How tonstructure Subject to deals with your taxes/insurance?

[Christina Colon]

I'm considering selling/offering my long term tenants a subject to deal on my property. Im so new to this strategy so I have questions that I couldn't seem to find answers to. How does the tax/insurance structure of the deal happen? I currently have them all in escrow under my name with my mortgage company. I'm considering having them put a down payment down, offer a loan amount, and interest rate, hire a real estate attorney/title company to legally write out the contract. Am I missing anything? I also am interested in a subject to insurance to prevent due on clause. Any experts in the group? I would love to chat. Thanks so much for helping a rookie out🤙.

[Don Konipol]

@Christina Colon

Lease options now fall under both the Consumer Financial Protection Agency and the SAFE ACT. Many states have also issued relatively restrictive regulations regarding lease option, contract for deed and other “disguised” sales. So if considering lease option it’s imperative that an attorney familiar with the relative laws be engaged unless you have specific knowledge of such.

As for a subject to, much of the risk is on the seller. You, as seller still retain personal liability for the loan should the buyer default. And in actuality, you are in technical default the minute the subject to sale take place, because it is a violation of the “due on sale” clause that’s been a covenant in every residential mortgage or deed of trust since 1979. Many will tell you that the due on sale clause is almost never enforced as long as long as payments are made timely. But if interest rates rise significantly, with the software now available for lenders to identify deed transfers, all bets are off. Subject to sales work best when a solid contingency plan is in place in the event of the loan being accelerated, or the loan going into default.

One way to reduce risk is to have the buyer make payments to a third party escrow agent, then have the escrow agent pay the mortgage from an account in your name. Of course insurance would have to be in the buyers name, as well as the property taxes, so that is problematic.

There are more sophisticated methods of doing subject to sales that try to eliminate the obvious deed transfer issue. These include LLC buyer where the seller is the managing and the buyer is the me member, the use of trusts with various parties as trustor, trustee, beneficiary and protector, and not recording the sale but having an attorney act as escrow office and hold the documents in his safe.

I’m not saying don’t do a subject to; I’m saying know and acknowledge the risks, know the ways to reduce risk and their cost, and decide if it’s worth it.