own. The problem with this is if you miss a payment, statute supports evicting you within 3 days (as if you were just an ordinary tenant). Taking subject to their mortgage is very high risk.
Since you are currently living there and plan to continue, another risk is that because you won't be receiving title, the property is technically not owner occupied, and that is something that potentially risks the mortgage being called.
There's also a risk that the lender could change their payment address but only sends notice to the legal owner and not you. In that case the mortgage could be called, you'd be in breach of contract, you could lose the property, the sellers could lose it in foreclosure, and then everyone loses out.
This deal isn't actually seller financed, it's an assumption of mortgage, and because of that we recommend getting financing to clear the mortgage first otherwise you risk some of the things happening that I mentioned above.
That being said, if you'd still like to move forward, we are going to need a complete copy of their entire mortgage loan agreement and review thoroughly to make sure we are drafting around those risks.
Let me know your thoughts and if you have any questions or concerns.


Thank you again, I your input is much appreciated!

Eric 

Sounds to me more like a Wrap than a Subject To. If you are paying more to the seller than what his payment is, it's a Wrap. Yes, title transfers to you and you now own the property. The exisiting mortgage stays in place in the name of the seller only. It is not an assumption. (That's a very different thing.) There is already a Due on Sale Clause in the existing mortgage. That can be handled. Most people, even lenders, do not understand, that a loan/mortgage and ownership/title are two entirely different things. They can be severed. That doesn't make one of them go away though. That is what the Due on Sale is all about. The lender underwrote the loan based on the information provided by the borrower and the property. Now, ownership has transferred and their underwriting is no longer valid. That increases their risk.

It doesn't matter that it is no longer an owner occupied loan since the loan isn't in your name and he will have already violated the Due on Sale Clause anyway. DOS is rarely called, but it can happen. I've had it happen twice in over 25 years and there are plenty of solutions.

If the lender assigns the loan to another lender you wouldn't get notice. Long term escrow has nothing to do with this. And you can't talk to the existing lender unless you get specific written permission from the borrower.

Your comment: "First, he said I won't receive title, I did not ask to receive a title, I asked for recording of title."
Recording title and receiving title are the same thing. There is no difference. You receive title when it is recorded which is what you'd want in this case.

If your agreement with the seller pays off in 20 years then his loan has to pay off in under 20 years or you have a problem. A Subject To means you are making the payment for the seller, same terms and payoff date. This doesn't appear to be that.

If he doesn't pay his loan you might be foreclosed on. It's better for you to pay the lender directly or through a servicer.

You don't want to add a Due on Sale Clause for your agreement with your seller.

You both are wrong on multiple items. Scary wrong.

Since neither of you seems to know what you are doing, (I've done only these for over 25 years,  I only do creative financing, and I used to be a mortgage originator) I would highly suggest changing attorneys and finding someone who knows how to put this together properly.

Here's a post I did on Subject To that may help

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