Subject-to is an astoundingly powerful tool in the arsenal of smart real estate investors. This strategy gives real estate investors the ability to finance the acquisition of a property's legal title by picking up the payments on an existing mortgage. This technique completely eradicates any property buying limits imposed by the investor's own credit.
But while subject-to transactions are 100% legal in most of the United States, there are some legal pitfalls that face novice real estate investors. My own experience as a real estate investor suggest there are 7 key legal issues that must be addressed to keep your subject-to real estate investing activities on legally solid ground:
1. Misrepresentation of Mortgage Terms & Other Liens. Reserve the right to terminate the agreement in the event that the owner fails to disclose all encumbrances against the property along with the terms of those encumbrances. (Remember, all liens become your problem after you accept title to the property.)
2. Errors In The Loan Amount And Outstanding Balance. It's very common for home owners to give inaccurate information when it comes to their home loan balances. Usually it's accidental, but the effect can be disastrous if the home owner owes significantly more against the property than you expect.
3. Debt Assumption Is A Huge "NO-NO". Never agree - verbally or in writing - to "assume" the home owner's debt. It's probably not even possible to do so according to the seller's mortgage, but it's a very bad policy to give a seller this impression. Instead, make it clear you'll be making the payments, and that your liability is to your agreement with the seller and not to the lender.
4. The Dreaded Due-On-Sale Clause. Be sure to tell the home owner that their mortgage has a due-on-sale clause in it, and because of that the lender has the option to foreclose against the property even if you make all of the payments on time. This isn't likely - in fact, it's highly unlikely - but you're better off to make the disclosure.
5. The Pay-Off Date - When Is It? Just because there are 25 years remaining on the loan you're taking subject-to doesn't mean the home owner is comfortable with your keeping the loan open for that long. Always specify exactly how long you are allowed to keep the loan open before refinancing.
6. When Do You Begin Payments? Include in your agreement the date when you become responsible for making payments. Generally that will be on the day of closing, but it could be before or after.
7. Review By Lawyer. Make sure that YOUR lawyer reviews your purchase and sale agreement, and require that your seller doe the same with his or her lawyer.
Subject-To transactions are undeniably one of the most powerful ways to quickly and easily increase the size of your real estate portfolio without using your own credit. So use these tips to make sure that you're not only acquiring a lot of great properties, but you're doing so in a legally safe manner.
But while subject-to transactions are 100% legal in most of the United States, there are some legal pitfalls that face novice real estate investors. My own experience as a real estate investor suggest there are 7 key legal issues that must be addressed to keep your subject-to real estate investing activities on legally solid ground:
1. Misrepresentation of Mortgage Terms & Other Liens. Reserve the right to terminate the agreement in the event that the owner fails to disclose all encumbrances against the property along with the terms of those encumbrances. (Remember, all liens become your problem after you accept title to the property.)
2. Errors In The Loan Amount And Outstanding Balance. It's very common for home owners to give inaccurate information when it comes to their home loan balances. Usually it's accidental, but the effect can be disastrous if the home owner owes significantly more against the property than you expect.
3. Debt Assumption Is A Huge "NO-NO". Never agree - verbally or in writing - to "assume" the home owner's debt. It's probably not even possible to do so according to the seller's mortgage, but it's a very bad policy to give a seller this impression. Instead, make it clear you'll be making the payments, and that your liability is to your agreement with the seller and not to the lender.
4. The Dreaded Due-On-Sale Clause. Be sure to tell the home owner that their mortgage has a due-on-sale clause in it, and because of that the lender has the option to foreclose against the property even if you make all of the payments on time. This isn't likely - in fact, it's highly unlikely - but you're better off to make the disclosure.
5. The Pay-Off Date - When Is It? Just because there are 25 years remaining on the loan you're taking subject-to doesn't mean the home owner is comfortable with your keeping the loan open for that long. Always specify exactly how long you are allowed to keep the loan open before refinancing.
6. When Do You Begin Payments? Include in your agreement the date when you become responsible for making payments. Generally that will be on the day of closing, but it could be before or after.
7. Review By Lawyer. Make sure that YOUR lawyer reviews your purchase and sale agreement, and require that your seller doe the same with his or her lawyer.
Subject-To transactions are undeniably one of the most powerful ways to quickly and easily increase the size of your real estate portfolio without using your own credit. So use these tips to make sure that you're not only acquiring a lot of great properties, but you're doing so in a legally safe manner.
About the Author:
Bryan Ellis is a real estate investment expert and marketing expert in Atlanta, Georgia. He offers a huge amount of free training at his blog and through the Bryan Ellis Videos website.
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