Subject to the Existing Financing

By
Real Estate Agent with eXp Realty of California BRE# 01822665

Have you ever negotiated a subject to?  This is a way a lot of investors take over properties with no money down.  They speak with a seller and without encumbering the property with a new loan, they take the payments over.  Usually this is done in conjunction with bringing the loan that is on the property current (as the seller motivation in the first place is to walk away or deal with you the investor because the seller is in foreclosure).  Next is speaking to the junior lien holders about discounting any secondary financing and paying that off, and then keeping the first loan on the property in the seller's name for a period of time.

Is this legal?  If you would look on a HUD-1 form, you will see a line item that in essence, asks if the buyer is going to be taking over the existing financing.  If this isn't legal, why is that line there?

In this day and time period, we have a lot of properties that could be taken back by lenders.  Do they want them back?  Not really.  They make it hard to negotiate a short sale, when the earlier OK from them would help the bank get the property off of their books.  Why?  I don't know!  Why would they want another non-performing asset to report to their stock  holders?  Why would they want to wait, tie up more of their money, and in the end only get the same deal months later?  Banks are puzzling, sometimes, and perhaps since there are so many more files/accounts in pre-foreclosure, they are hiring off of the street or hiring inexperienced people straight out of Cohen Brown training.

Investors can use this method of "subject to financing" with regularity.  The investor, though, has to be forthright and pay the payments.  There are two ways to pay the bank:  Have the seller keep paying the bank with the money you send them (iffy) or you the investor pay the bank.  Actually, there are more ways:  Set up an Escrow Company to hold funds and pay the monthly payment.  This will cost a small percentage, but would at least have credibility with the bank, with you, and with the buyer/seller.  The buyer can pay the small percentage, which would be wrapped up in the payment to you (now you are the buyer's bank), since the payment may be higher, anyway, if the buyer is NOT you - and the Escrow can send the bank their payment, you your payment, and keep their small percentage fee.  Everyone should be happy, yes?

Can the seller still face foreclosure?  that depends on you.  If you don't pay the bank, the seller's credit will be affected and they will be the ones going into foreclosure.  And then the seller will be the one who is coming to look for you.  Hopefully, the new buyer, whether it was you or someone you sold the house to, will soon refinance and pay off the old mortgage.  Then you, who bought low (took over the payments and gave the seller moving money), and sold low (at a profit) will still walk away with a substantial sum.

Happy investing!

Posted by

Connie Gohata
Realtor, ERA Buy America Real Estate

Comments (3)

Dennis Serra
Meridian Business Group - Schaumburg, IL

(I am no lawyer)  Looking at the contract between home owner and note holder the vast majority of them give the note holder the right to "call" the loan if it is found out that the property was sold "subject to."

Will they?  Who knows, but the lender has the right to do so.

Dec 20, 2007 07:03 AM
Connie Gohata
eXp Realty of California - Cypress, CA
Results that Move You

Hence the term:  Due on Sales, clause.  However, if the bank isn't getting paid monthly because the seller is 3 months or more behind, and suddenly the loan status turns around and the bank has been paid back payments and fees and is now getting their money every month, on time, they may think twice about envoking the clause.  This climate of foreclosures has been devastating to the banks.  Perhaps a novice banker wants to strut his ego and power and give the buyer a hard time, but ultimately, if the bank wants its money, it probably won't be getting it any time soon (at least, not in full).  That's about a sure bet that the home loan would have issues, the bank may start foreclosure proceedings again, and how is that a win for the bank?  I would think that if the bank is getting its money regularly and on time, they would look the other way.  The last thing they really need is another non-performing asset (foreclosure).

I also think that the banks put the due on sale clause on the loan docs because back in the 80's, when interest rates were high, people would assume loans at low interest rates.  They didn't want that to happen again, so they wanted people to have to get a new loan to take advantage of the higher rates (think 12-18%).  With interest rates being low, these days, there is no advantage to doing that.

However, it's a gamble, for sure.  Do you know anyone who has had their loan recalled because they did something (like selling their home unbeknownst to the bank) to envoke the clause?

AITDs are coming back in view, too.

Just my thoughts. 

Dec 20, 2007 01:31 PM
Chris Martin
Holly Springs, NC

Seriously, Connie, just tell the bank what your investor is doing and get "permission" from the bank in writing. Scrupulous, well capitalized investors should not have resistence from lenders in this environment. I plan do offer S-2 to pre-foreclosure property owners throughout 2009... and antgicipate  getting lender coopertaion and documented permission.

Jan 01, 2009 12:49 PM