Legality of 'subject to' deals - Posted by john

Real Estate Investing Real Estate Financing
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Posted by William Bronchick on April 21, 2004 at 19:55:15:

Having the former owner file Ch7 bankruptcy is a win/win for everyone. If you take a property subject to an existing mortgage, you are not personally liable for the note to the lender, having never executed the note. The seller, however, is still liable for the note, even though he doesn’t own the property. If he files for BK, he is no longer liable for the note, so it basically becomes a non-recourse loan. If you keep making payments to the lender, they will likely keep taking them - no questions asked.

I have a property a took ST in 1996. The owner filed for BK in 2001, and the lender is still taking my payments.

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Legality of ‘subject to’ deals - Posted by john

Posted by john on April 21, 2004 at 19:26:01:

Hello all,

I have a few questions regarding the legality of subject to deals… If I buy a house subject to the existing financing and the previous owner goes into bankruptcy, how does that affect the property I currently own subject to?

I question the legality of the whole ‘subject to’ transaction because when the lender makes a loan, it is secured against the property as collateral. If the borrower declairs a chapter 7 and the bank finds out that they can’t get their property (their collateral), aren’t you, the new owner at the wrong end of a lawsuit from this lender? It would seem so.

Maybe I have it wrong here, Are there any others out there concerned about this in ‘subject to’ financeing?

Thanks!

JC

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Re: Legality of ‘subject to’ deals - Posted by JohnBoy

Posted by JohnBoy on April 21, 2004 at 20:15:20:

Just because a seller files chapter 7 does not mean the lender can’t get the property back. If the seller files BK and has the debt on the loan discharged then the lender can take the property. They will still have to foreclose, but since they are a secured creditor they can get the collateral.

So what happens where you buy a property subject to and the seller files BK? Well it depends.

You might be able to get the seller to not have the loan discharged since you are making the payments. Although I wouldn’t count on that because the seller would be foolish not to discharge the loan since they are filing BK anyway. And their attorney would be foolish to not highly recommend they discharge the loan since they no longer own the property.

But even if the seller files BK and has the loan discharged doesn’t mean the lender will foreclose if the payments are being made and current. The lender would just end up with a loan that no one is personally liable for, but it still remains secured against the property.

If the lender did foreclose then they would name you as a party to the suit, but that would be required to eliminate your interest in the property. They couldn’t get a deficiency judgement against you since you aren’t liable for the loan.

The lender may just allow you to come in and sign on the loan. They may be willing to refinance the loan in your name. They may shout and scream and threaten to foreclose and not do anything if you ignore them and continue to make the payments. It all depends on the lender and the circumstances.

If the lender did pursue with foreclosing you can refinance and pay off their loan.

The worst thing that could happen is the lender pursues with foreclosing and you can’t qualify to get a new mortgage where eventually you lose the house to foreclosure. You will lose any money you had in the property.

But even if you couldn’t get get a loan to pay the lender off, a foreclosure could take a year or two to complete, depending on the state you live in. That would give you a year or two to sell the property and pay the lender off before they can foreclose on it.

But no matter who files BK, a lender that has a property secured by a mortgage does not lose their security. The debt can be discharged where the borrower is no longer liable for it, but the lender’s security remains intact. So if no one pays the payments on the loan the lender can foreclose and get the property.

So it all depends on the circumstances, the lender, how long it takes to foreclose on a property in your state, and your ability to refinance if you had to or sell the property before the lender could foreclose.