How to protect yourself if a subject-to is due on sale

[Tim C.]

Hi BP,

I was listening to the podcast with Karen Rittenhouse and she mentioned a strategy for getting seller's to agree to a subject-to.

I am wondering how a contract could be written so that if the home did face the "due on sale clause" the seller could be protected. If foreclosed on, would I be right in assuming the investor would give the house back to the seller and lose the payment they originally made?

Thanks,
TJ

[Bryan Hancock]

There were some folks in Texas trying to offer "insurance" for this via a group through a title company in San Antonio at some point.  Other than that I haven't seen any viable plans to protect the seller other than to be a strong investor capable of paying off notes if they're called; and that means ALL of them.  Consider these technically-in-default notes contingent liabilities on your PFS.  If you don't have the capacity to pay them if they're all stress-tested during some sort of a crisis then you can't assure the seller you'll be able to keep their credit clean.  

If you disclose that you may be incapable of paying the note if it is called and the seller still agrees to it because of their situation then one could argue that you have clean hands.  Your primary duty should be to adequately disclose what you'd want to see if you were the seller in order to make the best possible decision.  This is the honest and ethical thing to do.