I had a Subject 2 or wrap deal fall apart last month, getting title insurance and a closing attorney willing to close the deal were among the many issues. Is anyone working in GA closing these type of transactions reguarly?
Did they give you a reason why they wouldn't close and why title insurance wasn't available?
Can a “subject to” transaction be done safely?
There’s been a LOT of “hostility” on BP toward subject to transactions. Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer. While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase. They further point out that many sellers are unaware of the consequences of selling subject to.
I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing. Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.
The possible negatives of subject to have been thoroughly discussed. The positives are from the buyers prospective
1- the ability to buy a property with little down payment
2- the ability to obtain financing at below market rate
3 -not needing to qualify for convention/institutional financing
4- not having another debt on your PFS
5 - not needing to pay points and other fees to obtain a new mortgage
The positives for the seller are
1- can possibly sell a property in which they have negative equity without bringing cash to the closing table
2 -expand the pool of potential buyers
3 -possibly obtain a higher price/ quicker sale
4 - can utilize a wrap to potentially earn the “differential” on interest rate
5 -May be able to save the Realtors commission
All this being established, here’s the BIG question: Can a subject to transaction be done where both parties are reasonably protected? Let us know what you think!
.
These are very important points for each side of a creative finance transaction.
A lot of SubTo transactions don't take these considerations into account when filling out their future loan applications. Omitting this information may be mortgage fraud. When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.
***************************
I would modify #4 "4- not having another debt on your PFS" . Actually, on the loan application 1003's that I've seen,
***************************
Uniform Residential Loan Application 1003
Section 3: Financial Information — Real Estate. This section asks you to list all properties you currently own and what you owe on them.
and includes a full page of boxes to fill in such as
Property Value
Status: Sold, Pending Sale, or Retained
Intended Occupancy: Investment, Primary Residence, Second Home, Other
Monthly Insurance, Taxes,
Association Dues, etc. if not included in Monthly Mortgage Payment
For 2-4 Unit Primary or Investment Property
Monthly Rental Income
Creditor Name Account Number
Monthly Mortgage
Payment Unpaid Balance To be paid off at or before closing
Type: FHA, VA, Conventional, USDA-RD, Other
Credit Limit (if applicable)
It doesn't specifically ask who's name the loan is in. If you are taking the tax write off, you are acknowledging you are paying the debt. If you aren't making the payment, you don't get the tax write off and are subject to fraud for equity skimming.
Here’s where you make a slight error.
“Section 3: Financial Information — Real Estate. This section asks you to listall properties you currently own and what you owe on them”
What YOU owe on them. Unless you’ve signed some additional liability vis a vis the seller, YOU as the buyer of a property SUBJECT TO a mortgage on the property do not personally OWE anything.
“When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.”
No, when buying a property Subject to, the buyer is specifically NOT personally taking over responsibility for the debt. That would be ASSUMING the debt. This is merely purchasing a property that is encumbered. And, no, the courts do NOT see it that way. Case law is well established differentiation between a loan assumption, and a subject to purchase.
Fraud can be charged if the purchaser has not fully disclosed intent and circumstance to the seller, as well as the other way around. However, we need to be clear that with a subject to transaction the debt is secured by the property; most often personal liability via a guarantee rests and remains with the seller/original borrower, the property buyer has no responsibility for the debt and no personal liability UNLESS he modified this status by contract agreement with the seller; in which case he may be liable to the seller only.
No problem. It's a distinction without a difference, according to the federal court judge I litigated under.
Would you also say the seller has no right to sue the buyer if the payments aren't made? Would you also say equity skimming can't occur because buyer never accepted responsibility for the loan? Would you also say the original contract has no enforceable power on the buyer without the signature of the buyer?
I don't want to put words in your mouth, so I will just say those were issues as part of federal litigation. You have likely heard of Fidelity National Title Group, who sent 4 attorneys to litigate, because it was a Subject To case that would change Title liability.
As always, facts are case specific.
Do you have a cite for that case? I'd like to take a look at it.
