Subject to avoiding foreclosure with a little-known method known primarily to investors
There is a method of buying and selling real estate by investors known as “Subject To”. Most people who are not in the real estate investment field have never heard of this way of building real estate deals, because it is outside the bounds of standard real estate financing. Banks and mortgage companies despise this type of real estate deal, because it takes them out of the position of control and power over you and your property.
In a Subject To transaction, a property owner assigns the title deed to a buyer, without the buyer assuming the owner’s loan. The Owner understands that the loan remains in the Owners name, and the Buyer does not assume the loan, but only promises to make the Owners loan payments on the Owners behalf. In other words, the buyer is taking possession of the property “subject to” the existing mortgage that remains on the property.
Is that legal? Can you sell your property while there is still a loan against it? The answer is yes, you can. And that’s how it works.
First, look at how standard real estate is purchased and financed. A buyer finds a property that he would like to buy. They make an offer through a real estate agent or perhaps directly to the seller, and a price is agreed upon. The buyer then contacts a bank or mortgage lender to arrange financing. Or maybe the owner consents to the owner financing the property to the buyer. When the actual sale takes place, there are three basic documents that are implemented, a deed, a mortgage, and a note. The particular names of these documents may vary from state to state, but they are still the three basic documents that are created when it comes to a loan.
WRITING
A deed is the document that determines the real ownership of real estate. It is the paper that describes the property and, when executed correctly, transfers ownership of the property from the seller to the buyer. Once the deed is properly written, executed (signed), notarized and delivered to the buyer, the buyer is now the new owner of the property.
THE NOTE
The promissory note is the instrument that defines how the buyer is going to pay the lender and the terms under which the payment will be made. The promissory note will state the amount of money borrowed, the interest rate paid, the number of months or years to repay the loan, and the amount due each month. The note may contain other items, such as a balloon payment due in the future.
THE MORTGAGE
The mortgage is the document that places a lien on the property until the debt is paid. The mortgage generally defines the property and the language that encompasses what will happen if the note is not paid. Mortgages today almost always contain a “Due on Sale” clause, which will be discussed later.
This is how the three documents tie things together. Whenever a property is sold and any type of loan is taken against the property, there are four entities that interact with each other. They are the buyer, the seller, the lender, and the property itself. The deed establishes who is the actual owner of the property. Bind the property to the buyer. The note tells how the loan will be repaid and binds the buyer to the lender. The mortgage places a lien on the property and binds the lender to the property.
When a seller has a loan on a property and wishes to transfer ownership of the property to another buyer, a deed is created to do so. The creation of the new script does not affect the other two documents. The original buyer (now the seller) remains responsible for paying the note, and the mortgage that binds the lender to the property also remains in force. In other words, the transfer of title from one owner to another has nothing to do with the note or mortgage. It is not illegal to transfer title to property from one person to another while a mortgage exists. The only thing that could happen is that the lender could claim the note as due and payable immediately due to the transfer of the deed. This is the Due On Sale clause mentioned above.
Nowadays it is practically impossible to obtain a loan for a property that does not have a Expiration for sale clause. The expiration on sale clause is not a law, it is simply a sentence in a document that says that if you transfer ownership of the property to someone else, the lender has the right to demand full payment of the loan immediately, and if you do not it does. paid, the lender can foreclose on the property.
In a Subject To sale, when the seller transfers a deed to a new owner, they have activated the Due for Sale property. The lender may or may not find out about the transfer, and even if he does, he may not act on the demand for full payment. As long as the monthly payment is made, it is unlikely that the lender will declare the loan due as they are in the business of lending money and not in the business of real estate. They’d rather have someone write the note than foreclose on the house and then have to resell it.
So, in the end, a Subject To sale may trigger the Due On Sale clause, but it doesn’t affect the note or mortgage. Even if ownership of the property is transferred to a new owner, it’s not like the new owner can just go find the property and run away with it. If the new buyer defaults on their promise to make payments on the previous owner’s promissory note, the lender can still foreclose on the property through the mortgage document, regardless of who actually owns the property. The lender is still secured with the property as collateral.
The Subject To method of selling and buying property is a viable way for an owner to sell a property when the owner is in financial difficulty and is in danger of losing the property completely and destroying their credit.
