Don't Most Mortgages Exclude "Sub-to"?
I love what I'm reading in this forum but am confused...If most lenders don't do assumable mortgages, then why is anyone(or that's the impression i get) be a candidate for a sub-to contract? I understand that you are helping the homeowner but doesn't the lender specifically state the loan is not assignable? Thanks for your help! 
You are buying subject 2 the existing mortgage..... its a bail out for someone who cant make the payments...you are taking their place.... you are not exercising the assumption of the mortgage[ Edited by DaveREI on Date 10/04/2003 ]
I guess I don't see the difference. The lender I suppose accepts an additional body on the hook for the mortgage and still holds the original note holder responsible? Does the lender just breathe a sigh that there are payments coming in?
BethE,
You are mostly correct. Mortgages these days are not asumable without the lenders permission. They contain a paragraph that has become known as a "Due On Sale Clause". This states that the lender has the right to call the loan due upon transfer of the property. The key here being they have the right. This does not mean that it will happen. Basically when we purchase "Sub2" we take posession of the property and start making the payments without notifying the lender, or asking their permission. This situation rarely lasts for much longer that 2 years before the house is resold and new financing is brought in. The lender has a loan that has the payments being made on time, so their motivation to call the loan due is pretty weak, especially since they have shareholders to answer to that don't like non-performing assets on the ledger. Although it can happen, the reality is that it doesn't.
Jeff
Thanks Jeff,
I was told this morning by my realtor that you could only do "sub-to" with FHA loans. So you're saying do it with any loan and chances are it will not be called? I appreciate the reply. I am learning so much on this site! It boggles the mind...so many different ways to buy RE - so little time.
Before I belive 1988 or 1989 FHA loans did not include a "due on sale" clause. Most every loan today includes this clause which allows the lender to forclose the property. This does not mean they have to, and in reality, they don't.
A similar example is that you might receive a rent payment from a tennant on the 2nd day of the month when rent is due on the 1st. You have the contractual right to get a $35 late fee but you don't collect because they have always paid on time in the past.
Beth
Some people in the RE community feel that lenders have not been exercisnig the Due On Sale clause because interest rates have been dropping. They would replace a loan at yesterdays hgher rate with one at todays lower rate. Doesnt work to their benefit. Today we are at 45 year low interest rates. If you believe as many economists do, that nterest rates wil start to rise, then yesterdays patterns will no longer hold and you can expect the loans to be called pronto. In the period from 1955 to 1980 lenders did every thing they could think of to call in low interest rate loans - I doubt that they have changed their nature.
BethE,
Glad to meet you.
I teach not to buy and hold so, you are in and out of a Subject To deal before the interest rates would make any difference if they did at all.
I speak from experience on this matter because in 500+ deals I have never had a DOS clause envoked. When you learn how to effectively work with Subject To deals then the chances of ever having one called are not worth the concern.
So you can listen to someone who has never done a Subject To deal and does not understand how to effectively put them together or what really triggers the loan to be called, hint it is not interest rates.
The reason I say this is because during all the years I have been doing deals the rates have gone up an down still no loans called.
Remember foreclousures are at an all time high so the lenders plates are full at this time all they need to do is spend hundreds of millions of dollars looking for Subject To deals, I don't think so.
I will say this is a risk vs reward business, creative real estate investing, however it is up to the individual as to what they feel is best for them.
John $Cash$ Locke
dickknox,
Subject To investing did not exist between 1955 -1980 so what did lenders do then to call in low interest loans as these loans were fully assumable with no qualifying.
What I am saying is I do not see the coalition between the years you are referring to and today it doesn't make any sense to me.
John $Cash$ Locke
John my friend - Im sure you said something that was not what you meant. In the 50's and the 60's I was involved with subject to and assumption sales and purchases. What do you mean that subject to didnt exist then. That was the era of subject to purchases. They have become more difficult - as you know - since the 80's.
dickknox,
and it's hardly in the best interest of the banks.
I thought I covered your response in another post, but since you still stating it, I'll try to recap for the folks reading here.
Your talking about a 25 year time span. Yes, interest rates did rise greatly. However, in the sub2 method, the property is refinanced within 2 years, hardly enough time for interest rates to jump to a level that the lender would consider calling a performing loan due just to get a higher rate. Add to that the cost of foreclosing and the usual condition of the property after (ie lost "equity"
While you may have been involved with loan "assumptions", you did not do any subject to investing, at least not as it is as an investment strategy. During that time period, ALL loans were assumable, so there was no need for sub2.
Mr. Knox, everyone is entitled to their opinion. However, even though you keep putting it down, it seems to me that you know precious little about the subject to investment method.
If you're going to disagree with it, at least know enough about it to know what you are disagreeing with.
