Buying property through a Trust Conveyance, “Subject-To” the existing loan, or via a similar tactic with a new name, “Mortgage Assignment” seem to hold promise for a sagging housing market in which sellers cannot sell and buyers cannot qualify through the banks’ new rigors. It’s been said that in today’s economy, a homeowner’s loan may be worth more than the property itself because buyers recognize that paying more than market value for a home (by taking over the mortgage payments) may be the only way they will be able to buy at all, and “Anyway…” they are told, “prices will soon be going up and your home will be worth more than you paid for it even at an inflated price.”
But, is there a danger? Prior to 1982, a homeowners in California had protection from lender interference in a Real Estate transaction, even if it involved the new buyer assuming responsibility for the existing mortgage payments. Lenders were allowed to interfere with a transaction only when it was necessary to protect the lender’s security interest. In 1982, these protections were superseded by a new federal policy (driven by lender lobbies) allowing lenders to add the infamous “Due On Sale” clause to every mortgage note. Specifically this clause states that when the property is transferred to a new owner, the lender may call the loan due in full, without cause, and to foreclose on the property if it is not fully paid in 30 days. This means that lenders now are motivated to make the decision based on what is most profitable for the bank without regard to the buyer or seller situation, stability or the security for the loan.
This clause has, and will continue to discourage Real Estate sales and the recovery because it injects a level of extreme uncertainty and risk for everyone involved.* Or does it? Ask almost any Real Estate Investor and you’ll be told that “The banks just don’t do that…” and they may cite hundreds of transactions over many years in which it wasn’t done. BUT, the fact is, the banks do sometimes call these loans due, when it is in their best financial interest to do so. Duncan Wierman, one of the top Real Estate Investors in South Carolina reports that it has happened to him twice and as a result, he will never do a subject-to purchase again.** If it makes common sense to believe the banks will not call loans due and trigger foreclosures in a down market, it also makes sense that they will take such action as soon as the properties have equity and/or mortgage rates rise significantly…or just for no apparent reason like so many of the banks’ current choices: unpredictable and frequently counter to any reasonable logic.
Undoubtedly there are circumstances in which these subject-to type strategies pose an acceptable risk, for example in a case where the buyer has a time-frame in which to re-finance out of the existing loan. Nevertheless, we as investors must build our business on as much certainty as possible and using these strategies with impunity could create a “ticking time bomb” that could put you out of business, and maybe in jail. Just think carefully about what you are doing and consider any alternative that mitigates risk.
For all you who are in any form of housing distress, we can help. If you are trying to sell your home, even if you are under-water, let us know by clicking the “Sell a Home” button at the top of the page. We have many tactics to solve your problem without putting you and your family at risk. If you are trying to buy a home and getting nowhere with the banks, go to the “Buy a Home” button above and let us help you. Again, there are numerous strategies that can be activated so you don’t risk losing your home to some banker’s lack of concern for your welfare.