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Land Mines in Subject-To Deals

The last few weeks have been pretty hectic in my office.  I’ve been working on some really interesting and challenging real estate deals, including helping three separate investors solve problems with subject-to deals because they did them improperly and the deals were going sideways.  In two of the deals, banks had already sent out letters threatening to exercise the due-on-sale clause.

I want to talk about a mistake one of the investors made.  They took the property subject-to right after a loan modification was done.  Last November at NoteExpo in Dallas, I delivered a major presentation about why that was a dangerous tactic.

It appears that in this case, when the servicer went to have the loan modification agreement recorded, they realized the seller had transferred the property to an investor.  That triggered all the alarm bells and whistles.  That is why I urge investors to deed the house back to the seller in exchange for executing a different strategy that would give the investor and seller similar results. 

I’m not going to go into all the details of the strategy I gave this investor as to how to restructure the deal because I want to focus on what went wrong, which was taking a property subject-to right after a loan modification had been done.  This made things challenging for several reasons:

1. The loan modification was going to become part of the public record, but when it was to be recorded, the seller wasn’t there, so the loan modification may not technically be in the chain of title.

2. There were representations made in the loan modification application and paperwork that the borrower/seller who was seeking the modification was going to keep the property as their primary residence.  Not all loan modifications have that, but most do, so I’ve been very careful when telling people how to handle those situations.

For over a year now, I’ve told investors not to do subject-to in conjunction with a loan modification.  You must have a different kind of dialogue and structure with the seller in order to work around that loan modification situation. 

The most important piece of advice I can give you is that you must be careful where you get your information and knowledge about how to do real estate deals, particularly subject-to deals.  A smooth-talking, well-funded marketer is not necessarily the best person to learn from regarding doing subject-to deals.  You want to learn from someone who understands how title companies work, understands both the buying and the selling aspects, and understands the regulatory influences that are coming down on the real estate market today.

Investor, beware, because what you learn and who you learn it from are critical to the success or failure of your deals!

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