In my opinion no, an unrecorded deed, assuming it's properly executed, conveys title to the grantee. It may surprise people to know that a deed does not need to be notarized to be effective, since notarization is required to make a deed recordable, not effective. Of course, not recording the deed means it is does not provided constructive notice of the conveyance to third parties so their interest (the 3rd party's) may have priority over the grantee's, even if the 3rd party's interest arises after the conveyance, and surprisingly, even if the 3rd party's interest is also unrecorded. Of the course the 3rd party's failure to record its interest leaves it vulnerable to the same risk of a 4th party's interest.
.
"an unrecorded deed, assuming it's properly executed, conveys title to the grantee. It may surprise people to know that a deed does not need to be notarized to be effective"
@Peter Walther: Agreed. And the court agreed as well.
Can you give me the cite so I can look it up on PACER?
Can a “subject to” transaction be done safely?
There’s been a LOT of “hostility” on BP toward subject to transactions. Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer. While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase. They further point out that many sellers are unaware of the consequences of selling subject to.
I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing. Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.
The possible negatives of subject to have been thoroughly discussed. The positives are from the buyers prospective
1- the ability to buy a property with little down payment
2- the ability to obtain financing at below market rate
3 -not needing to qualify for convention/institutional financing
4- not having another debt on your PFS
5 - not needing to pay points and other fees to obtain a new mortgage
The positives for the seller are
1- can possibly sell a property in which they have negative equity without bringing cash to the closing table
2 -expand the pool of potential buyers
3 -possibly obtain a higher price/ quicker sale
4 - can utilize a wrap to potentially earn the “differential” on interest rate
5 -May be able to save the Realtors commission
All this being established, here’s the BIG question: Can a subject to transaction be done where both parties are reasonably protected? Let us know what you think!
.
These are very important points for each side of a creative finance transaction.
A lot of SubTo transactions don't take these considerations into account when filling out their future loan applications. Omitting this information may be mortgage fraud. When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.
***************************
I would modify #4 "4- not having another debt on your PFS" . Actually, on the loan application 1003's that I've seen,
***************************
Uniform Residential Loan Application 1003
Section 3: Financial Information — Real Estate. This section asks you to list all properties you currently own and what you owe on them.
and includes a full page of boxes to fill in such as
Property Value
Status: Sold, Pending Sale, or Retained
Intended Occupancy: Investment, Primary Residence, Second Home, Other
Monthly Insurance, Taxes,
Association Dues, etc. if not included in Monthly Mortgage Payment
For 2-4 Unit Primary or Investment Property
Monthly Rental Income
Creditor Name Account Number
Monthly Mortgage
Payment Unpaid Balance To be paid off at or before closing
Type: FHA, VA, Conventional, USDA-RD, Other
Credit Limit (if applicable)
It doesn't specifically ask who's name the loan is in. If you are taking the tax write off, you are acknowledging you are paying the debt. If you aren't making the payment, you don't get the tax write off and are subject to fraud for equity skimming.
Here’s where you make a slight error.
“Section 3: Financial Information — Real Estate. This section asks you to listall properties you currently own and what you owe on them”
What YOU owe on them. Unless you’ve signed some additional liability vis a vis the seller, YOU as the buyer of a property SUBJECT TO a mortgage on the property do not personally OWE anything.
“When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.”
No, when buying a property Subject to, the buyer is specifically NOT personally taking over responsibility for the debt. That would be ASSUMING the debt. This is merely purchasing a property that is encumbered. And, no, the courts do NOT see it that way. Case law is well established differentiation between a loan assumption, and a subject to purchase.
Fraud can be charged if the purchaser has not fully disclosed intent and circumstance to the seller, as well as the other way around. However, we need to be clear that with a subject to transaction the debt is secured by the property; most often personal liability via a guarantee rests and remains with the seller/original borrower, the property buyer has no responsibility for the debt and no personal liability UNLESS he modified this status by contract agreement with the seller; in which case he may be liable to the seller only.
No problem. It's a distinction without a difference, according to the federal court judge I litigated under.