Roger
Ill tie in an analogy for the due on sale cause... When and if you rent your house and your renter pays you rent, you use that money to make your mortage payment, unless you own the house outright. So would a lender call your note due for someone else making your payment? Everyone I have ever talked to about this and from my own experience, no. I think the due on sale comes into effect because lenders dont want notes being bought and sold without their consent. They use the verbiage as a control method. As long as the loan is being paid back as agreed, a lender wont call the note due.
Roger - I really dont want to be arguementative, but I doubt that you were in the market at that time, because - if you were - you would remember that the difference between a VA loan and an FHA loan was that you assumed the one and you took title to subject to the other.
If you have a friend who lives near Dayton Ohio - have him look in the county recorders records at Fairborn Ohio and he will see Lt Knox involved in a "subject to" transaction in the period Dec 1958 to Mar 1959.
Both "subject to" and "asumption" transactionw were very common in the real estate industry of the 50-60 time period.
Quote:
On 2003-10-13 00:13, rajwarrior wrote:
...
While you may have been involved with loan "assumptions", you did not do any subject to investing, at least not as it is as an investment strategy. During that time period, ALL loans were assumable, so there was no need for sub2.
...
If you're going to disagree with it, at least know enough about it to know what you are disagreeing with.
I dont understand why you are so confromtatinal when someone else has a different opinion than yours. It is as if you really dont believe what you say and are threatened when someone does not agree with you.
I have no basic problem with subject to and or assumed loans - I made enough money doing these plus 2nd TD's that I opened my software company in 1969 with the funds I had built up from these sources.
What's your problem?
Nonetheless - just as the internet companies went under when the bubble burst, loans that can be called are a risk when the interest rate turns - as it will - in my opinion.
Dick,
As I remember and I do remember back then, it was just a matter of deeding the properrty to your buyer, they in actuallity did not purchase Subject To the existing loan staying in place they got the whole ball of wax because loans were fully assumable without qualifying.
I remember in the 60's selling a house that I used my VA loan on, the only thing I could not do was use my VA until the loan was paid off. Once it was re-financed years later I received my Certificate of Eligibilty back.
We may be splitting hairs here but I don't think the terminology or method of Subject To investing really entered the picture until the early nineties.
When loans were "fully assumable without qualifying" then the buyer did not take possession Subject To the existing loan staying in place they assumed the loan and got the deed.
Nothing like two old Dude's trying to firgure out what when on in the 60's personally I have always believed if you can remember the 60's you weren't there. Peace and pass the pipe brothers ands sisters. Woodstock was a total wipe out to my memory anyway.
John $Cash$ Locke
PS: I almost forgot I didn't enhale, me and Bill Clinton. [ Edited by JohnLocke on Date 10/13/2003 ]
Gee I hate to step into this "discussion" with the bullets whizzing all about.
I can tell you that once all mortgages were assumable. I can also tell you that in 1973-1978+/- most lenders objected to issuing an assumption package when the purchase agreement was subject two. They just would not issue an assumption package under those terms. Some did so anyway. I did some. I specifically recall that some lenders tried to discourage assumptions by charging what I considered outrageous assumption fees. In those cases, I also took the property subject to the mortgage. I took many properties subject two for quick flips.
Don't rely on what a bank should rationally do. They oftimes defy rationality. I feel certain that when interest rates tick up sufficiently the banks will again search out and call those loans with the most attractive interest rates. It happened before and it will happen again. Remember, Garns- St Germaine Federal act was enacted in 1982.
Someone with a large portfolio of subject two loans may not have enough time, credit , buyers,etc.etc to get out alive.
Two years is enough time for the interest rates to change dramatically. I don't believe they will. But, Washington Mutual Bank didn't think it necessary to completely hedge their interest rates. They acquired over 100 billion dollars of loans in the 3rd quarter and they are going to show a loss because the rate jump caught them off guard. How big? The haven't reported yet.
I take almost all my properties subject to, but I'm ready to unload
I suspect your opinions are based on the period after Tucker v Lassen.
For what it's worth, Bronchick - a big promoter of ignoring due of sale - says that lenders don’t enforce due-on-sale clauses because market interest rates are low: “This trend will probably continue so long as interest rates remain within a few percentage points of existing loans.”
By inference, he is also saying the obvious opposite – which I will phrase this way: “This trend probably won’t continue if interest rates rise more than a few points above existing loan rates.”
And that is all I am trying to say.
sammyvegas,
At least you didn't say Green Valley is where you live, like Citbank is in The Lakes, Nevada. This is inside humor if you live in Las Vegas.
You can build in safegaurds to bail out of Subject To deals if you must at any time you care to Everyone of my deals have safeguards built in them, so I am never concerned about how to get out if I must, however I never had to use them.
