What is a Subject To Home Sale?
Interview with Dallas Real Estate Expert Dan Shoemaker Explains the Truth about Selling a House Subject To as a Means to Prevent Foreclosure
• What is a Subject To? Subject To is a short way of saying you’re selling (or buying) a house subject to the existing mortgage. It is a means of transferring ownership of a property to another person (most often an investment company) while the loan remains in the original owners name until such time as it can paid in full or refinanced.
• Why would someone want to sell a house using that method? It depends, but in most cases, the amount owed on the house along with repairs needed versus the market value does not make it a viable purchase. Sometimes the owner is facing foreclosure and must sell the house quickly. A real estate investor can come in, get the loan reinstated, and take over payments on the house. Furthermore, the real estate investor will then make all the repairs for the house and either sell it via retail, owner finance (called wrapping the original note) or keep it as a rental property.
• Are there any risks associated with selling a house Subject To? As long as you’re working with a reputable real estate company, the risks are very low. If there were an economic crisis of some kind, it’s possible the buyer the investment company finds for the property can’t make their payment. Although this has not happened to our company, our process would be to work with buyer as best as we can. Meanwhile, WE make the payments on your loan so your credit doesn’t suffer. If absolutely necessary, we will foreclose on the buyer and find a new one or turn the house into a rental property.
• How is it possible to sell a house Subject To if a mortgage company has a “due on sale” clause? A due on sale clause gives the lender the right, but not the OBLIGATION, to call the note due (require that it be paid in full with a certain time period) or they threaten to foreclose. Virtually every mortgage has this clause. The reality is that as long as payments are being made on the property, the bank has no reason to call the note due, and in fact, in our experience they never have.
• What would you do if the lender calls for the loan to be paid in full? Our real estate investment company works with other private lending institutions and has open lines of credit so if we can’t negotiate with the bank, we pay the note (relieving the seller from any further responsibility) and then work diligently to that new loan refinanced into more acceptable terms.
• Do you keep the homeowners insurance in the sellers name? Yes and No. A new policy will be issued listing the seller as an “additional interest” or “additional insured” The original policy will get canceled. If the mortgage was escrowed any refund check will need to be deposited back into the escrow account. If it was not, the refund goes back to the seller.
• I heard of scams associated with Subject To’s. How can a home seller stay protected? Do your due diligence. Make sure the real estate investment company is closing your transaction through a title company, and that all of the documents get recorded with the county. Make sure you maintain access to the mortgage records so you can monitor the account to confirm loan payments are made in a timely manner. Set up alerts so the bank can notify you if a payment is late. While it’s not uncommon for the investment company to need your login info so they can access important documents (statements, escrow analysis, tax forms, etc) make sure your password to your mortgage company is different than any of your other accounts. Ask if they use a third party company to service the note to make sure payments are being made in a timely manner. Finally, there should be more paperwork rather than less. In other words, if the investment company presents a standard real estate contract for your state along with a number of disclosures, they are being up front and clear about the process. Avoid the “investor” who has a 1-2 page contract that he or she found on the internet or had his or her attorney draft in THEIR best interests!
• Why would some attorneys say Subject To’s are illegal? That is a very good question! Many do not specialize in real estate law and are simply unfamiliar with the statutes, etc. If you have questions, most every title company has a real estate lawyer on site (or has one they can refer you to) who can answer questions for a nominal fee. Most escrow officers at title companies have experience with Subject To as well and can answer questions at no cost.
• Is there any other information a homeowner should know when considering selling a house Subject To? Done right, selling your house subject to can be a win-win-win scenario. You, the seller, get out of a house you can’t afford, prevent foreclosure, while saving your credit, so you win. The end buyer is almost always a self employed, hard working person who just can’t get financing from a conventional lending institution, so they win. And the real estate investment company makes a little money too, so we win!
Dan Shoemaker is a local Dallas/Ft. Worth real estate investor who specializes is purchasing houses using the Subject To method. If you think this method might work for you, call us at 214-444-9385 or contact us through our Fast Response Form.
Dan is not an attorney and is not offering legal advice. If you have legal questions regarding a Dallas/Ft. Worth real estate transaction, we recommend Martin Garcia with Texas Secure Title.