Can someone please provide the breakdown of SUBJECT TO after it's been transferred?

Question

It seems like every YouTube video, Podcast episode, Facebook group teaches about first part of "subject to", but I'm left with so many questions. I'm not understanding the "after transactions" of subject to.

You take over the seller's mortgage. The debt is in the seller's name, but the house is in the investor's name. What's the exit strategy on the investor's part? What part do you actually own the property as an investor? Does the investor gain equity in their name? Or does the seller still gain equity from the investor's payments? What happens to the seller's loans if the house sells from the investor?

There are so many missing pieces I can't get my head wrapped around that these gurus don't explain. I would appreciate it if someone could give me the breakdown once the subject to process is a complete success and the investor has gained financials on this portion.

Account Closed · Answer

Your Comment: "When you knowingly hide the fact that you're breaking a loan covenant from a lender to induce them to keep taking payments on a lower interest rate loan...that's techinically mortgage fraud.'Actually, for clarificaton, the borrower has violated the agreement, The new owner has not done anything illegal. The new owner is not a signer on the loan.

Doug Smith · Answer

Let me approach this from the lender's perspective. The holes in sub to financing tend to come about in the part after the transfer. Every year, the lender's escrow department is going to pull the new tax bill and reach out to the insurance company to get an updated declarations page and to ensure that all taxes and insurances are paid. Several things pop up here. First, that's usually when they figure out that the property has transfered without them being notified. Contrary to what the courses teach, this ticks lenders off (I've been a lender for 32 years...I know). It violates the due-on-sale provisions and the lender can call the loan. Will they? Usually not...at least right away. They have to figure out how they are going to handle it. They underwrote the loan to the former owner...not the investor. When you knowingly hide the fact that you're breaking a loan covenant from a lender to induce them to keep taking payments on a lower interest rate loan...that's techinically mortgage fraud. You're hiding/omitting material information from them. They likely won't go after you for it. They simply want to figure out how to extricate themselves from the situation. Here's another pitfall. If they get a cancellation notice of the old insurance policy in the former person's name and they can't show insurance on the property in that person's name, they are going to force-place insurance with a very, very expensive forced-placed policy. That pushes the payments up. You're right, there are a lot of missing pieces. It's certainly a gamble...one that I've never seen gurus share with their students. I'm not a fan of subject to. It's not a new concept...it's been around since long before my professional career and it will keep being a topic of paid courses going forward. Whether you partake in it or not, well, that's up to you. I wish you well in your investing career.

Kevin Sobilo · Answer

The investor can do whatever they want with the property, they OWN it at that point and they have legal authority to deal with the mortgage even though its in the seller's name. So, they can rent the property, rehab it, whatever they want. A smart seller might ask for some kind of limit to the Subject-To financing but I suspect that many don't because they are facing foreclosure and therefore aren't buying another house anytime soon. The timely payment of the existing mortgage by the investor is helping their credit! So, to them its a positive situation until they get to where they want to buy another house.

Christina Smith · Answer

Hi @David M. Thank you for your response! It sounds like there has to be an agreement established between the investor and seller for the number of years the investor will pay the seller's mortgage. There seem to be many ways to go about this which is why it is called creative finance. Let's say the seller wants to get out of the house. The investor gives a 5% down payment, and takes over the seller's mortgage, can the investor put a tenant in there in the meantime and collect equity even though the loan is in the seller's name?

Doug Smith · Answer

I won't redact. You are correct. A sub to is not fraud in of itself, but as you copied, knowingly hiding facts to induce a lender to take, or not take an action is, indeed, fraud. It's the active concealment that is the problem that some gurus had been preaching. I've noticed gurus have started to walk-back some of their teachings to knowingly and actively hide transfers as they are getting that same advice from attorneys.

Jay Hinrichs · Answer

agreed everyone just needs to read the events of default section of their mortgages. Alienation of title is one.. and as stated it simply gives the lender a right to foreclose if they so choose. Obviously those who do a lot of sub too want to make it as tough as possible for the lender or servicing company to find out there has been a transfer so thats why all the machinations around land trusts and not changing insurance and other tips and tricks to make the transaction appear that nothing has really changed in the eyes of the lender/servicer

Caleb Christopher · Answer

I call BS. Subto is not fraud. Everyone say it 3 times out loud.If you're obtaining funding from a lender and provide false information or withhold material information, yes, that would be fraudulent, but transferring after closing without notifying them is not fraud. It's a defined default within the mortgage document, and it has a defined remedy. The lender is not obligated to exercise that remedy, and often they don't.Come on now, you make important points overall, but this one needs to be redacted because it's just untrue.

Marcus Auerbach · Answer

If a seller is willing to do a subject to (which I would never as a seller, but anyway..), IMO a better option is the rent the property with the option to purchase. AKA lease option. No issue with the lender, financing rates stay low, title does not change, investor has locked in a low, present day purchase price and has the right to rent/cash flow and either execute the option personally with a new purchase mortgage in the future to harvest the equity or sell it to the tenant and pocket the difference. Good idea to send money directly to the lender, to make sure the old mortage is paid. I have done lease options as a investor/seller to tenants in Milwaukee and that works well. The issue is that you really have to coach the tenants for that year to get their credit fixed. Some unethical investors will actually hope they won't quailify, kick them out and collect a new non-refundable option fee.

Jay Hinrichs · Answer

further that violation gives the lender the right to foreclose but not the obligation as described in the Alienation clause of the mortgage.

Christina Smith · Answer

I appreciate your detailed response from a lender's perspective, Doug. I have many more questions to ask, but I will ask better questions once I get started. That's how I'm going to really learn. Thank you!