Skip to content
×
PRO
Pro Members Get Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
$0
TODAY
$69.00/month when billed monthly.
$32.50/month when billed annually.
7 day free trial. Cancel anytime
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Creative Real Estate Financing
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

User Stats

395
Posts
151
Votes
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
151
Votes |
395
Posts

Sub2 Deal- From an Agent Prespective

Matthew Morrow
Agent
  • Investor
  • Pennsylvania
Posted

Hi All

We have a client wishing to utilize a sub2 strategy for several purchased in our market. Fantastic idea and even better deal if we can find a seller willing to cooperate. What is everyone's experience with this regarding the due on sale clause once lenders are notified? Or have you had any experience with this where they either 1- don't care, or 2- continue but call the loan due. 
Broker is engaged, just looking for some real world feedback from a current transaction. 
**Assuming this loan is assumable. And if not- what are the creative options?

Thanks!

User Stats

5,494
Posts
8,428
Votes
Don Konipol
Lender
Pro Member
#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
8,428
Votes |
5,494
Posts
Don Konipol
Lender
Pro Member
#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
Replied
Quote from @Matthew Morrow:

Hi All

We have a client wishing to utilize a sub2 strategy for several purchased in our market. Fantastic idea and even better deal if we can find a seller willing to cooperate. What is everyone's experience with this regarding the due on sale clause once lenders are notified? Or have you had any experience with this where they either 1- don't care, or 2- continue but call the loan due. 
Broker is engaged, just looking for some real world feedback from a current transaction. 
**Assuming this loan is assumable. And if not- what are the creative options?

Thanks!

99.5% of loans are NOT assumable without lender consent.  Subject to is NOT a loan assumption; it is purchasing a property without paying off OR assuming the mortgage.  So, the mortgage remains in place, with full liability as stated in the mortgage/deed of trust for the original borrower.
I just completed a RARE subject to sale in which the bank holding our mortgage note agreed, via signed documentation, to allow the sale of the property without enforcing the “due on sale” clause.  This was based on our continuing commercial relationship with this institution.  
The way most people do subject to deals is by setting up a system of checks and balances providing some protection for both buyer and seller, and trying to avoid alerting the lender that a deed transfer has taken place. With technology and on line title records, major loan servicers are set up to detect deed transfers in major counties.  Whether or not the note holder chooses to do anything depends on many factors, not the least of which is the interest rate being paid on the note I question vs the current market mortgage rate.  
In a subject to transaction the buyer may be in a precarious position if the note is called and he doesn’t have access to capital to pay off the note, or doesn’t have a capacity to obtain new financing.  The seller is in even a more precarious position.  If the buyer defaults, the seller finds himself personally liable for payments, or if the default goes far enough, liable payment of the loan balance, on a property he does not own.  Even with a right of foreclosure in event of default, he still may have to spend tens of thousands of dollars foreclosing, and if the buyer files BK can spend even more.  
As a broker in the transaction, you’d want the principal party you represent to sign waivers acknowledging their understanding of the significant risks they’re undertaking.  My personal opinion is that unless there is no other way to sell the house, subject to should only be used when BOTH parties are sophisticated investors. 

User Stats

41,758
Posts
61,525
Votes
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
61,525
Votes |
41,758
Posts
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
Replied

U will want to check on your liability here..  the risk of a lender calling the loan is real but it does not happen very often as long as the terms of the note are adhered to.. At least that was my experience doing well over 100 of them that I personally bought.

I think as a Broker though if your representing the seller I would NEVER advocate that they do this. The risk of failure from the buyer is real.

1. Buyer fails to pay and rips the rents because the loan is not in their name and the property is in their name.. Just like what happens to us as lenders when we are foreclosing .

2. If Buyer fails to pay your sellers credit is going to get trashed.. U know what happens with just one late payment.

3. It can hurt your sellers ability to buy another home because of DTI issues.

4. In a state that a lender can get a deficiancy judgement if the deal goes through foreclosure the client can get their credit trashed and end up with a big fat judgement against them.. ( state specific).

the reason your probably getting buyers that want to do this is because of all the online notoriety currently like Pace Morby who is huge in the space and the legions of students and followers and then to a lesser extent there is BP's own Sub to Guys.. No matter how well meaning all these trainers are they cant vette the buyers each and every time or even a little bit. And believe me there are going to be schemers and crooks go at this big time once they figure out how little it takes to get into title and no real consequences if they default and they can rip rents.

