What Happens If The Bank Refuses To Take Your Payment On A “Subject To” Deal?

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“What happens when this occurs? You acquire a property via a Subject To (taking over the existing loan). You put a tenant buyer into the property. The new tenant buyer signs a tenant application and a lease option with your agreeing to buy the property in one year. But the bank decides they don’t want you to be paying the payments, instead just the original owner. Do you have to kick out the tenant buyer, get back the lease option fee and could this lead to possible legal problems with both the tenant and the buyer and the seller?” – Julie Oden

Joe: Well first of all, I’ve never seen that happen. Let me qualify that. I have had the banks ask that the original borrower make the payments. That’s happened a few times. I once had a bank say that they wanted me as the lease option owner, the deed holder of that property who was renting it out to a new tenant – they wanted me to qualify for the loan.
 
Joe: Bank of America did this to me. They called me up and I said to them, ‘I took over this property a couple of years ago and I’ve been making the payments ever since. They’ve been coming from my bank account. I’m going to continue to make those payments as long as I have this property. If I gave it back to the original owner, I know that they can’t make the payments – that’s why I took it over from them. I can make the payments. That’s why I’m doing this way.’ And they said, ‘Well, I understand that but you still have to qualify for that property.’ And I said, ‘Well, that’s now how I work. I don’t do that. I don’t qualify for the property. What I’ll do is make the payments and I’ll maintain the property and take care of it for you and make sure you guys are whole.’
 
Joe: And they said, ‘No, you can’t do that. If you don’t do this, we’re going to file a notice of default.’ And I said, ‘I understand that, but let me just tell you – as soon as I get the notice of default on this property, that’s the day I quit making the payments, so I want you to understand that before you file that.’ They said, ‘I understand that. We still have to do it.’
 
Joe: They got off the phone. They called me back 15 minutes later. They said, ‘I just talked to my supervisor and he said please continue to make your payments. We’re not going to file a notice of default.’ I said, ‘That’s great. I’ll continue to do that’. And I still own that property.
 
Joe: So, that’s the closest I ever got to anybody ever trying to exercise their due on sale clause, which is what I think you’re talking about here. But if it did happen – if somebody was in a property and they suddenly said we’re going to foreclose on his property, then you can either help that buyer find another property – it’s going to take months and months for them to take that property back, you can continue to make the payments…
 
Joe: If they refuse to take the payments and you’re not able to get the original owner to make the payments for you or have them write a check or whatever to figure out a way to do it for you – because you can do it as a property management company (you can do it a lot of different ways) but if you couldn’t solve that problem, just get your buyer and put them into another property. You can always find them something else, and just help them understand what’s going on and keep them abreast of the process so that there’s not a big issue.
 
Joe: I’ve never seen anybody get into legal trouble because of a situation like this. The reason people get into legal trouble is because they don’t pay attention, they don’t solve the problem when it happens and they get angry with people or piss people off, so if you can avoid those things, most of the time – 90% of the time you can avoid a lawsuit. 10% of the time, you’re going to get into a lawsuit no matter what you do, and then you have to deal with it and you have to deal with an attorney and all of those things.
 
Joe: But if you structured your business properly you probably don’t have that much to lose. I have a lot of assets but it’s going to be very difficult to take those from me because of the way I’ve structured my business. That’s something I teach my mentor students – how to structure LLC’s versus S corporations, how to protect yourself and how to make sure you pay as few taxes as possible.
 
Joe: I’m going to end this video and we’re going to pick it up on the next one with your next question, okay? Thanks a lot.