Bryan Ellis Breaks down Seven Problems with Subject-To Real Estate Deals
In the world of creative real estate investing, few strategies are as powerful or desirable to a real estate investor as Subject-To transactions. But even though Subject-To real estate investing is absolutely legal in most of the United States, you certainly should be aware of some legal problems investors can face when not behaving with sufficient care. I’ve observed that there are 7 primary legal problems you’ll face as a subject-to real estate investor – unless you’re careful:
1. Inaccurate Representation Of Loans Terms & Other Encumbrances. Be sure to have the right to terminate your agreement if the owner doesn’t tell you everything about every obligation for which the property is collateral. Remember – those obligations become your responsibility after you own the property.
2. Misrepresentation of Mortgage Balance. Property owners frequently misrepresent their mortgage balances, albeit usually unintentionally. Since the balance of those mortgages will become your responsibility after closing, reserve the right to adjust the agreement in your favor if the mortgage balances provided to you are inaccurate.
3. Stipulate “Non-Assumption” of the Debt. A subject-to purchase agreement must be clear that the buyer is not assuming the debt of the seller. Assumption entails acceptance of liability to the lender, which is not acceptable for a subject-to transaction. Rather, the real estate investor’s liability should be exclusively to the property seller in the form of the purchase and sale agreement, rather than to the lender in the form of a mortgage.
4. The Dreaded Due-On-Sale Clause. Be sure to tell the home owner that their mortgage has a due-on-sale clause in it, and because of that the lender has the option to foreclose against the property even if you make all of the payments on time. This isn’t likely – in fact, it’s highly unlikely – but you’re better off to make the disclosure.
5. The Pay-Off Date – When Is It? Just because there are 25 years remaining on the loan you’re taking subject-to doesn’t mean the home owner is comfortable with your keeping the loan open for that long. Always specify exactly how long you are allowed to keep the loan open before refinancing.
6. Date of First Payment. Stipulate the date of the first payment that the buyer is required to make, so that the seller will be clear that they are required to continue making payments on the property until that time.
7. Review By Lawyer. Make sure that YOUR lawyer reviews your purchase and sale agreement, and require that your seller doe the same with his or her lawyer.
Bryan Ellis is a real estate investment strategist and business strategist in Atlanta, Georgia. He offers a huge amount of free training at his blog and through the Bryan Ellis Videos website.
