Bryan Ellis on Real Estate Investing - 7 Dangerous Factors For Every Subject-To Purchase Agreement

Bryan Ellis on Real Estate Investing - 7 Dangerous Factors For Every Subject-To Purchase Agreement

by Bryan Ellis

In the world of creative real estate investing, few strategies are as powerful or desirable to a real estate investor as Subject-To transactions, in which the real estate investor acquires legal title to a property in exchange for taking over payments on the existing mortgage. Using this strategy, a real estate investor is literally unlimited in terms of the amount of property they can acquire without ever using their own credit.
But while subject-to transactions are 100% legal in most of the United States, there are some legal pitfalls that face novice real estate investors. My own experience as a real estate investor suggest there are 7 key legal issues that must be addressed to keep your subject-to real estate investing activities on legally solid ground:

1. Misrepresentation of Mortgage Terms & Other Liens. Reserve the right to terminate the agreement in the event that the owner fails to disclose all encumbrances against the property along with the terms of those encumbrances. (Remember, all liens become your problem after you accept title to the property.)

2. Misrepresentation of Mortgage Balance. Property owners frequently misrepresent their mortgage balances, albeit usually unintentionally. Since the balance of those mortgages will become your responsibility after closing, reserve the right to adjust the agreement in your favor if the mortgage balances provided to you are inaccurate.

3. Stipulate "Non-Assumption" of the Debt. A subject-to purchase agreement must be clear that the buyer is not assuming the debt of the seller. Assumption entails acceptance of liability to the lender, which is not acceptable for a subject-to transaction. Rather, the real estate investor's liability should be exclusively to the property seller in the form of the purchase and sale agreement, rather than to the lender in the form of a mortgage.

4. Due-On-Sale Disclosure. It's absolutely critical to inform the seller that his mortgage is probably subject to a "due-on-sale" clause which gives his lender the right to foreclose the property merely by taking part in this type of transaction. While the lender is unlikely to ever know or care about the transaction, the wise real estate investor will nevertheless give full disclosure about this issue.

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. Date of First Payment. Stipulate the date of the first payment that the buyer is required to make, so that the seller will be clear that they are required to continue making payments on the property until that time.

7. Attorney Review. Ask your attorney to review your contract with each separate transaction, as subject-to transactions have received some negative publicity which has led to changing laws in a few states. Further, require in writing that the seller have the contract reviewed by their own attorney to avoid any future charge that the seller was misled or pressured into the agreement.

Subject-To transactions are undeniably one of the most powerful ways to quickly and easily increase the size of your real estate portfolio without using your own credit. So use these tips to make sure that you're not only acquiring a lot of great properties, but you're doing so in a legally safe manner.