So in my mind as an agent if your not the owner broker of your agency I would be talking to them and talking about if your E and O will cover you .. And or I would be talking to a good RE lawyer to understand what liability you might have if you recommend this or don't disclose all the bad things that can happen and your client ends up in a mess. 

That all said there will be sellers who could give a rip about their credit and just want out.. but if it was me I would have as iron clad of disclosure agreement signed by your seller as one can possibly get.

the Buyer we dont care about the buyer they already know the risks if they lose their money tough luck on them.

Just like in your aviation days always have an out !!  and be thinking 5 moves ahead ..

BiggerPockets logo
BiggerPockets
|
Sponsored
Find an investor-friendly agent in your market TODAY Get matched with our network of trusted, local, investor friendly agents in under 2 minutes

User Stats

41,758
Posts
61,525
Votes
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
61,525
Votes |
41,758
Posts
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
Replied

@Don Konipol   Don to funny we both wrote the same things.. Of course yours is much more elegant than my reply but we are both saying the same thing !!!

User Stats

395
Posts
151
Votes
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
151
Votes |
395
Posts
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
Replied
Quote from @Don Konipol:
Quote from @Matthew Morrow:

Hi All

We have a client wishing to utilize a sub2 strategy for several purchased in our market. Fantastic idea and even better deal if we can find a seller willing to cooperate. What is everyone's experience with this regarding the due on sale clause once lenders are notified? Or have you had any experience with this where they either 1- don't care, or 2- continue but call the loan due. 
Broker is engaged, just looking for some real world feedback from a current transaction. 
**Assuming this loan is assumable. And if not- what are the creative options?

Thanks!

99.5% of loans are NOT assumable without lender consent.  Subject to is NOT a loan assumption; it is purchasing a property without paying off OR assuming the mortgage.  So, the mortgage remains in place, with full liability as stated in the mortgage/deed of trust for the original borrower.
I just completed a RARE subject to sale in which the bank holding our mortgage note agreed, via signed documentation, to allow the sale of the property without enforcing the “due on sale” clause.  This was based on our continuing commercial relationship with this institution.  
The way most people do subject to deals is by setting up a system of checks and balances providing some protection for both buyer and seller, and trying to avoid alerting the lender that a deed transfer has taken place. With technology and on line title records, major loan servicers are set up to detect deed transfers in major counties.  Whether or not the note holder chooses to do anything depends on many factors, not the least of which is the interest rate being paid on the note I question vs the current market mortgage rate.  
In a subject to transaction the buyer may be in a precarious position if the note is called and he doesn’t have access to capital to pay off the note, or doesn’t have a capacity to obtain new financing.  The seller is in even a more precarious position.  If the buyer defaults, the seller finds himself personally liable for payments, or if the default goes far enough, liable payment of the loan balance, on a property he does not own.  Even with a right of foreclosure in event of default, he still may have to spend tens of thousands of dollars foreclosing, and if the buyer files BK can spend even more.  
As a broker in the transaction, you’d want the principal party you represent to sign waivers acknowledging their understanding of the significant risks they’re undertaking.  My personal opinion is that unless there is no other way to sell the house, subject to should only be used when BOTH parties are sophisticated investors. 

 Fantastic advice. Thanks for the feedback. We are not pursuing this deal, and we have engaged BOR to ensure we are adequately covered - and may not even proceed with this clients request. But just wanted to throw this out there and see what people though. Thanks!

User Stats

395
Posts
151
Votes
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
151
Votes |
395
Posts
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
Replied
Quote from @Jay Hinrichs:

U will want to check on your liability here..  the risk of a lender calling the loan is real but it does not happen very often as long as the terms of the note are adhered to.. At least that was my experience doing well over 100 of them that I personally bought.

I think as a Broker though if your representing the seller I would NEVER advocate that they do this. The risk of failure from the buyer is real.

1. Buyer fails to pay and rips the rents because the loan is not in their name and the property is in their name.. Just like what happens to us as lenders when we are foreclosing .

