How do I avoid triggering a due on sale clause with a subject to deal?

Question

I'm currently working on my first real estate deal and will be buying a property subject to the owners existing mortgage. I've done some negotiation with the seller already and we've agreed on the broad terms of the deal. My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance. I'm working with a real estate attorney to help me with transferring the deed. My question is how do I avoid triggering the due on sale clause in the mortgage when the seller transfers the deed to my name? I've heard there's a good chance the mortgage company won't care as long as the payments continue to be made on time but I still want to protect myself just in case. Does anyone know how to go about it?

Marie M. · Answer

I hear it happens based on the insurance policy change when it does happen.  It doesn't happen much and probably won't be a process lenders go through in a systemic search until we hit closer to double digit rates on those 2 and 3% loans. Looks like the fed has chosen inflation instead of more rate hikes for time being so should prevent that from becoming a reality.

Rick Pozos · Answer

Get the property in your name, make sure that the seller is an additional insured. Keep the bank as the mortgagee on insurance.

Since you are rehabbing, you should be done in 3 to 6 months anyway. It will take that long to foreclose even if they find out. Just refinance before they foreclose!!

But really, I have done this at least 5 or 6 times. By the time I rehab and sell, the bank never knew what happened. They got paid off and all done.

Tom Gimer · Answer

@Sharvil Patel

1 is incorrect because of 3.

5 is prohibited in many jurisdictions or at a minimum causes insurability issues on future transfers.

Brandon Bell · Answer

What kind of attorney should I be looking for in my area to help me with this kind of situation?

Roger Paschal · Answer

Quentin, build your knowledge, make sure all this is done correctly.

Banks rarely call the loan just because of the deed being transferred, something else triggers this, mostly because the investor decides education is not worth the money.

It can be because the Insurance was not done correctly, the seller does not understand the process, the Title Company does not know what to do so they call the Bank and make a mess out of the process and a few other factors,

If the investor is knowledgeable on what to say to the Bank if they call this is a fairly simple conversation to have. If the Investor does not disclose to the seller how this process works and the Bank calls them yes you will have a mess and may be hard to undo.

A couple of years ago, I worked with an investor who never updated the contact information for the loan and the Bank call the seller (ex-wife), that day she was mad at her ex-husband and told the bank her ex allowed someone to steal their property from them and they got no money, she was kicked out of her house and there were strange people living there.

This could all have been avoided if the investor did this process correct.

Get educated, also I do not know your attorney but not many attorneys have the knowledge to do this process correctly.

Roger D. Pachal

Jessie Dillon · Answer

one thing that you can do is have the seller transfer the deed to a living trust that they're the sole beneficiary of, and call the bank to give them a heads up that they're doing it for estate planning purposes. then, a month or more later, buy the property sub-to, and change the beneficiary of the trust. the bank can not see who owns a trust, and if they ever come back and question it, you can just swap the beneficiaries again, show the bank that the seller is still the owner, then swap it back again when they buzz off. this is one of many reasons it's so important to keep a good relationships with the seller if you're buying this way. you have to work together on some stuff.

Roger Paschal · Answer

Regarding Insurance, personally I would never have someone else (A Lawyer) handle the insurance on a Sub 2 deal or any other real estate deal for me, you would be setting yourself up for failure.

First of all now you would need to get a POA for the attorney from the seller, that may not be your best move. Why not just invest in a little education instead of paying an attorney to do work you can do in 5 minutes.

Good luck Rog...

Bo Tully · Answer

Regarding the insurance aspect of a subject to deal, what are the main questions you would ask an attorney to ensure the deal is structured correctly as it relates to the insurance policy? Do you include specific clauses in each of your subject to deals spelling out exactly how insurance on the property will be handled? I appreciate any feedback.

Tom Gimer · Answer

That's correct but changing the beneficiary to someone or something other than the borrower does trigger the due on sale... no exemption applies.

A performance deed executed prior to default violates the borrower's right/equity of redemption in many jurisdictions. By insurability I'm referring to the problem created for title insurers evaluating what has transpired and whether they will issue a policy on the next transaction.

How do I avoid triggering a due on sale clause with a subject to deal?

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