Given the rise of interest rates over the last few months in the united states and steady investor demand, there has been a sharp rise in the number of investors seeking to purchase properties utilizing a subject to transaction. However, there are many traps that sellers need to be wary of. In real estate, a “subject to transaction” refers to a type of purchase in which the buyer agrees to take over the payments on an existing mortgage, rather than obtaining a new mortgage themselves. In this type of transaction, the buyer becomes the new owner of the property, but the original mortgage remains in the seller’s name. The buyer takes on the responsibility of making the mortgage payments, but the seller remains liable for the mortgage if the buyer defaults. This can be a useful option for buyers who are unable to obtain a traditional mortgage due to credit or income constraints, as well as for sellers who are unable to sell their property through traditional means. It is also useful in obtaining the highest price in a rising interest environment since the Buyer would be able to afford a higher purchase price if the underlying mortgage had a much lower rate than today’s rates.
Things to know about as a seller in a subject to transaction
1) What security will you have to ensure the Buyer will continue to make payments?
In most traditional subject to transactions, The Buyer does not provide any assurances to the Seller that they will indeed continue to make the mortgage payments. Should the Buyer decide to never make a mortgage payment, or ever decide to stop making payments, the Seller likely will have no recourse against the Buyer, nor would they be able to get their home back. A Subject to contract does not have any sort of self-executing triggers, despite what a Buyer may tell you!
It is important to ensure that your Buyer has enough resources to be able to guarantee you performance. There are many unscrupulous buyers out there that are picking up houses for little to nothing down and have no incentive to continue to make payments on the underlying note since it does not affect their credit. They could potentially never make a payment, collect rent for the home, and it would take upwards of a year to allow the lender to foreclose on the house. This would cause catastrophic harm to the seller’s credit score.
2) Documents drafted by the Buyer typically favor the Buyer in a Subject to deal
- Some of the typical documents used for a Subject to transaction are
- Assignment of insurance proceeds or transfer of escrow funds
- Limited power of attorney or real estate power of attorney
- Authorization to release information from the mortgage company.
- A Subject to addendum or acknowledgement
- A subject to deed or assignment of beneficial interest
- Change of insurance request
- Notice of conveyance of residential property
- Temporary lease agreement
You should be aware of each of these documents and what they are used for and how you may be affected by signing each of them. Should you not be aware, we recommend you contact a subject to attorney that is well versed in this area of law.
3) Are you receiving a deed of trust to secure assumption as part of the transaction?
A “deed of trust to secure assumption” is a legal document that is used in real estate transactions to in conjunction with a transfer ownership of a property from the seller to the buyer, most commonly used in divorces and deeds incident to divorces. The crux of the deed of trust to secure assumption is that it creates a security interest in the property to secure the assumption of an existing mortgage.
4) Have you considered an assumption agreement?
A loan assumption agreement is a legal document that allows a new borrower to take over the responsibilities and obligations of an existing mortgage from the original borrower. It creates a contractual agreement between the parties that requires the Buyer to make the payments, and can provide, amongst other things, a requirement that the Buyer show proof of a good payment history to the Seller amongst other things.
5) Remember the Due on sale clause!
A due on sale clause is a provision in a mortgage contract that gives the lender the right to demand full repayment of the loan balance if the property securing the loan is sold or transferred without the lender’s prior written consent. It is a possibility, and certainly allowed in the deed of trust to accelerate the loan, even if payments are being kept up.
6) How will you verify payments are being made in a subject to deal?
Typically, the buyer in your subject to transaction will ask you for your bank login details to begin making the mortgage payments. While this is typical, and a good sign that your seller is desirous of continually making the mortgage payments, it is also worrisome if they are able to lock you out of your own mortgage account since you will not likely be able to view the documentation. It would be adviseable that any of the documentation between buyer and seller require the buyer to provide proof of mortgage payments, proof of tax payments and proof of insurance on the property periodically. Alternatively, the parties can stipulate that each have non-exclusive access to the account to verify that the mortgage is being kept current.
7) Are you ready to make a long term commitment with your buyer?
Remember that a typical subject to deal has the buyer paying the Seller’s mortgage, which could be up to 30 years, That means, that unless you have some other type of advanced maturity date, you may potentially be making an arrangement with your Buyer to take your loan, which WILL remain on your credit for up to 30 years. This is perhaps the worst part of the Subject to transaction for a Seller; you are giving up ownership of the home (through the deed) and yet, you are still on the hook for your mortgage (from your deed of trust and promissory note). Be careful in your contract negotiations and be sure to have an attorney review it beforehand to advise you.
8) Your real estate agent is not your lawyer.
Since real estate agents cannot give legal advice, and since Subject to Transactions and their addendum are not authorized by law to be drafted by a real estate agent; most subject to transactions REQUIRE an attorney if the seller is represented by an attorney. A good realtor should have a real estate attorney on speed dial to ask questions and help advise on the transaction.
9) Does a wraparound transaction make more sense?
AS fully explored in the intense rules contained in the Texas Statutes, a wrap around transaction differs from a subject to transaction since the Buyer would be taking out a note from the seller and issuing a Deed of Trust while being secondary to the primary note and deed of trust that is still outstanding between the Seller and Original mortgage company. This arrangement has many pitfalls that can lead to a range of issues with both the Buyer and the Seller. Word of caution: DO NOT.
Just remember that not every subject to deal is the same, or necessarily a good option to take. It is true that you may be able to get your asking price, but at what cost. Aside from price the price and closing date, there are many negotiations that SHOULD be had between a Buyer and Seller in a subject to deal.