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Should I Record The Deeds On My Subject To Deals?
Joe: Hey, it’s Joe. I’ve been getting the question a lot and actually running into this situation for myself. And the question sis, “Should I record the deed when I do a subject to deal.” Let me first explain what a subject to is. A subject to is where a seller says, “I’ll give you my property if you just take over the payments on it.” And so, let’s say they, it’s $150K property. They owe $140K on it and you’re going to just start, you’re going to take over their $140K loan. And you’re going to make payments on it. You’re not going to qualify for that loan. You’re not going to apply for that loan. All they’re going to do is deed you the property. So now you become the owner of that property, but you’re not on the loan. Your name’s not on the loan, but you are, you have agreed to make the payments.
Joe: And you need to make those payments. If you’re going to take over that property, and you don’t make the payments, and you don’t give the property back to them if you get into a situation where you can’t make the payments, then you’re committing fraud. So make sure that you can make the payments and follow through with what you tell them you can do.
Joe: So, you’re going to take this property, you’re going to make the payments on it, you’re going t get it subject to. And the question is now you’ve got this deed in your hands, should you record it? There’s a thing called the “due on sale” clause that’s on every loan out there, at least every conventional loan out there, an FHA loan. And it says that if you transfer the title to your property while you’re the owner and borrowing on it, if you don’t pay off your loan then the bank has the right to call that loan due. It’s an acceleration clause. And they can foreclose on that property and say, hey, you know, you have to pay us back.
Joe: Now, that’s what they can do in theory and that’s what they can do on paper. I’ve been doing subject to’s for many years and my students have been doing them as well. So over the period of the last two decades, we’ve done hundreds, maybe thousands, of these subject to’s. And I’ve never seen one of them foreclosed upon because of the due on sale clause. I’ve seen them go down for other reasons, but not because of the due on sale clause, not because the bank got upset because they recorded the deed. So, I used to think, and I taught earlier, and maybe on some of these other videos on my blog you’ll see me talking about it. But, I used to think that maybe we shouldn’t record the deed because it doesn’t make a lot of sense and, you know, the lender finds out about it and you know, it protects you, but not a whole lot, and, you know, it can be a pain in the neck.
Joe: So, we didn’t record the deeds. But, FHA has a rule that if you’re trying to sell that property you have to give them three months after it’s recorded before they’ll allow a new loan on it because they don’t want people just flipping properties to FHA people. So, you have to record it at least three months before you sell it. But it might make sense to do it anyway, because somebody could come in and put a lien against the property. I once had a subject to property where the person I bought it from went out and got another $10K home equity line on the property that he’d already sold to me. And got his $10K out of that property and he didn’t tell me about it. And I didn’t find out about it for three or four months later when that other lender sent me a note saying, “Why aren’t you paying the loan?”
Joe: And I sent him back a note saying, “Well, it’s not my loan.” And I found out what the deal was and what he did to me and I gave him the property back and let him deal with it. And it wasn’t a big deal. I didn’t lose a lot of equity and I was able to get my lease option buyer into another property that I had and that all worked out fine. But these things happen and you have to be, you know, flexible to learn how to deal with them as you go. You’re always trying to find the least risky way to do something. And sometimes you find that maybe the way you did it wasn’t the least risky way and then you’ve got to deal with cleaning up the mess. It’s not the worst thing in the world.
Joe: And again, I’ve never seen a bank foreclose on this. I did have, on the due on sale clause, I did have the, Bank of America called me once and they said, it was a, I’m not sure who it was, it wasn’t a bank manager or anything, it was just somebody who was working on this, they said, “We see that you have been making the payments on this loan, but you’re not on the deed and we need you to qualify for this loan.” And I said, “Well, that’s not how I work. What I do is, I make the payments and you know, I’m making the payments for this guy. I’ve been doing it for the last five years and I plan on continuing to do that.” And they said, “Well, I’m sorry, if you don’t do that, then we have to file a foreclosure.” And I said, “Well, I just want to you know that if you, as soon as I get a notice of default on this property I’m going to stop making the payments. And I know that the guy who’s on the loan can’t make the payments. So that means you’re going to get the property back. If that’s what you want to do, I understand.” And she said, “I’m sorry, that’s what we’ve got to do.”
Joe: She hung up, and then she called me back, said, “I just talked to my manager and he said we’re not going to foreclose. Please keep making your payments.” You know, banks have credit reports, too. If they have too many foreclosures on their credit report, it looks bad for them. And it makes it impossible for them to get more loans, or to give more loans because that’s how they work in the secondary market. So, you’re probably going to be safe.
Joe: Now, with all that said, I’m not an attorney, I can’t give legal advice, you know, don’t even play one on TV, you know, so, if you need legal advice on this, talk to an attorney and get their opinion and then you can decide for yourself how you want to proceed.
Joe: All right. I hope that helps.