My Meeting with RE Attorney re: Subject To

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My Meeting with RE Attorney re: Subject To

Ryan Urban
Real Estate Investor · Colorado Springs, CO · Member since 2008 · 96 posts · 4 votes

I'd appreciate your input on this.

I've been looking into the Subject To strategy, but I've been concerned with the legal and ethical issues involved. So I scheduled a meeting with a local RE attorney to discuss it. I had to contact several attorneys, as most of them said they wanted no part of Subject To deals.

I'll try to condense a 45-minute meeting into a few primary bullet points:

1. He agrees with virtually everything I've read about the Due on Sale clause, in that it's highly unlikely that a lender is going to (a) even recognize that someone else is paying the note and (b) go out of its way to act on it. However...

2. It is certainly possible that a lender would act, and if they do, it can involve more than just calling the loan due. "If you're willing to risk the small chance of being contacted by the District Attorney for fraud, give it a try. I've seen it happen." Moreover...

3. By far the bigger concern he has is action by the seller. He has seen several cases in which the seller claimed to be "duped" out of his equity by the Subject To buyer. He says that no contract will hold up in court, because all the seller has to claim is duress. And since the Subject To buyer is practicing a questionable purchasing strategy, he would not have much legal support.

The feeling I took away from this meeting is this: If you don't have much to lose, if you're willing to take on significant legal and financial risk, go for it.

Look, I know that many people are practicing Subject To purchasing regularly and with success. But even if I wanted to take all this risk on, I can't locate an attorney in my area who is willing to work on these deals. And that's quite a red flag, right there.

Before I toss the Subject To strategy out the window, I'd appreciate your thoughts.

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  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    18y

    Ryan,

    1. The lawyer is offering an opinion. In some ways they are putting their E&O insurance on the line so they need to be conservative.

    2. OR Attorneys General settled an action against two investors. They were doing subject-to deals and similar. Not exactly the same as your question but very close.

    The AG indicate that there was nothing illegal about the deals. The problem was the buyer was making a commitment to the seller and then failed to perform as agreed. Hence there was liability and in these two cases fraud specific to the buyer not delivering on the promises made to the seller. There was no fraud related to the lender who was somewhat along for the ride.

    3. If you send a lender a certified letter then the lender has been put on notice. The DOS is optional and the lender's non-action implies that so far the lender has no issue. The seller can not claim that there is fraud as you have declared your hand. You are not deceiving anyone. If a lender fails to exercise their DOS rights that is fine. They can do so later or they can choose to never do so. No crime in this case.

    4. The seller can argue they were cheated out of their equity. You have have then sign something that documents that they know that they are freely handing over the keys after failing to sell through other means. That they recognize that you are there to make a profit. That they no realize that there is possibly no equity to be saved hence they are freely choosing an option that minimizes the risk to their credit. That they lack the financial means to continue to service the loan so a sale is better than continuing to hold the property.

    There are bozos who might want to sue you and they might even find a judge who is willing to listen. Hence you want to set things up cleanly, using liability protection (LLC, umbrella policy, documenting the transaction and being clear what you are stating to the seller).

    Bottom line:

    You can just avoid subject-to deals unless the seller pretty much begs you to solve their problem. In that case you can structure things so that they are being very clear that they want you to do the deal.

    Tangent: Anyone who holds a license is much more at risk. The seller can more easily claim that the agent had a fiduciary responsibility to provide better advice or to pay the seller for their equity. The seller can say they were confused because you are an agent and they thought you were there to help them get their house sold. Harder to document that the seller recognizes you are not there to help them. They will say they were under duress and were confused so what they signed is not really an accurate reflection of the situation.

    John Corey

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  • Ryan Urban
    OP
    Real Estate Investor · Colorado Springs, CO · Member since 2008 · 96 posts · 4 votes
    18y

    John, thanks as always.

    I think I'll continue by trying to assemble a team (Title, Insurance, perhaps this or another attorney if I can find one) - and if I can put a group together that all agree with the process, I'm good to go. If I cannot due to their issues with the process, I'll know it's probably not best for me to proceed.

    If I may ask one more question - If I can create a contract package on my own (with help from books like Bronchick, etc), is the attorney necessary? I obviously need Title and Insurance pros on my side to do the deals, but what about the lawyer?

    Seems to me there are two benefits to using an attorney: First to provide legal advice and support, but second to send a not-so-subtle message to the seller that this is being done by the book.

    Your thoughts?

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  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    18y

    Ryan,

    1. What is the state convention? Do most deals in CO close at the title company or do people use lawyers as closing agents?

    2. If you want a more tight process then consider having a lawyer. It puts them and their E&O insurance on the hook for each deal. It might help the seller feel that things are legal. Or it might put off some sellers as they feel outgunned.

    3. Consider Bronchick or a lawyer he recommends. Obviously he is a CO lawyer and has outlined what you need to do. Hence his office could do the work. Or his manuals are good enough.

    Overall it is how you present the deal and how professional you come across. A person who is really facing the nightmare of a foreclosure could see you as a savior. Just keep it very clean and do what you say. Then ask them for a referral or letter of recommendation. A few positive words from sellers will help a lot with other sellers.

    Be prepared to pay off any subject-to loan if the lender takes action. You do not want any negatives showing up on the borrower's credit. You could be sued if you damage their credit. If you claimed that a subject-to deal will save their credit and then more black marks happen it can be your fault. Hence be clear about what you are doing for them and what you are not.

    John Corey

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  • Richard F.
    Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
    18y
    Originally posted by "Urban Investments":
    ...if I can put a group together that all agree with the process, I'm good to go. If I cannot due to their issues with the process, I'll know it's probably not best for me to proceed.

    In my experience, attorneys, and to a lesser extent accountants, generally cover their OWN butt first... Don't ask "should I..." instead, ask "what are the consequences if I..." Then, make your decisions.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    Closing's here (CO) are handled by title companies.

    I just had a discussion at the CAREI meeting two weeks back where we spoke about Subject To's. The title company rep handed out a sample package with extra documents dealing specifically with the loan that was remaining in place. There were two extra disclosures, a due on sale acknowledgement and a subject to acknowledgment. Both were signed by both seller and buyer. The deed mentions the existing loan as does the title insurance policy.

    Jon

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  • Eric Foster
    Real Estate Investor · Portland, OR · Member since 2008 · 1k+ posts · 23 votes
    18y
    Originally posted by "REI":
    ... 2. OR Attorneys General settled an action against two investors. They were doing subject-to deals and similar. Not exactly the same as your question but very close.

    The AG indicate that there was nothing illegal about the deals. The problem was the buyer was making a commitment to the seller and then failed to perform as agreed. Hence there was liability and in these two cases fraud specific to the buyer not delivering on the promises made to the seller. There was no fraud related to the lender who was somewhat along for the ride... John Corey

    Any one know any more about this comment by John Corey?

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