One to watch out for on “Subject To” investments
by James Miller
“subject to” refers to the purchasing of a property “subject to” the underlying debt. A great way to purchase, if you can, as the mortgage and note stays in the sellers name, but the property deed transfers to the new buyer.
There are a few tricky parts when buying property using this method; First, the seller has to have a great deal of trust as the buyer holds all the cards and second, there is a due on sale clause in most if not all of today’s mortgage documents that allow the lender to accelerate the mortgage if equitable interest in the property shifts to a someone other than the person on the mortgage.
In practice, as long as the mortgage is being paid, the last things a lender wants to do is to accelerate the mortgage and turn his performing note into a non-performing one. It can happen in theory and give the subject to investor some things to worry about when it comes time to communicate with the lender.
Lenders cannot communicate with anyone whose name is not on the mortgage without getting a Authorization to release information and for changing anything like contact information, a Limited power of attorney with regard to the property is needed.
I recently realized a potential mistake I almost made with regard to a subject to transaction.
We purchased a house from a woman who wanted to sell, but her mortgage was already at the market value of the home. She deeded the property over to us “subject to” the underlying mortgage. Unlike most sellers facing foreclosure who are very grateful that they can sell their property any way possible, she tended to fight us on every little detail of the transaction and generally seemed to be difficult to work with.
I dropped the ball on getting our insurance information to the lender in a timely fashion and the lender placed their own hazard insurance on the property, deducting the double priced premium payment from the escrow account.
I wrote a letter to the lender providing our insurance information and asking that they refund the premium amount to the escrow account, or apply it to the balance of the mortgage.
I then forgot about the situation as more pressing fires caught my attention.
A short while later I received the mortgage statement for the property in the mail from the seller, as the lender had not yet changed over to using our contact information. It often takes them a while to do this.
In with the statement was a letter from the lender acknowledging my letter, and indicating acceptance of our insurance and cancellation of theirs. However on the mortgage statement I didn’t see where the amount had been credited back to the escrow account, or deducted from the principal the loan.
I thought it was strange that the lender would comment on the situation, but not reflect it on the statement.
I realized right then where I had created an Achilles heel.
What if the lender sent a check back to the original seller? The mortgage would still be in her name, so the check would likely be written out to her as well.
She was still receiving and opening the statements from the lender so she could actually remove the check and forward on the rest of the statement to me.
She already seemed disgruntled by the whole process, so I realized that it would be easy for her to justify (and also hard to forward onto me) a check for over a thousand dollars that was made out to her.
My position on it was that I took over the property (including the escrow account) as is. I actually even caught up her back payments and have made a half dozen or so since then, so the escrow money was also money that we put into the account.
Her cashing that check would be no different than her coming back over to the place and removing a few windows.
It’s just a lot easier to cash a check.
Since the property was purchased with her name still on the mortgage, I could, in theory, threaten to stop making mortgage payments until she paid the money back to the escrow account.
This would place her back in the pressure position of again facing foreclosure.
The problem with that ethically questionable tactic was that I had already placed a tenant buyer in the property. I couldn’t risk losing the property to foreclosure and then getting sued by the tenant buyer for not fulfilling my end of the deal. As long as the tenant buyer was in place and current on their payments I would have to keep paying the mortgage.
This made that whole idea a non-threat.
I resolved to the fact that I would have to take her to court to try to get the money out of her. I was pretty sure that I could win, given I keep very good records and had been paying the mortgage for so long, but the case would be confusing to the judge as “subject to” is a somewhat atypical transaction in our rural location.
I decided that if she had indeed received and cashed a check I would negotiate to try to get her to keep some and send me the difference. We would both be better off that way than if I had to take her to court. Court would also completely sour our business relationship.
As it turned out, all of my worry was for naught. When I called the Mortgage Company they had already credited the escrow account with the money, it had just not made the last statement.
It was however an interesting (and panic stricken) mental exercise.
With Real Estate it is easy to let something slip through the cracks that can cost you quite a bit.