#9 - "How to Sub-2 and Please Stay Away From The Darkside..."

Strategy #9 is Subject-2, a/k/a "Subject-to", a/k/a "sub2"

In short, it is taking over someone else's "headache".

That is taking over someone else's property, where they allow the underlying mortgage (debt obligation they have incurred) to stay in place. And the reason I say taking over someone else's headache is because the only person who would give the keys to their property and still remain on the mortgage would be someone who is clearly a highly motivated seller, who "just wants it gone". The technique is actually rather simple, despite the fact that my description of it may be complicated.

When a property is acquired, it is usually acquired with borrowed funds. The lender making the money available wants collateral, so the borrower and the lender agree to a mortgage. What the mortgage says is that the borrower will pay back the funds borrowed (with interest) and that the lender has a lien on the property as collateral, until such time as the loan is repaid. Now 99.99% of the mortgages out there do not prohibit the borrower (property owner) from selling the property while the loan is in place. However, 99.99% (or at least something close to it) of the mortgages out there say that if the Borrower (property owner) does sell the property, then the loan is "DUE ON SALE", meaning it must be paid off at the time the property is sold. To determine if the mortgage is in fact due-on-sale, you have to read the document. There is no law that requires a due on sale clause. In fact, this is why it is called a "clause", meaning it is term of a contract, and as we know from earlier blog posts, contracts are the specific arrangements between two (or more) parties - there is no State or municipal regulation that tells folks everything that MUST be in a contract.

So in short, when an investor buys a property "subject-2" what they are telling the seller is that they are taking the asset, but leaving them "on the hook" for the debt.

So who would fall into a category of sellers who would even think about doing this?

People who have lost a job, lost a loved one, inherited a property, have been relocated and are paying on two mortgages, got "right sized" and are now living with their mother, are going through a divorce, have come through a divorce, are planning a divorce. In other words, people who are experiencing this thing called "Life", and all the ups and downs it has to offer.

Subject-2 is another one of the great devices that investors use to get properties "Nothing Down", and it has great advantages for both the seller and the investor. But it has a "Dark-side" too.

Recently, a number of states have passed laws to prevent properties from being taken over "Subject-2", or more precisely, they have attacked some of the techniques used because they do not like the philosophy behind "Subject-2" deals. North Carolina is probably the most aggressive state going after Subject-2 deals. They have specifically gone after investors who use land trusts as a mechanism for transferring a property between an investor and seller whereby the deal is done "subject-2" the underlying mortgage.

So is Subject-2 Bad? NO! But some of the techniques used to make a subject-2 deal "work" Are!

In fact, there are a number of situations where having an investor come along and buy a property "subject-2" is the only way the property owner is going to get out from underneath their situation. There is nothing inherently wrong with Sub-2, either the concept or the strategy. However there may be issues with the manner in which it is executed. Anytime you hear a "guru" pitching "GET THE DEED", or "JUST HAVE THEM SIGN A LAND TRUST", you need to step back and really look at what is being "preached".

Specifically, investors who do not disclose to homeowners what the ramifications are of selling a property where they are still on the hook for the mortgage may be operating either unethically, or even illegally depending upon your state law. Investors who get people who are clearly distraught emotionally and mentally to sign documents that in essence have them signing away their biggest asset, may have a contract that is unenforceable. Investors who induce homeowners to commit fraud, may in fact be setting themselves up for jail time, or at least a big fine.

Again, while I do not believe there is anything inherently wrong with Subject-2, as with all things, there is a right way to do it, and a wrong way to do it. So, if you are going to do Subject-2 deals, you need to first figure out how to do it, and then make sure that what you are thinking of doing is legal and ethical. Do it the legal and ethical way, or don't do it all. This is true not only of "Subject-2" investing, but all investing. a) you don't want to have to explain to your momma why there is a picture of you on the front page of the Washington Post being led away in handcuffs, and b) when you hear the clang of the cell door behind you and Bubba, (or Bubbaette) asks "what are you in here for", you're not going to hold up well if you say, "Stealing people's houses".

Subject-2 is a great way to create win-win scenarios for both the seller and the investor. It is also an area that can be really abused. It is quite understandable why there are equal numbers of investors who rave about it, as well as those who say they "would not touch it with a 10 foot pole". It comes down to what techniques will you use to make "Subject-2" work for you, and how does this plan conform to state laws. Any strategy that emphasizes "getting the deed", or "land trusts" are naturally suspect and you need to make sure you are operating in the clear by discussing with your mentor, or the leadership of your REIA (assuming you belong to a good one) before moving "full throttle" with your Subject-2 strategy.

Sherman Ragland - Thank you for reading...