Subject To: what sellers think vs. the reality

[Don Konipol]

There’s been a LOT of hype about purchasing property SUBJECT TO existing financing.  With YouTube videos, seminars and mentorship’s exploding around this niche, there are plenty of inexperienced buyers and sellers going to be involved in these type deals - and in my opinion this is going to be a disaster for many.

The reason is that both the buyers and sellers don’t actually perceive where they stand after doing a “subject to “ transaction.

My experience has been that sellers gloss over any information outlining their legal responsibilities after the sale; they believe that they have sold the property, and if there have been no negative repercussions after a few months they never think about it again. To them it’s just like any other sale.  What they don’t fully, or sometimes even partially comprehend is that they still are fully legally responsible for the mortgage note they signed.  Only now they’re arguably in worse position because although they are responsible for the debt they DON’T own the asset securing said debt.  And if the buyer stops paying, or the note is accelerated under the due on sale clause, the buyer can potentially continue ownership without making payments for as long as it takes to foreclose in the state in question PLUS the length of time given in any TRO, PLUS the length of time it takes to get through a bankruptcy filing.  And if the buyer purchased the subject property through a single asset remote entity, the bankruptcy of that entity likely will not reflect on his personal credit history.  All this time the seller is responsible for interest accumulating at the default rate, often as high as 18%, legal fees of the lender, appraisal fees if the court orders or wants the property appraised, insurance and taxes.  I’ve seen cases where sellers subject to ended up being sued for $100,000 more than the principal balance of the note at the time of sale.

Buyers are being told that this is a low risk strategy - they have no legal obligation for the note payment, and so their loss would be limited to the down payment.  Well, maybe in 1978.  Even assuming the seller is so naive as to not engage a real estate attorney to insist on buyer guarantees, they may still have grounds to sue the defaulting buyer under numerous Federal and state statutes regarding full disclosure, statute of fraud, deceptive trade practices, Dodd Frank violations, and regulations of the CFPB.  Spending $50k to defend yourself for each instance of default tends to be a wake up call.  Further, the purchase of the property still has to make sense.  Buying a property that needs tons of work to be put in rental condition and or negatively cash flows isn’t made any more profitable because on is purchasing it subject to.  And, the majority of sellers willing to sell subject to have just such properties. 
‘Also, buyers believe that “lending institutions almost never call the note due for violation of due on sale”.  Well, this is based on history - the last 40 years, when interest rates in general fell from 18% to 3%, thereby giving the lenders absolutely no incentive, in fact a NEGATIVE incentive to call the note due.  Further. Most of this time there wasn’t easy, online verification of deed transfers, as there are now.  So, we will have to see what happens when a lender finds out that a 2.75% mortgage he’s stuck with has the securing property transferred, rending them able to foreclose and reinvest their money at 8%.

It’s sure going to be INTERESTING.