2. If Buyer fails to pay your sellers credit is going to get trashed.. U know what happens with just one late payment.

3. It can hurt your sellers ability to buy another home because of DTI issues.

4. In a state that a lender can get a deficiancy judgement if the deal goes through foreclosure the client can get their credit trashed and end up with a big fat judgement against them.. ( state specific).

the reason your probably getting buyers that want to do this is because of all the online notoriety currently like Pace Morby who is huge in the space and the legions of students and followers and then to a lesser extent there is BP's own Sub to Guys.. No matter how well meaning all these trainers are they cant vette the buyers each and every time or even a little bit. And believe me there are going to be schemers and crooks go at this big time once they figure out how little it takes to get into title and no real consequences if they default and they can rip rents.

So in my mind as an agent if your not the owner broker of your agency I would be talking to them and talking about if your E and O will cover you .. And or I would be talking to a good RE lawyer to understand what liability you might have if you recommend this or don't disclose all the bad things that can happen and your client ends up in a mess. 

That all said there will be sellers who could give a rip about their credit and just want out.. but if it was me I would have as iron clad of disclosure agreement signed by your seller as one can possibly get.

the Buyer we dont care about the buyer they already know the risks if they lose their money tough luck on them.

Just like in your aviation days always have an out !!  and be thinking 5 moves ahead ..


 Thank you! Broker is engaged in the convo- and there are many flags with this particular one. I understand its a growing concept which has legit upside. But we are actively engaged in the clients best interest- EVEN if it contradicts their goals and there are many negative here. Careful to not assume any legal position and we disclaim every convo.

Aviation - Love it. Always 5 steps ahead

User Stats

41,758
Posts
61,525
Votes
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
61,525
Votes |
41,758
Posts
Jay Hinrichs
Professional Services
Pro Member
#2 All Forums Contributor
  • Lender
  • Lake Oswego OR Summerlin, NV
Replied
Quote from @Matthew Morrow:
Quote from @Jay Hinrichs:

U will want to check on your liability here..  the risk of a lender calling the loan is real but it does not happen very often as long as the terms of the note are adhered to.. At least that was my experience doing well over 100 of them that I personally bought.

I think as a Broker though if your representing the seller I would NEVER advocate that they do this. The risk of failure from the buyer is real.

1. Buyer fails to pay and rips the rents because the loan is not in their name and the property is in their name.. Just like what happens to us as lenders when we are foreclosing .

2. If Buyer fails to pay your sellers credit is going to get trashed.. U know what happens with just one late payment.

3. It can hurt your sellers ability to buy another home because of DTI issues.

4. In a state that a lender can get a deficiancy judgement if the deal goes through foreclosure the client can get their credit trashed and end up with a big fat judgement against them.. ( state specific).

the reason your probably getting buyers that want to do this is because of all the online notoriety currently like Pace Morby who is huge in the space and the legions of students and followers and then to a lesser extent there is BP's own Sub to Guys.. No matter how well meaning all these trainers are they cant vette the buyers each and every time or even a little bit. And believe me there are going to be schemers and crooks go at this big time once they figure out how little it takes to get into title and no real consequences if they default and they can rip rents.

So in my mind as an agent if your not the owner broker of your agency I would be talking to them and talking about if your E and O will cover you .. And or I would be talking to a good RE lawyer to understand what liability you might have if you recommend this or don't disclose all the bad things that can happen and your client ends up in a mess. 

That all said there will be sellers who could give a rip about their credit and just want out.. but if it was me I would have as iron clad of disclosure agreement signed by your seller as one can possibly get.

the Buyer we dont care about the buyer they already know the risks if they lose their money tough luck on them.

Just like in your aviation days always have an out !!  and be thinking 5 moves ahead ..


 Thank you! Broker is engaged in the convo- and there are many flags with this particular one. I understand its a growing concept which has legit upside. But we are actively engaged in the clients best interest- EVEN if it contradicts their goals and there are many negative here. Careful to not assume any legal position and we disclaim every convo.

Aviation - Love it. Always 5 steps ahead


Well between Don and I there is I suspect close to 100 years of experience at this. But for sure you will get those that will post all the ways you can circumvent the alienation clauses and etc etc. 

But you acting as a transactional agent/broker making a fee its not about that as much as downside if your seller gets hammered.

User Stats

395
Posts
151
Votes
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
151
Votes |
395
Posts
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
Replied
Quote from @Jay Hinrichs:
Quote from @Matthew Morrow:
Quote from @Jay Hinrichs:

U will want to check on your liability here..  the risk of a lender calling the loan is real but it does not happen very often as long as the terms of the note are adhered to.. At least that was my experience doing well over 100 of them that I personally bought.

