3 Gotchas With Sub To Real Estate Transactions

Happy Wednesday Everyone,

As I am squeezing this in on the eve of our 2nd annual KeysCon event for our Scale Community members, I wanted to create a quick email around a topic I have Regularly and Openly hated on for most of the past couple of years:

Subject To Real Estate.

Its not that Subject To in itself is BAD per say, what I cant stand is the way the biggest name in the industry over simplifies it and its risk.

(We are not shy about our beef with Pace Morby)

Its a serious topic that involves real risk to both buyers and sellers and its irresponsible to be promoting it exclusively using videos showcasing how fun he is with his outlandish community meet ups and leveraging his lovely little family doing little family things to make himself seem more trustworthy but I digress….

There are THREE main things are are Rarely (Never) addressed in mainstream Subject To Content and that we have had to learn by working with lawyers and jumping through some pretty big legal hoops, so I wanted to set them straight.

1. Insurance

Both Dan and I had several direct DM discussions with Pace, and he dipped, dodged, ducked, dived, and dodged around how to handle the Insurance piece when it comes to buying or selling Sub To.

The key problem is that the Insurance policy will stay in the Sellers name, you cant change it without alerting the lender and risking the due on sale clause, and you also cant just leave it because the Lender wont protect the Buyer who isn’t the insured.

Despite essentially PRYING TEETH to get this answer, the good news is the solution is pretty simple.

Essentially you just work with the EXISTING insurance company and add the buyer as an additional insured, and then if there’s an issue such as the house burning down they’ll be more willing to work with the buyer.

2. What happens if the Seller dies while still being on the mortgage?

When a person dies, all their creditors are made aware so that they can seek to reclaim their debts from either the deceased estates or next of kin.

Well what happens when the lienholder on the property you bought subject to learns that the property securing their debt is no longer in the estate of the deceased?

The handful of times I have heard of this happening, the lienholder has called the loan due with no other choice.

The options in this case are to either Refinance or Pay off the debt. Sorry no sexy secret work around here.

The JANKY solution I have heard of is people taking out life insurance policies against the seller… but that’s just getting out of hand in my opinion.

3. Protecting the Seller in case of Default

The unfortunate thing with Sub To is the Seller is never completely relieved from the debt. And even if you legitimately have the best intentions, how do you protect them in case things get weird?

What happens if you go bankrupt?

What if you wholesale it and the buyer is a dirtbag?

What happens if YOU die and are unable to keep paying?

Well this solution is slightly complicated and also one of the reasons I dont think Sub To is right for most sellers because it TECHNICALLY keeps them very tied to it.

To protect them, you need to create a 2nd position mortgage called a Mirror Mortgage that directly matches the payment of the 1st position loan, but gives them the ability to act FASTER than the primary lienholder should you default.

For example say the Mortgage is a $1000/month payment with $800 going to principle and $200 to interest, the sellers second position Mirror mortgage will also be $1000/month payment with $800 going to principle and $200 to interest but transferring directly to the primary mortgage holder.

This of course all needs to be serviced by a note servicing company so it can actually be enforced, but regardless the seller will need to be que’d in enough to take action if needed.

Anyways there you go!

Long one today! Any other parts of Sub To you want me to dive into?

Hit me up on Instagram and let me know!

-Mike