Sub2 and the risk of "due in full"


This question is based primarily for those who have experience doing pre-foreclosure deals. My question is that should I even worry about the “due in full” clause of the existing mortgage when I buy a home Sub2? Also, how will I know whether or not the lender really means business or is just talking jive? Thanks.

Howdy Mrfancypants:

I was hoping John would help you here. He may still add to my limited knowledge. If you are buying to resell I would not even give it much thought as you will be paying the loan off hopefully soon anyway. The systems of setting up trusts to own the property work well. The main problem is if the payments start getting late and the banks starts calling to collect… and start to snoop around.

As long as you go in knowing the risk and can refinance or sell quickly should there ever be a problem you should not be overly concerned.

Thanks Tedjr for your response. What do you mean by setting up trusts? I was just planning on assuming the home owners mortgage and covering any back payments. But I am still probably misunderstanding the process. Another question: how likely is it that people , when I ask them to, will actually deed me their house. I just have the feeling that a lot of people will think I am a con artist? Is all this perfectly legal? Because I just went out and bought Peter Conti and Finkel’s “Making Big Money Investing in Foreclosures” and they talk about being secretive with the homeowners lender, being sure not to tell them you’re buying the house. Sounds potentially shady…? Thanks everyone.

Fancy Pants,
First, the clause within the deed of trust or mortgage document you are referring to is, the “Due on sale” clause, or “Acceleration clause”.

Basically, if done right, this is a non-issue in my opinion.

Sounds to me perhaps a better explanation of sub2 might help you.
Since I’ve posted something VERY LONG before, rather than re-type that, I’ll cut and paste it from elsewhere for you.
I posted this some time ago, but it stands true still.
I’ll paste it below…Hope this helps,
Jim FL

A run down of sub2.
I’m sure Dan sent you some good info, he’s a treasure trove of it.
I’ll also throw in my two cents…

A basic run down of subject to, is this.
A “subject to” transaction, as commonly referred to here and other places, basically means buying a property, and leaving the existing financing in place.
This means, you take ownership of the property, and any loans held by lenders, or whoever, secured by that property, but in the sellers name, remain in place, in the sellers name.
No assumption of the debt required, no credit checks, most times no money out of pocket, other than title search and due diligence.
There is another benefit too, when taking over a property sub2, with a nice low owner occupied interest rate, you save, because generally, investor loans will be higher interest.
In addition, there is not a limit to the number of deals you can do, as opposed to convention buying, where some lenders will stop you at 4-5 loans.
PLUS, when buying sub2, you are taking over financing that has been in place, for at least some time, so you are paying off that debt quicker than if you had obtained new financing.

The benefits are many, and the process for setting them up is a little complicated, at first.
Simply because it is more paperwork than simply signing a contract.
However, once it is learned, and you see the mechanics of this type of transaction, they flow like melted butter.
The essential key to most creative investing methods is to use ‘other peoples money’.
This method takes that to the extreme, because now you are using a lenders money, in someone elses name.

There are many details to attend to when handling these kinds of deals, but with a system in place, they become easy to manage.

In fact, while I’m at it, I’ll cut/paste a post from my forum that might explain the documents used by most folks when buying this way.
Perhaps that will help explain ‘how?’ the deal works.
It is a post, not an article, so pardon any typos.
I usually post online while in my office doing several other things at once…I’m a multi-tasker, and can talk on the phone (thanks to headphones) and respond/post.
It helps me relax, and keeps my mind working, but I’m not real great at catching mispells etc.

Anyway, here it is:

1.Purchase and sale agreement: This is the “Contract” that you and the seller sign, outlining the terms of your sale. I use a standard agreement, and an addendum which outlines how we will use a land trust, the possible risks involved with the due on sale clause, as well as language which states that IF the loan is called, I am not liable, nor any person who I may assign the deal to. (I NEVER assign these however.)
There is sometimes also language added stating that any arrears will not be made up until such a time when/if I find a buyer or tenant for the property. I now even state in my agreement that should I not find a buyer or tenant, the loan “May” go into default, or default further, causing the lender to foreclose, and I will not be held liable by the seller. Just standard CYA language. Not that I intend to have the loan default, but “just in case”, I at least have something to show that the seller was advised of ALL the risk involved.
This DOES NOT prevent lawsuits, or allow you to escape responsibility, it just discloses everything to the sellers, which I teach is only right.