I think as a Broker though if your representing the seller I would NEVER advocate that they do this. The risk of failure from the buyer is real.

1. Buyer fails to pay and rips the rents because the loan is not in their name and the property is in their name.. Just like what happens to us as lenders when we are foreclosing .

2. If Buyer fails to pay your sellers credit is going to get trashed.. U know what happens with just one late payment.

3. It can hurt your sellers ability to buy another home because of DTI issues.

4. In a state that a lender can get a deficiancy judgement if the deal goes through foreclosure the client can get their credit trashed and end up with a big fat judgement against them.. ( state specific).

the reason your probably getting buyers that want to do this is because of all the online notoriety currently like Pace Morby who is huge in the space and the legions of students and followers and then to a lesser extent there is BP's own Sub to Guys.. No matter how well meaning all these trainers are they cant vette the buyers each and every time or even a little bit. And believe me there are going to be schemers and crooks go at this big time once they figure out how little it takes to get into title and no real consequences if they default and they can rip rents.

So in my mind as an agent if your not the owner broker of your agency I would be talking to them and talking about if your E and O will cover you .. And or I would be talking to a good RE lawyer to understand what liability you might have if you recommend this or don't disclose all the bad things that can happen and your client ends up in a mess. 

That all said there will be sellers who could give a rip about their credit and just want out.. but if it was me I would have as iron clad of disclosure agreement signed by your seller as one can possibly get.

the Buyer we dont care about the buyer they already know the risks if they lose their money tough luck on them.

Just like in your aviation days always have an out !!  and be thinking 5 moves ahead ..


 Thank you! Broker is engaged in the convo- and there are many flags with this particular one. I understand its a growing concept which has legit upside. But we are actively engaged in the clients best interest- EVEN if it contradicts their goals and there are many negative here. Careful to not assume any legal position and we disclaim every convo.

Aviation - Love it. Always 5 steps ahead


Well between Don and I there is I suspect close to 100 years of experience at this. But for sure you will get those that will post all the ways you can circumvent the alienation clauses and etc etc. 

But you acting as a transactional agent/broker making a fee its not about that as much as downside if your seller gets hammered.

 For sure. Your input is greatly appreciated! And honestly, wed rather not have this deal (representing buy side) than have it go sideways for any party- for any reason. 

User Stats

7,328
Posts
9,083
Votes
Bill B.#3 1031 Exchanges Contributor
  • Investor
  • Las Vegas, NV
9,083
Votes |
7,328
Posts
Bill B.#3 1031 Exchanges Contributor
  • Investor
  • Las Vegas, NV
Replied

I was thinking same thing. Your client pays  $20-30-40k in commissions and then a year or 2 down the road the loan gets called and the “buyer” can’t pay off the loan and walks away. I’m not sure your client would agree you worked in their best interest. Maybe if they could afford to pay the mortgage off and wanted the property back but they probably wouldn’t be ahead. 

I don’t know how much more I would want as a seller. But it would be A LOT. (10-20%?) And then I wouldn’t want a buyer who would pay A LOT more. Because all I would be thinking is why would they pay a lot more if they don’t plan to screw me over. 

I think this is a desperation move by a seller in a bad market and I’d still go with some kind of lease with an option where the title stayed in my name. 

User Stats

395
Posts
151
Votes
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
151
Votes |
395
Posts
Matthew Morrow
Agent
  • Investor
  • Pennsylvania
Replied
Quote from @Bill B.:

I was thinking same thing. Your client pays  $20-30-40k in commissions and then a year or 2 down the road the loan gets called and the “buyer” can’t pay off the loan and walks away. I’m not sure your client would agree you worked in their best interest. Maybe if they could afford to pay the mortgage off and wanted the property back but they probably wouldn’t be ahead. 

I don’t know how much more I would want as a seller. But it would be A LOT. (10-20%?) And then I wouldn’t want a buyer who would pay A LOT more. Because all I would be thinking is why would they pay a lot more if they don’t plan to screw me over. 

I think this is a desperation move by a seller in a bad market and I’d still go with some kind of lease with an option where the title stayed in my name. 


 Completely agree. Lots to go down if the buyer "defaults" and the seller truly carries all the risk with virtually no hand the game after closing