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Investing Using “Subject-To”

Updated: Mar 31, 2022

Claiming The Tax Benefits

One great real estate investing strategy which requires no credit and sometimes little or no money is to take over the property “Subject-To” the existing loan.  This basically means the seller is willing (for one any number of reasons) to deed you their house if you agree to make the payments on their loan.

There are many sellers out there who are facing foreclosure and are willing to deed you their house if you will save them from being foreclosed on.  This way, the seller’s credit is saved, which may mean a lot to them.  In other cases, the seller may not care about their credit, but they’ll still deed you the house if you’re willing to give them some moving money.  The situations are pretty much endless and these types of deals are being done on a daily basis across the country.

No Credit Required

When you take a property “Subject-To” the mortgage, you are not formally assuming the loan; therefore, you won’t be using your credit to do the deal.  Furthermore, your name does not appear on any of the bank’s documents and you’re not personally liable to the bank for payments on a note you took over “Subject-To”.

Little Or No Money Required

The only money you will need would be for making up any past due payments the seller didn’t make.  You may also agree to give the seller some moving money as part of the deal.  From then on, the only other money you should need would be for any repairs and of course the monthly payments on the seller’s loan.

Very Little Closing Costs

The only closing costs you will have are for recording the deed.  We’ll cover how to draw up your own quit claim deed in the Agreements Module and there is no need to have a formal closing at a title company.  You can simply have the deed notarized and then go down to your court house and have it recorded.  In addition to paying a recording fee on the deed, some states may require you to pay a transfer tax.

When taking over a property, it would be in your best interest to at least have the title checked, which could cost you a couple hundred dollars.  You can get title insurance on a property you took “Subject To”, but you may find a few title companies that won’t write you a title policy.  Usually, a title company will make an exclusion in the policy stating the property’s title does still have a mortgage against it.

Realize, just because a seller transfers title does not mean the loan goes away.  The loan remains as a lien against the property in the seller’s name until that lien is paid off or assumed.  Until then, you’ll be making the payments on behalf of the seller.

Claiming The Tax Benefits The interest on the payments you make are even tax deductible and you don’t need the interest statement from the lender to be able to claim it on your tax return.  Just because the tax statement the lender sends to the IRS is in the old owner’s name, does not mean you can’t claim it on your own tax return.  If you get audited, all you have to do is produce copies of the checks where you were the one who paid the interest.

Making The Mortgage Payments

To make the payments, the only thing you’re going to do is mail in your check to the lender.  You don’t have to ask their permission to send them money on behalf of the seller.  If you send them money for a payment, they will take it… no questions asked.

When the bank receives the payment, they send it to their data entry department which enters the loan number you wrote on the check, and the dollar amount paid, into their database.  The person doing this data entry goes from one check to the next, one right after the other.  When entering each payment, they don’t look up the account by the name; they look it up by the loan number.

By the way, do not try to change the name on the coupon book or the address the coupon book is sent to.  It doesn’t matter whose name is on the coupon and the new books should be coming to the property’s address anyway.  If you don’t have the coupon book, don’t worry about that either. Just mail in the payment without it and don’t forget to put the loan number on your check.

You never want to personally confront the bank and tell them that you are taking over payments on the loan without formally assuming it.  Don’t try to create problems by asking the bank to change anything in regards to the mortgage and whose name it is in.  Just make the payments.

Circumventing The Due-On-Sale Clause

If you’re still worried about the due-on-sale clause, there are ways to try and circumvent it, or at least hide the fact you took over the property from the seller.

The Garn-St. Germain Act

The most popular way investors get around the due-on-sale clause is by using the Garn-St. Germain Depository Institutions Act Of 1982.  This act outlines certain cases in which a lender may not exercise their right to call a loan due under the due-on-sale clause.

Under this federal law, it says that a lender cannot call a loan due if the seller puts their property into a land trust for estate planning purposes.  Furthermore, the GarnSt. Germain Act does not just apply to owner occupied properties.  The law simply says it applies to single-family residences, and because it is a federal law, it applies to all fifty states.

When necessary, some investors have the seller put their property into a land trust with the seller as the beneficiary.  This is covered under the Garn-St. Germain act because it is a transfer into an inter vivos trust and the transaction does not relate to the rights to occupancy in the property.  The seller then assigns their interest in the trust to the investor.  This does give rise to the due-on-sale clause; however, this is done on a separate document that is not required by law to be recorded.  Furthermore, usually the only people who have a copy of the transfer document, are the seller and the investor.

If the lender sees there was a transfer into a trust, they may ask for a copy of the trust for their files, usually by sending you a letter. 

If the lender does ask, simply ignore the letter and see if they send you a second one.  If the lender still wants to push the issue, you simply mail them a copy of the land trust showing the original owner as the beneficiary in compliance with the Garn-St. Germain Act.  Of course, you’ll want to conveniently forget to include a copy of the assignment of beneficial interest.  We’ll cover more about land trust agreements and all the documents involved in detail, later in the Agreements module.

You can even name the trust using the last name of the seller.  i.e.  Your Name as Trustee of the 123 Main Street Smith Trust.  By doing this, you make  the trust look related to the original owner for anyone looking at who is the new title holder.

Will Lenders Call A Loan Due?

Most banks won’t cause you a problem even if they did somehow realize you took over the property.  Banks already have enough problems with loans that are in default. They don’t want to create more defaulted loans by calling loans due which are paid up to date.  Banks would rather have the money than have the house because the house becomes a liability on their books and even affects how much money the government will allow them to lend out on new loans.

This is not to say banks never exercise the due-on-sale clause, but it is extremely rare.

If The Seller Has An Equity Line Of Credit

One circumstance in which a lender will call the loan due almost 100% of the time, is when the seller has an open equity line of credit on the property.  This is because the seller could go down and borrow money against the property, which they no longer own.  So, if the seller has a credit line on the property, do not purchase it until that credit line is closed.  You can find out if a seller has a credit line simply by asking them.  Just incase the seller doesn’t tell the truth, any open credit lines will still show up in a title search.

What If A Bank Tries To Call The Loan Due?

There is always the slim chance the lender will call the loan due, or at least pressure you to qualify to assume the loan, if they figure out you took over the property “Subject To”.  If the bank tries to call the loan due or tells you that you have to pay it off or qualify to assume the loan, you can tell them you are not going to do it.  You can even point out that you have not signed any paperwork which says you will pay off the loan or qualify to assume it.  If you bailed the original owner out of foreclosure, you’ll want to point out to the bank that at the time you took over the property, the original borrower was several months behind.

To help discourage the bank, you can further tell them the property is in poor condition and if they call the loan due, you will abandon the property.

By the way, if the bank calls the loan due and actually files for foreclosure (which rarely happens), the foreclosure will not show on your credit because you never signed on the note as a borrower.  The most money you can lose is whatever you have invested.  This should not be very much if you got a good deal.  If you are not willing to risk that, then this technique may not be for you and you may want to look more heavily at the Lease Option method.

No copyright infringement intended. This article was originally published at by Robert Lawry II

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