I give a lot of classes, including continuing education credit classes for Realtors, on the topic of “Sub2” — the practice of purchasing a home through the transfer of deed without paying off the existing liens. This is a way to assume someone’s payments without having to qualify with the lender and without taking the note out of the seller’s name. Attend a CE Class for more information!
One of the first reactions is that this must be illegal! Or the banks “don’t allow” that.
The truth is, it is perfectly legal and the lender cannot prohibit you from transferring your deed to whoever you want! More importantly, they cannot prohibit you from purchasing property “subject to” the existing lien.
However, they do have a right to call the note due in full if the deed is transferred (as it is when you purchase this way). So what do you do if they do call it due?! Should you be scared of the Due on Sale Clause and never purchase property subject to the existing mortgage lien?
There is no Due on Sale Police!
One of the first things to remember is by purchasing the property “subject to” you have not violated any laws or code of ethics. As long as all parties in the transaction understand that the transaction has given the lender the right to call the note due (in other words, DISCLOSE!), you haven’t done anything wrong.
The second thing to understand is that this is actually very rare. Lenders generally don’t have a financial incentive to call a note due. There are some rare exceptions to this rule, and that’s not to say the economic climate couldn’t change to where they DO have an incentive to call them due, but right now, let’s understand that it is a rare (although not unheard of) circumstance.
And the most important thing to understand is that if the lender does call the note due, they are not showing up at the door the very next day with a SWAT team, locksmith and movers. Calling the note due is a process that involves inquiries, letters, demands and eventually steps to foreclose.
In other words, you have plenty of time! So take a deep breath and make a plan to deal with it.
How Do I Deal With a Note Being Called Due?
First, make sure you bought right. In other words, make sure you have some equity to play with. This will give you more choices and options than if you purchased property “subject to” that had little to no equity.
So if you have time, and equity, these options are now available to you…
- You can sell it! Remember, it will be months before the lender can take control of your property (through foreclosure) after inquiries, demands, etc. In the meantime, if you purchased right and left yourself equity, selling is an option! You can probably see why if your intent is to flip, then the due on sale clause is rarely a concern!
- You can refinance it! Again, with time and equity, taking out a new loan to pay off the lender is a reasonable option. There is no penalty for a note being called due as long as it does not result in foreclosure. The lender is just demanding their money.
- Pay it off! The first two solutions are really just doing that. But if you have the cash without having to sell or refinance, then just pay it off. You can always re-leverage the property later!
What if I Wrapped the Note to a New Buyer?
When you take property “subject to” and then wrap the note with a new note to an end-buyer (an amazing strategy and one of my favorite money-making techniques!), you now cannot sell the property OR refinance. So if you don’t have the cash to pay off the note, what can you do?!
You can sell your note! The note you created that wraps the existing note is now a product that can be sold on the open market and there is a large demand for them. Sell your note, pay off the underlying lien and problem solved!
So Should I Purchase Property Subject To?
Yes! Just buy right, have a plan B if the note is called due and be confident that you will have the time to deal with it in the rare occasion is happens!