Subject To

By Bernard Hale Zick
(Copyright, with right of publishing to MSI.)

Taking a property "Subject To" a loan is not complex, but it is involved. If you know what it is and how to explain it to the seller, and what steps to use to protect the loan from being called, you can buy many more properties faster than you can if you have to go get new loans on each purchase.

Here is how...

In real estate financing, the note says I owe money and the Deed of Trust or Mortgage says "here is how the lender proceeds to take over the collateral or sell it if you don't pay the note." Generally, the person borrowing the money is personally liable on the loan. This means that if the collateral that backs the note, once sold, is not enough to cover the debt, then the borrower will have to make up the difference from their other resources.

Traditionally, if you don't get a new loan when you buy a property, you will take over ownership and "assume and agree to pay the loan." However, for many years now, lenders have had a "due on sale" clause in their collateral agreements. This means the lean may, but does not have to, require full payment of the loan now rather than continue to accept payments. In the early years of the due on sale clause, the current interest rates were much higher than the rates on old loans. So the lender had a reason to call the loans where due on sale had been violated. But not only have recent rates been lower than historic rates; lenders in general have not been filing due on sale cases at all. And as a rule, unless something out of the ordinary happens, the lender never notices that a transfer has occurred. If you don't make the payments, they will notice. f you cause them to do a lot of paper work, they will notice.

Taking a property "subject to" mean that you get the deed but you do not assume the loan. You, of course, acknowledge that the property has a loan on it. This means that if you don't make the payments you could loose the property. But if you don't pay the loan and you loose the property, there will be no personal liability beyond the loss of the property.

The motivated seller will agree to almost anything. But if asked, you can explain to a seller that the risk of loosing the equity is enough to keep you from missing payments. If they still are unsure, you could have some sort of an intermediate collect and disburse the payments. There are loan servicing companies or trust companies that will do this. Or, you could have the seller open a savings account at the S & L that has the loan. You make the payment into that account and set that account up for auto pay of the loan. That way the seller can check the account and see that the payment was made in and paid out. This idea has the added advantage of the S & L still seeing a payment come from whomever they were used to seeing it come from. (Remember the less paper work rule.)

The biggest problem comes with insurance. You have to have insurance. And the homeowner's policy they have is only good for 30 days after the transfer. So for starters, call or write the insurance company that has the existing policy and ask them to add you to the policy "as your interest may appear." If you do this, remember to follow up in two weeks and change the policy to a "renters" policy rather than a homeowner's policy. Or, get a new homeowner's policy in both your name and the seller's name.

I usually add another approach. I write the S & L a letter, signed by myself and the seller, saying that I am going to take over property management of the property for the owner and the owner has asked me to find a renter for the house. The letter also says that the S & L can take directives from me the same as if I were the owner. There is a chance, as interest rates climb in future years, that lenders will be more interested in who is making the payments. But the certain way to catch their attention is to get behind in making payments. So of you are using subject to as a tool, make doubly sure you do everything else by the book and on time.

Example of a letter to the S& L:

Ref: Loan number 494949 Borrower: xxxxxxxxxxxxxxxx Dear S & L, I am the owner of the subject property and will be having Bernard Zick manage the property for me and find a tenant for the property. If you have any questions or correspondence or actions that need to be taken, please contact him at: XXXXXXXXX XXXXXXXXX I have asked him to co-sign this letter so you will have his signature on file. VTY

BZ