I received an email the other day that had a video from I think Lou Castillo and Josh. I couldn't find it, but they were saying Subject 2 deals are Illegal, that they bring out the "Due On Sale" clause, and everything else, and that you could get into trouble.
How true is this, and is there a better way to work around this and to still get $5k per deal doing subject to the owners existing financing or I guess wholesaling pretty houses and still keep the owner happy?
There was a guy I know that was doing something like this about 5 years ago, but I couldn't figure out how they were doing it. Thank you and Merry Christmas. :smile
The due on sale clause is only important if 1) you have equity in the house, and 2) the bank rates are at least 4 points (approx) above what sellers (competition) are willing to charge in interest and 3) the loan defaults.
This is the Trifecta of due on sale clause actions. Meantime, I do “subject to” investing, flipping, and merchandising professionally and I’ve been doing it since 1990. I’ve never had a bank call my loans.
Search this forum for my posts on the subject and you’ll get a much better understanding …or go to my blog and read about it.
The Due on Sale clause is a HUGE issue. Just because some one investor says (with no law experience) that it is legal does not make it so. The new promotion of a Mortgage assignment product is just a new twist on an older concept which is still illegal.
These deals will come back to bite you ! Don’t let anyone tell you there is no Due on Sale Jail…
Because you can go to prison for …
Mail, Wire Fraud
Insurance Fraud - ( PMI)
Not to mention you have to abide by the SAFE Act, and various other state laws! At this time in the economy with the current government… I would suggest staying well clear of Sub 2.
Why not call up HUD, or a Mortgage Compliance officer and ask them… Or better yet, why not call the bank, tell them what you did, and have them send you a confirmation letter that your new deal is okay with them… They will not! Therefore your entire real estate business is built on very shaky ground.
Viking, is there any light or windows where you live? Or is your world a constantly dark and dreary place? Good lord! What a downer you must be. :rolleyes
The good news is others can go out and proceed to do their deals while the likes of you offer no competition.
I couldn’t agree more. I won’t subscribe to the theory that my closing attorney who’s been in practice for over 30 years doing sub2 transactions would risk being disbarred or going to jail by effectively breaking the law over and over again.
[quote author=Viking link=topic=48500.msg240616#msg240616 date=1298221720]
The Due on Sale clause is a HUGE issue. Just because some one investor says (with no law experience) that it is legal does not make it so. The new promotion of a Mortgage assignment product is just a new twist on an older concept which is still illegal.
These deals will come back to bite you ! Don’t let anyone tell you there is no Due on Sale Jail…
Because you can go to prison for …
Mail, Wire Fraud
Insurance Fraud - ( PMI)
Not to mention you have to abide by the SAFE Act, and various other state laws! At this time in the economy with the current government… I would suggest staying well clear of Sub 2.
Why not call up HUD, or a Mortgage Compliance officer and ask them… Or better yet, why not call the bank, tell them what you did, and have them send you a confirmation letter that your new deal is okay with them… They will not! Therefore your entire real estate business is built on very shaky ground.
The biggest thing that hangs up most “subject to” investors isn’t the
legality of the sub2, but the contracts they use when putting together deals.
There’re several disclaimers that need to be in place to protect you from
having a seller come back and say you tricked them or something like that.
Just one of many is to have the seller….IN THEIR OWN HANDWRTING…write out
and sign that they completely understand that the house is being purchased
subject to the existing financing and that the lender can call the loan due on
sale/transfer .
I use a several types of contracts, pro-buyer and pro-seller….some long form
and some short form depending on the situation.
Finally, closing through a title company or attorney that understands the
business offers an, “arm’s length plus six inches component. A transaction
in which the buyers and sellers of a property act independently and have no
relationship to each other. The concept of an arm’s length transaction is to
ensure that both parties in the deal are acting in their own self-interest and
are not subject to any pressure or duress from the other party.
The extra six inches is the paperwork with all the disclaimers. The paperwork
is done to protect me and my interest, but when presented by an attorney,
ensures I am not influencing the deal in any way.
Hope this helps!!
I’ve been at this about 19 years, and I’ve never found it necessary to do all that you suggest. For me, that would be a Sub2 deal-killer.
