This seems to be the toughest subject for investors to understand, especially new investors.
What is 'Subject To'? Here is a section from the Purchase Agreement I use that talks about encumbrances and marketable title:
| DEED / MARKETABLE TITLE: Upon performance by Buyer, Seller shall deliver a Warranty Deed joined in by spouse, if any, conveying marketable title, subject to: (A) the existing mortgages. (B) Building and zoning laws, ordinances, state and federal regulations; (C) Restrictions relating to use or improvement of the property without effective forfeiture provisions; (D) Reservations of any mineral rights by the state of Minnesota; (E) Utility and drainage easements which do not interfere with existing improvements; (F) Exceptions to title which constitute encumbrances, restrictions, or easements, which have been disclosed to Buyer and accepted by Buyer in this Purchase Agreement; (Must be specified in writing) _______________________________________________________ (G) Others (Must be specified in writing) ____________________________ |
When you buy a property and take over the existing mortgages and start making the payments directly to the bank, you have bought the house 'Subject To' the existing mortgage.
Example:
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Maplewood, MN
4 BR / 2 BA
The seller had a job transfer and needed to move in a relatively short time frame. I bought the house from the seller, and he was able to make the transfer on time, and with out worries of having 2 mortgage payments.
$60,599.34 - 1st Mortgage
$15,386.71 - 2nd Mortgage
I got the deed, and started making the payments on both the first and second mortgage. After putting about $25,000 in rehab work, I sold the property for $170,000 on a Contract for Deed. I have about a $400 per month positive cash flow from the difference between what the Buyer is paying me, and what I am paying the 1st & 2nd Mortgages.
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The mortgages in the above example are still in the seller's name, but I make the payments directly to the bank.
Why would the Sellers, sell me the property and leave the mortgages in his name? The Seller was motivated, and I offered him the best solution he had available to him at the time.
How can you buy a house 'Subject To' with the due on sale clause in the mortgages? Simple, the due on sale clause says that the lender may call the loan due; it does not say they will.
The due on sale clause came about in the late 1970's and 1980's when the interest rates were rising. Interest rates had gotten so high, that many people started assuming mortgages with lower interest rates then what they could get from the banks. The banking industry figured out that their toughest competitors were their own, lower interest rate loans. So they came up with the due on sale clause. However, they had enough foresight to figure out that if interest rates were lower in the future, then they would be better off letting the old, higher interest rate loans in place.
Every once in a great while, a bank will try to enforce the due on sale clause when the title has transferred, but I have never heard of one going all the way through foreclosure. I have never had it happen to me, and I have never talked to anyone that has had it happen to them. As long as you keep making the mortgage payments on time, why would the banks want to call them due, just because title was transferred? They wouldn't.
In fact, most of the time, when I am talking to the banks about the loans that are in someone else names, they tell me, they are glad I got involved with this property, because this is the first time since they wrote the mortgage, that the payments are actually being paid on time, every month.
The other benefit to the sellers is that I actually increase their credit scores.
One of my favorite reasons for buying houses 'Subject To' is that my name is not on the mortgages. Heck, my name is not even on the deed. I put every house in a land trust. We will discuss Land Trusts in one of the next few articles. As far as the rest of the world is concerned, I don't own anything, but I do control a lot.
'Subject To' seems to be a complicated subject, but it is not as complicated as most people make it out to be.