How easy is it to foreclose when selling S2 (Subject to)?

Question

We're considering selling a property Subject to (S2) -- meaning the buyer would pay closing costs and a downpayment, we keep the mortgage in our name, and the buyer would make the mortgage payments and monthly payments to us. Two questions about this deal: (1) Since its our credit on the line b/c the mortgage stays in my name, we'd put a clause in that would allow me to foreclose on the house and get it back fully in my name if he misses two payments.

Have any of you done this? How expensive/difficult is the foreclosure process in a case like this?

Thanks!!

Have any of you done this? How expensive/difficult is the foreclosure process in a case like this? Thanks!!

T. Alan Ceshker · Answer

It depends what state you are in.  If in a non-judicial foreclosure state (ie Texas), it is relatively easy.  You have a 20 day notice and then a 21 day notice and set the foreclosure for the 1st Tuesday of the month.  You can easily google foreclosure procedure in your state.

Now for the controversial part -- if the transaction is papered up correctly, you will have a right to foreclose.  From a documentation standpoint: wrap = assumption = sub to = mirror wrap = exact wrap.  All have a note and deed of trust.  If in Texas and if doing them correctly.

The reason for this is a note is needed (and deed of trust) to allow a remedy in the event of default and to also solve DTI issues for the seller (by showing a new lender the note and timely payments).

I hope I do not get BP crucified - it is just the way all attorneys who know what they are doing in Texas do them.

Stay safe out their

Alan

Andrew Kiel · Answer

@T. Alan Ceshker - Alan's got it right.  This gets technical, you need to understand the difference between a true "subject-to" and a "wrap".  As the seller, you almost certainly want a wrap as you retain rights.  With a wrap Buyer pays you (your representative title company or loan servicing company) and that company pays the loan that is in your name.

Here's an example - I recently sold a property on a wrap where I had acquired it subject to.  The biggest reason I did this is so I can step in and make the payment if my buyer does not.  I feel deeply obligated to make sure the seller's credit is protected as they trusted me personally to make sure bad things don't happen.  If for any reason my buyer fails, I will make payments and I will foreclose on the buyer - in this scenario, the seller's credit would never be impacted.

Hope that helps make the subject a bit less fuzzy.

Ben Zimmerman · Answer

You will likely get two different answers to your question, and it ultimately stems from your usage of the word "foreclosure".

The word has technical definitions, and as JD pointed out, in a sub2 deal you don't have a security instrument that authorizes you to foreclose on the property. So you can't "foreclose".

However, I'm 100% certain that what you meant to ask is effectively, "Do I have recourse and can I get my house back if the buyer defaults." And the answer to that is yes, just not through the foreclosure process, you would use a different process.

Some states call things by different terms, but look up performance deed, or deed of trust to secure performance, or some verbiage along those lines. This is essentially a type of deed that will transfer ownership as long as specific conditions are being met. In this case, as long as the person is making all payments as they are supposed to. This gives you recourse if the buyer stops making payments as you can have the courts enforce this performance deed and transfer ownership back to you.

Just make sure you have a competent REAL ESTATE attorney review the documents prior to signing them to ensure that everything is properly worded to ensure you are protected.

Jay Hinrichs · Answer

google all inclusive deed of trust CA and then read that document.. this is how you set it up.

gives you standing to foreclose.. really depends on what state your in and the foreclosure time lines.. if the buyer defaults you have to continue to make the payments on your mortgage I would never let anyone else pay a mortgage that my credit is on.. thats why the AITD or also called a Wrap is how you do these.. Never sell sub to then just take back a second or think there is some agreement that you can get the property back you can only do that by foreclosure or if they agree to give it back.. HIGHLY risky way to do things.

JD Martin · Answer

You can't foreclose because you don't have any legal means to foreclose. Only the bank can foreclose. If the bank allows the new buyer to assume your mortgage, they are going to be the new legal owner, subject to foreclosure. Otherwise, you are just gambling that the bank will not call the loan if/when they discover you have left the property (which probably states it will be owner occupied in your loan, if it's a primary) and are no longer making payments.

The bottom line to this kind of deal is that you are SOL if the "buyer" does anything that lets the bank figure out you're no longer living in/operating the property. If the property is a PITA then just sell it outright the right way. Or buy out your partner (the bank) and seller finance it to your new buyer; then you'll have foreclosure power.

Steve K. · Answer

If the property is a stinker, I'd just sell it outright and be done personally because the next owner is probably going to have the same issues you're having with it. Whatever the deal structure is, with a mortgage in your name the bank will always be in first position and your credit will be at risk. If you're still involved then it doesn't solve the problem of the property being a hassle for you IMO, you're just kicking the can down the road and could end up dealing with much worse problems later on (dealing with the time, expense, and headache of having to take the property back, then going back to square one with the property which will most likely be in worse condition than it is now).

Tom Gimer · Answer

Jay, the holder of the second would be a defendant in the first mortgage foreclosure action. Without notice and the opportunity to defend their position, the second lien would survive.

Is that what you’re asking? Probably not!

Tom Gimer · Answer

Wrap the existing mortgage, as suggested... or take a balloon second for your equity. That way you could foreclose.

Lindsey Bodner · Answer

You're correct that they would make payments directly to the lender. AND they would also pay me an agreed upon amount monthly. They'd be taking over an 80k loan and buying the property for 125k.  They'd be making payments to me toward the purchase price -- let's say $250/mo for 5 years, then a lump sum. We're not headed toward foreclosure. The property is just a hassle (and some years it's an alligator), and I'd like to get it off my hands and put the money elsewhere. My credit is excellent and I am concerned about having the buyer miss payments. I might not do the S2 in the end.

How easy is it to foreclose when selling S2 (Subject to)?

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