I know that I need to speak to an attorney but I wondered if anyone had ever defaulted on a Sub-2. What happens?
I’ve never defaulted on a sub2 transaction, but I know of those that have, and I feel qualified at the same time, to provide some feedback.
The good news: Despite your name being on title (or your trust, etc.), you won’t have late payments, an NOD, or Trustee Sale showing up on your credit.
Other good news: The bank will not go after you for the default, except that you’re the only contact the bank now has, and so the original borrower will be broadsided when he discovers your late payments; an NOD filing; a trustee sale; and finally a foreclosure is splattered all over his credit report. Worse, his name now shows up forever in the public records as a deadbeat. Nice.
The good news: You can offer to deed the property back to the seller, before all this happens; with the payments all caught up, and let him deal with it from here on out (assuming the house is in the same general condition as when you first took possession).
The other news: If you cause a loss to the seller, not only will you be in court over damages to the seller, but you could become a criminal defendant in a fraud suit. I’m not an attorney, so I won’t attempt to further characterize how a charge of fraud could be made, but you effectively promised to make the seller’s payments and/or pay off the mortgage in a timely manner, and you deliberately failed to protect the seller from loss, while at the same time benefited from the transaction at the original borrower’s expense.
The worse news: The seller will sue you and at least get a judgment for damages.
This is not a simple agreement you had with the seller. You took title; left the seller with no recourse; benefited from the transaction, or expected to benefit; took “unfair” advantage as a professional, of the seller’s lack of sophistication, if not ignorance (which the court will assume is true, if you’ve done more than one of these transactions). And it will be worse, if you’re a real estate agent.
You’re not just liable for screwing the seller’s credit six ways from Sunday, but you’ll be paying thousands in legal fees to defend your position, lose anyway, and perhaps, again, become liable for punitive damages.
Solution: Pray the seller takes back his title, as you bring the loan current. Or keep the loan current, offer the title back, and then threaten to let the property go back to the bank, if they won’t accept the title. And do it all by certified mail.
Otherwise, if you just let the loan go; fail to offer the seller a remedy; or fail to warn the seller about a pending default; you will pay a heavy price, especially if the seller’s credit was intact after he deeded you the property, but before you defaulted.
And just adding insult to injury, no LLC, or trust agreement, will protect you from personal liability in the case of your deliberate failure to protect the seller’s position by maintaining his loan. So, unless you take immediate remedial action, you may have to prepare for a crash landing by bending over and kissing your butt good-bye; legally and financially.
In the end, you might not be damaged by the actual loan default. However, defending yourself against a breach of agreement, or charge of fraud, will certainly have a negative impact on your business, if not your life.
[b]
Bottom line:
Bring the loan current and offer to deed the house back, intact. And pray the seller accepts your offer.[/b]
javipa is telling you just like it is. If I was you I would be out looking for the money NOW to bring it current and hope you have not damage the borrowers credit. Now can you answer the question why you defaulted on a sub2 transaction?
Thanks for the information. I haven’t defaulted on a sub-2 (nor anything else). I’m in the process of refinancing said sub-2 and simply wondered what would happen if a default occurred.
If you are not upfront with the seller on the subject2 and you can not refinance and you decide to walk away and the word get out you are done in the real estate business because no one will trust you. I have found by giving the seller $2000 EM on a subject2 and if anything went south the seller take the $2000 and walk or you can go the other way and it will cost you more in lawyer fees.
Just because you can buy Sub2, doesn’t mean you should. Few real estate deals are actually deals, regardless of how easy the financing happens to be. Most bad deals, are also bad Sub2 deals, too. It depends mostly on your exit strategy.
RES,
I’m not sure we can say that walking away from a bad sub2 deal causes us to be ‘done’ in the real estate business. I know many slime bags that have screwed a series of people, and they’re still doing business. I suppose it depends on how well they camouflage the damages…
javipa,
You are correct.