Would you also say the seller has no right to sue the buyer if the payments aren't made? Would you also say equity skimming can't occur because buyer never accepted responsibility for the loan? Would you also say the original contract has no enforceable power on the buyer without the signature of the buyer?
I don't want to put words in your mouth, so I will just say those were issues as part of federal litigation. You have likely heard of Fidelity National Title Group, who sent 4 attorneys to litigate, because it was a Subject To case that would change Title liability.
As always, facts are case specific.
Do you have a cite for that case? I'd like to take a look at it.
In my opinion no, an unrecorded deed, assuming it's properly executed, conveys title to the grantee. It may surprise people to know that a deed does not need to be notarized to be effective, since notarization is required to make a deed recordable, not effective. Of course, not recording the deed means it is does not provided constructive notice of the conveyance to third parties so their interest (the 3rd party's) may have priority over the grantee's, even if the 3rd party's interest arises after the conveyance, and surprisingly, even if the 3rd party's interest is also unrecorded. Of the course the 3rd party's failure to record its interest leaves it vulnerable to the same risk of a 4th party's interest.
Can a “subject to” transaction be done safely?
There’s been a LOT of “hostility” on BP toward subject to transactions. Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer. While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase. They further point out that many sellers are unaware of the consequences of selling subject to.
I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing. Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.
The possible negatives of subject to have been thoroughly discussed. The positives are from the buyers prospective
1- the ability to buy a property with little down payment
2- the ability to obtain financing at below market rate
3 -not needing to qualify for convention/institutional financing
4- not having another debt on your PFS
5 - not needing to pay points and other fees to obtain a new mortgage
The positives for the seller are
1- can possibly sell a property in which they have negative equity without bringing cash to the closing table
2 -expand the pool of potential buyers
3 -possibly obtain a higher price/ quicker sale
4 - can utilize a wrap to potentially earn the “differential” on interest rate
5 -May be able to save the Realtors commission
All this being established, here’s the BIG question: Can a subject to transaction be done where both parties are reasonably protected? Let us know what you think!
.
These are very important points for each side of a creative finance transaction.
A lot of SubTo transactions don't take these considerations into account when filling out their future loan applications. Omitting this information may be mortgage fraud. When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.
***************************
I would modify #4 "4- not having another debt on your PFS" . Actually, on the loan application 1003's that I've seen,
***************************
Uniform Residential Loan Application 1003
Section 3: Financial Information — Real Estate. This section asks you to list all properties you currently own and what you owe on them.
and includes a full page of boxes to fill in such as
Property Value
Status: Sold, Pending Sale, or Retained
Intended Occupancy: Investment, Primary Residence, Second Home, Other
Monthly Insurance, Taxes,
Association Dues, etc. if not included in Monthly Mortgage Payment
For 2-4 Unit Primary or Investment Property
Monthly Rental Income
Creditor Name Account Number
Monthly Mortgage
Payment Unpaid Balance To be paid off at or before closing
Type: FHA, VA, Conventional, USDA-RD, Other
Credit Limit (if applicable)
It doesn't specifically ask who's name the loan is in. If you are taking the tax write off, you are acknowledging you are paying the debt. If you aren't making the payment, you don't get the tax write off and are subject to fraud for equity skimming.
Here’s where you make a slight error.
“Section 3: Financial Information — Real Estate. This section asks you to listall properties you currently own and what you owe on them”
What YOU owe on them. Unless you’ve signed some additional liability vis a vis the seller, YOU as the buyer of a property SUBJECT TO a mortgage on the property do not personally OWE anything.
“When buying a property SubTo, one is taking over responsibility for payment, thus incurring the debt. The court sees things that way.”
No, when buying a property Subject to, the buyer is specifically NOT personally taking over responsibility for the debt. That would be ASSUMING the debt. This is merely purchasing a property that is encumbered. And, no, the courts do NOT see it that way. Case law is well established differentiation between a loan assumption, and a subject to purchase.