Sub2 deals require a high level of mutual trust. I suppose, if there’s not a high level of trust, or perhaps intelligence, then having the seller hand write affidavits attesting to ‘understanding’ what their doing …would be necessary.
Otherwise, I would say I’ve either screwed up the offer, or I’m in front of the wrong seller. Either way, not everyone qualifies for a Sub2 deal.
My clients are usually delighted that I’m saving their credit (or improving it), and that they are out from underneath a debt load. They give me appliances, furniture, and cars just to make sure I’ll buy their houses. They’re not confused about giving up their deeds and handing over their loan payments, or what to expect from me later.
I mean how complicated is that concept, really? I spell it all out in my offer.
If they are still confused, then signing an affidavit is beside the point. If so, I’ve got to take into consideration that the seller is both a retard, and too much of a risk to do business with in the first place. I never buy houses from retards. I just get out of Dodge.
That said, some states require the sellers explicitly acknowledge that they understand what they’re doing in a sub2 transaction. So, there’s that.
There’s no need for an attorney. I just have the seller write down that he understands that he is giving me the deed to his house and that I’m taking taking over his loan payments. He also acknowledges that I will likely begin making his loan payments late every month and lower his credit rating by at least 200 points, and that he’s “OK” with that.
Then I have the seller write his bank, informing them of an ownership change, so when they don’t respond in a reasonable time, he knows the bank has given him “permission” to assign his loan to me without any further “problems.”
I call it the “KYBG” package. Yes, it does stand for, “Kiss Your Butt Good Bye.”
I’ve done exactly ONE subject to deal, and here’s how it played out:
I called the seller’s bank and asked if I could assume the loan. They checked me out and said: “No.” (I had no credit history at the time.)
The seller and I agreed that instead of doing a formal assumption I would just start making his payments for him and ‘cash him out’ for the mortgage balance at a later date.
I called the bank back and told them I was going to be making the payments on his loan. They said: “OK.”
You didn’t do a ‘sub2’ deal here. A “sub2” deal by definition means you’ve taken title to the property 'subject to" the existing mortgage; not just taken over payments.
That said, if the seller deeded the property to you, and you held the deed unrecorded, this would constitute a ‘sub2’ deal, since there is an effective transfer of the deed.
The pros of not recording the deed include that the bank can’t technically call the loan due (short of a default), even if there is an effective transfer of the title. The actual recording of the deed gives the bank the option of exercising the due on sale clause.
The cons are that without a formal recording of the deed transfer, the buyer remains liable for any future title defects caused by the seller. To make matters worse, not recording the deed presupposes the buyer didn’t secure title insurance either.
Meantime, the IRS could file a lien against the property seeing that the property is still technically in the seller’s name. The IRS won’t know, or care, that the seller has constructively delivered the title of the property to someone else prior. So, then…it’s off to court to prove constructive delivery and prove a time line in order to expunge the lien.
So, taking over a seller’s payments without getting the title is not a ‘sub2’ deal. I don’t know what that is exactly in your case. However, getting the deed, not recording it, and taking over a seller’s payments meets the definition of a ‘sub2’ transaction. FWIW
Everytime I read someone stating that sub2 deals are illegal, I just want :banghead it is not. Now I have not done thousands or even 500 like some seminar promoters tought. But the biggie is to be sure it is a deal from the begining. I was not a fan of wholesaling these out until about a year ago. Still a little shy and will only do them if I feel the buyer has some skin or something to loose. But I do see it as a viable business tool. I did not say business model. It is just a tool.
Most of what has been typed in there is true. If you whip out 6 inches of disclosures or have a seller and buyer write a statement of what is going to happen with this deal or some sort of disclosure like that I can see that you are going to have trouble. Maybe not the deal you are doing, but that model for sure.
Follow David’s and Jay’s advice and you cannot go wrong in my opinion.
There is one other problem with not recording the deed, javipa, depending on state laws anyway. Some states, like NC, are race states, which means it doesn’t matter which buyer has the earlier signed deed, only which buyer gets it recorded first. So by not recording, you run the risk of possibly losing out if someone else gets a signed deed from the seller and records it first.
The basic answer to the question of are Sub2 and Lease Options illegal is check the state laws concerning them. Over the past several years, many states have (or attempted) to make at least versions of both illegal or damn near impossible to do.
Know your state laws, use the right paperwork and you should have no issues.