Bryan Ellis Reveals 7 Subject-To Flaws The Gurus Won’t Tell You
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 even though Subject-To real estate investing is absolutely legal in most of the United States, you certainly should be aware of some legal problems investors can face when not behaving with sufficient care. I’ve observed that there are 7 primary legal problems you’ll face as a subject-to real estate investor – unless you’re careful:
1. Inaccurate Representation Of Loans Terms & Other Encumbrances. Be sure to have the right to terminate your agreement if the owner doesn’t tell you everything about every obligation for which the property is collateral. Remember – those obligations become your responsibility after you own the property.
2. Misstatement of the Loan Balance. The home owner you’re working with might not tell you the right loan balance. Whether they do this on purpose or not, you can get stuck in a difficult spot if the balance is greater than you expected. So leave yourself an out if this happens.
3. Never “Assume” The Debt. The loan you’re taking over in the subject-to transaction almost certainly isn’t even “assumable”, but you should never put language in your contract to suggest that you are assuming it anyway. In fact, you should specifically state that you are NOT assuming the debt from the seller.
4. Due-On-Sale Notice. Always remember that you must tell the seller that their mortgage contract probably “prohibits” subject-to transactions, and that as a result the property could end up in foreclosure even if you make all payments 100% on time. We all know this is almost certain not to happen, but if it does, this notice can save you a lot of trouble.
5. Specifically Address The Pay-Off Date. Include language that indicates when you will satisfy (pay off) the existing mortgage(s) and lien(s) against the property. If you have no intention of limiting your time to satisfy the mortgages and liens, include precise language to that effect so that no confusion exists at a later time.
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.
Without a doubt, Subject-To real estate investing opens the door to a larger portfolio and more deals than any individual could otherwise hope to achieve. But be sure to address each of these issues in each transaction so that your subject-to real estate investing deals will proceed without a hitch.
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