Fraud can be charged if the purchaser has not fully disclosed intent and circumstance to the seller, as well as the other way around. However, we need to be clear that with a subject to transaction the debt is secured by the property; most often personal liability via a guarantee rests and remains with the seller/original borrower, the property buyer has no responsibility for the debt and no personal liability UNLESS he modified this status by contract agreement with the seller; in which case he may be liable to the seller only.
No problem. It's a distinction without a difference, according to the federal court judge I litigated under.
Would you also say the seller has no right to sue the buyer if the payments aren't made? Would you also say equity skimming can't occur because buyer never accepted responsibility for the loan? Would you also say the original contract has no enforceable power on the buyer without the signature of the buyer?
I don't want to put words in your mouth, so I will just say those were issues as part of federal litigation. You have likely heard of Fidelity National Title Group, who sent 4 attorneys to litigate, because it was a Subject To case that would change Title liability.
As always, facts are case specific.
Do you have a cite for that case? I'd like to take a look at it.
If the lienor failed to follow the statutory requirements to perfect the lien, the title insurer will probably advise the management company of the problem and request they record a release. If they refuse or fail to do so, I suspect the insurer will tell its insured, the lien appears to be unenforceable and to notify them (the insurer) if a suit is filed to enforce it. I doubt the insurer will simply pay the lien amount since the insurer has no way of knowing if the amount demanded is actually owed. If a suit isn't timely filed, the lien will fall off after the expiration of the statute of limitations. The insurer will probably also tell your friend (s)he appears to be in breach of the averments in the seller's affidavit and will be held responsible for any loss the insurer suffers as a result. Assuming your friend has a contract with the management company it sounds like (s)he may be in breach of that and could possibly be sued for damages.
I've found many properties with title issues wind up with unpaid property taxes so checking on delinquent taxes, tax deed sales and lands available for taxes might help you identify some.
Thanks, Peter, for the info!
I’m going to take a look and see if I can pull a tax delinquent list for the areas where I’m looking to do deals.
Happy Friday
Good luck.
Thank you, everyone, for your advice! I wanted to provide an update on the status of my situation. I hired a litigator to review my position, and they concluded that we had a very strong case. The seller had attempted to buy me out of the deal but ultimately realized they had no legal grounds to back out. Thanks to my attorney’s efforts, the seller has backed down and has now agreed to proceed with the sale.
Congratulations, I'm glad it's working out for you. Did you find out why the seller wanted to back out?
Sellers remorse.
Err in haste, repent at leisure
I've found many properties with title issues wind up with unpaid property taxes so checking on delinquent taxes, tax deed sales and lands available for taxes might help you identify some.
Thank you, everyone, for your advice! I wanted to provide an update on the status of my situation. I hired a litigator to review my position, and they concluded that we had a very strong case. The seller had attempted to buy me out of the deal but ultimately realized they had no legal grounds to back out. Thanks to my attorney’s efforts, the seller has backed down and has now agreed to proceed with the sale.
Congratulations, I'm glad it's working out for you. Did you find out why the seller wanted to back out?
I see several problems with this model. First, who collects the rents and distributes payments? The owner, the lender or a third party? Second, what priority does your lender's claim to rents have? Taxes have to be paid, so does insurance, what about maintenance? Who gets to decide if a repair that appears to be needed is real or fictious, created to reduce the net available to the lender? Next, what sort of lien on the net proceeds do you envision? With a mortgage the borrower signs a Note and a mortgage creates a lien on the property to secure the debt which must be recorded in the public records to provide notice to third parties. In your explanation nothing is recorded to notify the world of your claim to the income. I suspect the owner could sell the property to a third party free and clear of your lender's claim to the income stream. I'm pretty sure if the owner filed bankruptcy the Trustee would have your claim to the income disallowed and since the owner does not have personally liability for the "debt" you're not even an unsecured creditor. Also, I think this could not be used as secondary financing. I suspect in most mortgages the Borrower entering into this type of agreement without the written consent of the prior lender would be a default.
What debt coverage ratio do you think would be fair considering the risk? $1 lent for $10 of income? $1/$50, $1/$100? While this kind of investment might be of interest to someone who "invests" in crypto, I don't see this going mainstream.