As many of you know, I have been investing in real estate for over a half century, and have personally trained over 116,000 students. Lately I have had a number of people come to me with questions on the "subject 2" method of "investing" in real estate. It seems a number of real estate "gurus" are teaching this method, and I am being asked why my course does not teach it.
I will begin with the short answer - Sub 2 is immoral and unethical, and could constitute fraud, as I will explain in a moment. My program will never, ever teach any method that is not legitimate, moral and ethical, and I really do not care if that stance loses me some potential students.
I have monitored people on sites like "Bigger Pockets" who discuss the pros and cons of Subject 2, and I have checked out well-known TV Infomercial gurus who do the same, and even teach it. And it really pains me that many are handing out information that literally puts would-be investors AND sellers at great risk. Some do it because they are ignorant of the risks, or do not care if their info gets other people in financial hot water, or, as in the case of the infomercial gurus, they teach it simply to make themselves more money at the expense of the uninitiated.
What Sub 2 is: Buying a property "subject to" means a buyer essentially takes over the seller’s remaining mortgage balance, without making it official with the lender. In a subject-to transaction, neither the seller nor the buyer tells the existing lender that the seller has sold the property and the buyer is now making the payments.
And here is the problem: In almost every mortgage or trust deed, lenders insert what is known as a "due-on-sale" clause that give the lender the right to accelerate the loan - calling it due, in full, if any rights in the property are transferred..
Many of the people on those sites, and even the infomercial gurus try to convince others that it is okay to deceive the lender, and it is "very unlikely" that the lender will call the note due. And that, frankly, is BS. First, the due-on-sale clause almost always states that the full amount of the mortgage balance can be called due immediately upon any transfer of ANY right or rights in the property. It does not even have to be a sale.
And they try to tell you banks do not really care. Really? So exactly why would the banks include such a clause? For giggles? If you doubt even for a New York minute that lenders would not protect their interests by invoking the due-on-sale clause, just go to your local bank, ask to see the mortgage loan manager, and ask his/her opinion on that. Ask yourself - if you loan money to someone and they deceive you and you find out, what are the chances you would simply laugh it off?
And now as to fraud - if any seller conspires with a buyer or investor to transfer any right in the property and purposely deceives the lender by not telling the lender or getting the lenders permission, that is fraud. And if you doubt that, ask any criminal lawyer.
What are the risks: subject-to homes do put buyers and sellers at risk. Since the property is still legally the seller's liability, it could be seized should they enter bankruptcy, or if the buyer fails to make the mortgage payments. Additionally, the lender could require full payoff if it notices the home has transferred hands, which, if not paid in full can result in foreclosure which can cost the BUYER the property, and anything he/she has invested. Bear in mind, the SELLER is still legally obligated for the mortgage payments. So, if the buyer does not make the payments, or walks away, the seller could lose his home.
There can also be complications with home insurance policies - insurers are reticent to insure any property that does not have a clear title.
To be sure, a lot of investors get away with Sub 2's and make a bundle. But the reasons I have stated are the reasons "The Simple Man's Guide to Real Estate" does not teach Sub 2. There is substantial risk, both financial and legal, to both the buyer and seller. If an investor does not care what he does to make money, that is his choice. Our choice is to not teach people how to sell their souls for a little extra profit.
And we simply will not put our students at risk, or teach them how to put innocent sellers at risk. There are better and easier ways to grow wealth from real estate without resorting to taking unnecessary risks. "The Simple Man's Guide to Real Estate"includes 22 of them.
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