Pre-foreclosures: Buying Subject-to?

Question

How difficult is it to purchase a pre-foreclosure, subject-to the existing financing?

In these cases, the owner has defaulted and the lender has begun the foreclosure process.  There is usually a foreclosure attorney or trustee that is assigned to the case.

If you want to purchase the property subject-to the exising financing and you won't be paying off the owner's mortgage, will the foreclosure attorney have a problem with it?  Or will they insist that any buyer pay off the mortgage?  Does anyone know any strategies to purchase a pre-foreclosure subject-to?

Bryan Hancock · Answer

It may be different based on whether or not it is a mortgage state.  If you are just curing the default with a trustee you can clear things up until the day of the sale.  I have had coaching students drive to the trustee in Dallas to give them a cashier's check to cure defaults the day before the auction.  The lender just wants to get paid and the owner has a right to cure the default.

Paul B. · Answer

I've bought only one house this way. I've never sweat so much in my life. It's a very unsettling feeling to drop a certified check off to the lawyer's office for $10,000 the day before an auction. Sure, you have the deed already, and sure, you've gotten the all-clear from your title company, but it's nerve-wracking.

And you can bet that my stomach was one huge knot when I went to the house a couple days later and saw that the locks had been changed by an asset manager!

This was an error; the house was just on the schedule to be serviced. But it still made me VERY nervous.

I don't think you will be able to cure the default by just paying the lender what's owed. At that point, the attorney has the file, and they have the reinstatement amount. The lender doesn't want to be bothered.

In this market, I would be shocked to see a lender call a performing loan simply as a result of the due on sale clause being triggered. However, it's always possible. That's why my suggestion is that you do subject-to deals only when you're planning on flipping the house quickly or refinancing it.

Kevin H. · Answer

point taken, and true after some thought, most agents release the house but they will STILL activate the clause,why ?? because it doesnt cost them a dime to do it, and its in the RLA that the seller signs when the agent takes the listing(full disclosure)and the agents biggest fear is that the property will be sold by another agent"swooping" in on their gig. However if the property is still under a RLA with a listing agent and an investor who is representing himself approaches and shows an interest in the purchase of the property and an agreement is radified the commmision must still be paid to the listing agent. Now I am reffering to Shorts sales that currently dominate my market here in So Cal.And further, Because the agent was the procuring cause of the interest or transaction they will want to get paid.Now the secret In IMO is to get to the seller BEFORE they list with an agent.
 And Bryan I am fan BTW
 the info that and questions that you provoke are a great asset to this site!
 I am student of investing and you contributions are invaluable.
 Best Regards

Jon Holdman · Answer

You're going to have to pay all the back payments, fees and charges and get the foreclosure stopped.  Then the trustee is out of the picture and its a normal subject to.

Wayne Brooks · Answer

Melinda,
What you described is Not a short sale.  No one would want to buy sub2 when a property was upside down, if they were planning on paying the mtg.

David A. · Answer

At what LTV does it make sense to take a property subject-to?
What happens if the lender finds out and calls the loan due. I am a bit confused of why investors take this risk. Would a homeowner be able to file a suit if the investor misses any future payments? 
If you take a sub-to and wrap it to a new buyer, do you have to use a loan servicing company in Texas?

Bryan Hancock · Answer

No worries Kevin...This is a bit of a sore subject for me because I often have this conversation with sellers and they are more worried about the agent not getting their commission than they are in allowing their problem to be fixed.

However, most agents are fairly reasonable and would rather have the seller get bailed out than to have the house go to foreclosure.

Bryan Hancock · Answer

Most Realtors WILL release the house.  The seller generally isn't going to sell through another agent because they will be selling it to the investor buying subject-to.  I don't know of any investors that pay agents to release a contract when they weren't the procuring cause of the sale.

Kevin H. · Answer

If the realtor is still involved, it will/can  be a little tough, the realtor will be looking for a regular RPA on the property. And it WILL have to be submitted to the bank for approval/disapproval. remember, the realtor will be looking for a commision too, thats their objective sell that property for the client and get paid.And most realtors will have a listing agreement well into the forclosure date.The only way to "get" the property is to talk to the home owner and try to make a side deal and fire the Realtor.......but again thats tough to do. Most Realtors WILL NOT release the property and they will activate a clause in the RPA that states that if the property sells by another agent or means the Primary Listing agent will recieve his/hers FULL commision, and then you just opened a can of worms.
 The other avenue is to call the agent, and be upfront about what you want to do, offer them half of what ever commision they would get on the transaction so if it 6% to all agents offer him/her  2.5-3% the regular commision. And you just might have a legit shot at getting the deal done with the agents help. Utilize the skills of the agent your advantage. Im on the hunt right now for the same "deal". I hope this helps.
 Best Regards, Kevin

Sharad M. · Answer

How much is the property listed for with the realtor?