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 investing field have never heard of this way of building real estate deals, because it is off-limits to standard real estate financing. Banks and mortgage companies despise this type of real estate deal, because it takes them out of a position of control and power over you and your property.

In a Subject To transaction, a property owner assigns the 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 legit? 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, take a 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, the owner may agree to let the owner finance the property for 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 can 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 properly executed, 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, at that time, the new owner of the property.

THE NOTE

The promissory note is the instrument that defines how the buyer will 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 owed 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 to 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 real owner of the property. Links the property to the buyer. The note says how the loan will be repaid and links 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 deed does not affect the other two documents. The original buyer (who is 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 promissory 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.

Today it is practically impossible to obtain a loan for a property that does not have a Due to Sale clause. The due-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 payment in full on the loan immediately, and if not 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 Overdue property for sale. The lender may or may not find out about the transfer, and even if they do, they may not act on the demand for full payment. As long as the monthly payment is made, the lender is unlikely to declare the loan due as they are in the business of lending money and not in the business of real estate. They would rather have someone make 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 To Sale clause, but it doesn’t affect the promissory note or mortgage. Even if ownership of the property is transferred to a new owner, it’s not like the new owner can go find the property and run off 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 properties 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.