Sub 2 Deal in a Title Theory State.

[Rich Hupper]

Hi Biggerpockets

I am trying to better understand the concept of title and the bundle of rights that come with real property.

Lets say we have a sub 2 deal in a title theory state. The owner of the property is highly motivated to sell, tired of dealing with his tenants, heading to foreclosure and looking for debt relief. You offer to start paying his debt and bring his loan current in exchange for a deed. 

Please excuse me if I am wrong here, however in a title theory state the mortgagee / lender holds legal title on that deed and the borrow / current owner holds equitable title on the deed. I am trying to figure out when a sub 2 deal is executed, is the equitable title of the Mortgagor/borrower transferred to the sub 2 buyer? And legal title stays with the mortgagee? If this is true.....

I thought equitable and legal title are one in the same whole,  shared between the mortgagor and mortgagee.

Also in a sub 2 deal a buyer pays a homeowners payments in exchange for a deed, however does that deed convey all the rights and covenants of a warranty or special warranty deed? What kind of deed is used in this transaction? Just how many rights and covenants can an owner who has a mortgage on his property convey to a new buyer without first settling the debt he has with the mortgagee?

It seems the Sub 2 buyer is acquiring a heavily clouded title that has limited rights because most of them are tied up mortgage contract between the mortgagor and mortgagee. 

In crafting a purchase and sale agreement for one of these deals, there must be very specific language to address how title is being conveyed. Can anyone elaborate on this?

Thank you

[Bill Gulley]

Rich, You're right that in a title theory state, the lender has legal title, but that is conditioned upon a released upon payment of the debt, might think of it as the homeowner being in second position. They both have an equitable interest as well, but the homeowner clears the financial interest held by a lender as the debt is paid. The homeowner also has the right to convey any and all interests, paying the debt in full. 

In a sub-to, the owner conveys their "second position" in legal title and all of their equitable title, according to the degree of conveyances as contracted (all or part of their title interests).

A Special Warranty Deed is the same as a General Warranty Deed except the SWD describes aspects of title that are not warranted, for example, all rights except those interests held by XYZ Bank.    

Rich conveys marketable title to Bill, "except and subject to the lien interest in favor of XYZ Bank, shown in the Office of the Recorder of Deed public of Tin Cup County, RC, in Book 123, at Page 321".

For a contract, "title taken by buyer subject to the existing mortgage having an approximate balance of $33,333.33 in favor of XYZ Bank" .....usually acceptable unless state law dictates specific language.  

   The issue is not that title rights are clouded, as the seller conveyed those rights, the issue is the due on sale clause in the mortgage, the bank can call the loan due. Simply (LOL) pay it off and all rights revert to you.

Looks like you're studying! Great!! :)