It is about how you set up your creative real estate investing business to keep yourself covered in the best possible way for contingencies.
John $Cash$ Locke
Folks, I guess I couldn't stay away long enough on the DOS issue.
I will not do SUBJECT TO deals and I will stay away from them just as Dick Knox and a few other seasoned investors that frequent these forums.
We are experienced investors - even very creative investors, although John may accuse us of being more conventional and uncreative.
I have enjoyed the discussions about Subject To investings and learned from them. The argument that guys like Dick and I do not know what we are talking about doesn't hold water for me. I don't need to do this to know that there are fundamental problems with it.
(Dick)Let's stick to the forums that deal with the type of investing we believe in....
Gregg
_________________
Gregg Fous
Investor/Developer
"If you wait for all your ducks to get lined up, you will never get into the water"[ Edited by GFous on Date 10/14/2003 ]
Gregg,
The one thing I try to do is stay objective when a poster posts reasonably. It is when someone says this is going to happen if you do it this way, when they have no expierence with a particular investing method. Only speculating on what they heard or overheard.
I have followed your posts and I understand you methodology, I have no fault with the way you do business, however I would not criticize yours unless you stepped in my ball park, then I will become involved.
This may come a a suprise to you but Dick Knox an I talked on the phone the other night, had a few laughs about Howard Hughes and some folks we happened to know from the old Las Vegas days.
I am trying to help him with a project he is working on, so what you see on the board doesnt mean that two people can't have different opinions and still laugh about things together.
Don't get to serious about things, I think you are here to help within the scope of your investing knowledge and methods(applied knowledge that is) So don't take everything you see here as black and white.
Keep posting Gregg, people with your experience are always welcomed here at TCI.
John $Cash$ Locke
John,
As you know I have been posting about a month. I admire you guys that can keep answering the same questions over and over again - you notice that I soon tired of the repeat stuff and my posts went way down- but you guys keep hammering at it.
Thanks for keeping the forums going - I enjoy them. If I wasn't such an insomniac I would not be so active. I will keep posting, and thanks for the encouragement.- and I won't visit the Subject to forum too often <IMG SRC="images/forum/smilies/icon_mad.gif"> , but every one in a while I take a gander.!
My post about "what is creative investing" :: http://www.thecreativeinvestor.com/ViewTopic13571-7.html
I did that one in response to you telling us that this is the creative investor site - not the conventional investor site.
Keep up the good work.
Gregg
_________________
Gregg Fous
Investor/Developer
"If you wait for all your ducks to get lined up, you will never get into the water"[ Edited by GFous on Date 10/14/2003 ]
Subject two's are a great way to go. Most of my deals are subject two's. As
John $Cash$ Locke says, take the necessary safeguards to cover everyone. Know when to execute your
end game. Do them right.
Beside the CYA paperwork, I keep good records, and my financial data with my mortgage broker is updated every couple of months. Noone need cry , "the sky is falling" at this date. Noone need fear the DOS clause.
I'm afraid that a lot of rookie subject2er will let the mortgagor go down with the ship while they swim to shore. In those cases, I pray for sharks.
John, before moving to Henderson, I use to live in Summerlin, NV.. [ Edited by sammyvegas on Date 10/14/2003 ]
Peace, Brothers. Make Love not War.
I grew up in a real estate household and I can specifically remember during the '70s and '80s my late father on the phone with various buyers and sellers discussing "subject to" and "assuming" and the differences, advantages and disadvantages. Of course it was all greek to me then.
As for bans calling loans that are "subject to", when I first got out of graduate tax school I was in an office where a client had dropped her home into a trust for estate planning purposes and the goofy bank was trying to call the loan and enforce the due-on-sale clause even though they had a rate that was a point or two better than the going rate. This was the early '90s, and apparently banks had yet to adjust to the new reality that rates were going down, down, and further down ... they were still reflexively calling loans when the title changed hands. Now, this was an employee with a curlicue signature with smiley faces in it (I may be making the last part up), and we were trying to both talk the bank out of being hard-ass and the client into refinancing ... or maybe get the both of them together on doing the smart thing.
I don't know how it came out because I was only at the firm a couple of months ... my then-wife got a dream job in Miami and we were whisekd out of Denver.
I'm just curious to know how people frantically theorize that the bank will enact the DOS clause. I mean, how is the bank going to find out about the title transfer? Pay somebody 8 bucks an hour to check county records on all of their accounts? Is it the fact that the mortgage checks coming in are from somebody else? I don't think so. I write a check out for my fiance's mortgage every month and I don't think the bank is going to suspect that she's sold me the house based on that. I've rented a house to my mom, who just made the mortgage payment herself. The bank doesn't care who pays.