2.Declaration of Trust. This is the actual land trust that will own the house (Hold title) when all is said and done. This will name you or a person of your choosing as the trustee. The trustee is the person who is directed by the beneficial interest holders of the trust (the trust owners), to handle all business relating to the house. You will own the trust when this deal is closed. Have the sellers signature notarized on this document.
When this is filled out, you will have a trustee of your choosing, and the sellers will be the beneficial interest, or owners of this trust, which will in turn own the house.

  1. Warranty Deed to Trustee. - this is the “Deed” which conveys title to the trust. This will have the seller as the “Grantor” and the trustee, name under a trust name xxx family trust, dated xx/xx/xxxx." as the “Grantee”.
    Title is passed with this document from the seller to the trust.
    This document needs to be notarized as well. And, this is THE ONLY document that will be recorded in public records. Each state and local jusrisdiction has their own requirements for recorddation, so make sure your deed forms comply. Example, in my state, any recorded doc needs a notary stamp AND two witnesses. In my old state, as long as the doc was notarized, it was recordable.

  2. Assignment of beneficial interest in trust. - This is the document where the seller is assigning his “Beneficial interest in the trust” to you. (Ownership of the trust goes to you with this, and the trust owns the house, therefore you now own/control the house.) I get this notarized as well, just to make it more official.
    Additional notes, somewhat related to this part, but not this doc…
    :Some folks like to make the ‘beneficial interest holder’ of the trust (owner of the trust) another entity, like a corp, or LLC. I agree, but advise you to check with a comptent local attny to clarify, since I’m not a lawyer. Making a person, who is hard to locate the trustee is wise, and then have them give you power of attorney, or change trustee outside of public records to maintain more control is wise as well.

  3. Letter to Insurance company.- this is a letter you will type up, and have the seller sign. This letter simply tells the insurance company that has the existing policy that the policy needs to be changed to a non owner occupied policy, or landlords policy. It will also tell the insurance company that the home was placed into a trust, and to change the insured, or loss payee to the trust, trustee, and the “beneficiaries as they may appear”. (do NOT include the beneficiaries names, just put what I wrote here.)

Not all insurance companies will carry landlord, or rental dwelling policies, and this letter will not work in that case. I personally prefer to skip this step, and simply obtain a new policy, non owner occupied, naming the trust/trustee as insured, and trust/trustee/lender as loss payee, then cancell the old policy. SAves explaining things to an insurance agent who might not understand, and allows me to shop for rates with my own resources.
Many folks read, and spout online that the existing insurance must remain in place, or the lender will be alerted with the change in insurance and call the loan due. This is PURE MALARKY. Lenders want payments, and to know their collateral is insured, that’s it. Besides, people move from primary residences all the time and change to rental status. If the owner occupied policy is left in place, its no good anyway, as the home is not owner occupied any longer.
And paying for two policies is just plain idiotic.

  1. Letter to lender(s).- Get one of these for each lender. This will have the sellers name, the address of the property on it, as well as the lender, the lender address, and the loan number.
    This letter will simply state that the seller has placed the home into a land trust, and that all future correspondence for the loan needs to be sent to the trustee and the trustees address.
    Frankly, I rarely send these in, I just keep them on file. When we collect statements and payment stubs from the sellers, we just fill out a change of address on them and have them sent to our office. Saves time, and lenders often lose the letters we sent in anyway.
    You can open this mail when it comes in the sellers name, because of the next document.

  2. Limited/durable power of attorney. - This is a document that the seller signs, and is notarized. This is where the seller will grant you “power of attorney” over all things related to the house, including the mortgage loans, accounts, taxes, insurance, etc.
    This is something to keep, “just in case”. This will allow you to act as the seller. Rather than call the lender and lie that you are the seller (I’ve actually read a few investors stating that they do this at times, NOT something I condone or do!), requesting information, or the insurance company sends a check by mistake on a claim made out to the seller. You can now use the loan authorization to get info from the lender, as well as the POA if needed. You can also cash that check in the sellers name to do what is needed with the money, since you have a POA.
    If anyone mistakenly will not give you info on the house, because the sellers name is still on the loan, this document gives you the same powers the seller had when they owned the house.
    When you sell the house, if there are escrow overages from the lender, or insurance rebates, or balances owed, they may come made out to the seller. With the POA YOU can sign and cash these.

  3. Seller Disclosure. - This is a form that we use. This simply lays out the EXACT way you are taking title, makes it clear to the seller that there is the risk of the loan being called, (however rare that is anyway.), and makes it clear that the loan will remain in his name, and the taxes, etc. are now for you to deal with, because YOU own the house.
    I go a step further in my form, and have it state that at no time am I promising to accept liability for the loan, qualify for it, nor make payments on it, until I get a buyer.
    No promises are made at all.
    The seller signs this to acknowledge it. I like to have it notarized to give this more credibility.
    I also ad an addendum to my agreement to buy the house, including this language. Just to re-iterate the point to the sellers. No seller is going to get away with saying later, “But he never told me this”, because I make them sign and acknowledge the risks in this document and in other places, mulitple times.
    There is one other thing that we add to our seller disclosure letter as well. The seller must acknowledge, and promise by signing this that they will NOT contact, or make it known to the lender that title has transferred. This will not stop them from doing it, if they REALLY want to, but it should make it clear that IF they do, they are only trashing their credit. It might also be used as a reminder later, should a seller get squirrely and threaten to call the lender. A quick fax of my copy of this to them, signed by them reminds them of what they promised, in writing.

9.Authorization to release loan info: This is simply a document that the seller signs, to the lender, along with the lender name, address, loan number, the sellers date of birth and social security number. This gives YOU the right to call the lender and manage the account. Something good to have BEFORE getting the rest of the docs complete, so you may verify all info regarding the loan, and it is good to have for later use as well.

Now that I’ve laid all this out, I’ll TRY to give you a short explanation as to “Why?” we do them this way.
In most modern day mortgages and deeds of trust, there is what is known as the “Due on sale clause”, or “Acceleration clause”.
These state that the “lender may at its option” call the entire balance of the loan due and payable, IF title is transferred with out the lenders prior written consent.
What this means is, if the lender finds out the seller gave you the title, and you do not qualify for the loan, the lender can call the loan. When you don’t pay them, they get the house back.
Now, be advised, this does happen. But, it is rare. If you do these right, you can MINIMIZE this risk. Not totally eliminate it, but reduce the chance of the loan being called.
There is federal law. (Garn St. Germain Fed. Dep. act. 1982), that states certain exemptions from the due on sale clause.
Things like deeding a house to your child, or spouse are not violations of the due on sale. The lender cannot per federal law call the loan under these circumstances.
Another exemption is to deed a property into a trust.
Now, when the beneficial assignment takes place, this is a violation, and the lender CAN call the loan due.
But, the lender first needs to know about this.
And since this is not a recorded document, and the ONLY copies remain PRIVATE, the lender will never know. The only things a lender can see without a court order are the insurance policy, which will only name the trust and trustee, so no finding out there, and the title search, which will reveal only that the home is in a trust. No finding out there either.
This is also NOT illegal, as many may claim.
If you look at a HUD-1 statement, which is a document printed and provided by the federal govt., look at line 203, and 503, I think those are the correct line numbers? They state, “Mortgages being taken subject to”.
If this was “illegal”, the federal government would NOT have put this on there form.

So, you are using the land trust to convey the ownership of the house to you.
Once this is done, you own the house.
And, the good news is that, since you own the trust, and it is a flow thru entity, per the IRS, all the tax benefits of owning the house are yours.

One other benefit of the trust is that it somewhat protects the home from judgments you may get against you from attaching to the house. If you do this right, you will create an entity, like a corp, or LLC, and have that as the beneficial interest in the trust. This keeps you twice removed from the house. Harder to trace ownership for others this way.

I will often also fill out a HUD-1 statement for my sellers. This then gives them something to show any lenders in the future that they have sold their house. Like when applying for car loans, etc. later.

I know this seems like a lot, and it is. All docs need to be completed correctly, and you would be wise to gather them up, have them reviewed by a local comptenent RE attny.
They can make any changes needed for compliance etc.

So, does that help?

Take care,
Jim FL

Thanks JimFL. That was very helpful. I am going to try to get some deals in the works very soon.