“Mortgage Assignment/Subject to Financing” is dangerous,
deceptive and a short-term strategy. Use it at your own risk. I am on the war path and very alarmed about many real estate information marketing gurus who are promoting this strategy. These so called real estate gurus are glossing over the real risks – to the buyer, seller, and “broker” – inherent in this strategy, I am appalled!!! Before you attempt to do one of these so-called “Mortgage Assignment/Subject to Financing” deals, Before you use do these strategies, you better look long and hard at the below:
What is a “Typical” Mortgage Assignment/Subject to Financing Deal?
Suppose Sam Seller borrowed a hundred thousand dollars from Bank of America five years ago to buy a house, and today he needs to sell. But he’s having a hard time in this market because he has a real problem… the house is worth less than the $100,000 he borrowed. How much less? It’s only worth $90,000 today, making it “upside down” by $10,000.
But wait! Ivan Investor comes along and makes Sam an offer he can’t refuse. Ivan says he’ll buy the house for the full $100,000 Sam owes, and as you probably guessed, Sam is thrilled. The only catch? Sam must agree to sell “subject to” his existing mortgage. (More on that below…)
Overpaying For Mortgage Assignment/Subject to Financing?
Who’d pay $100,000 for a $90,000 house? Ivan Investor would, and you’ll see why in a moment. Smart sellers know it’s a bad idea to sell your house “subject to the mortgage.” And that’s why “sub to” sellers are nearly always sellers in some form of distress. At the very least, they’re desperate to sell.
Sam Seller knows “sub to” deals are high risk and should be avoided, but he also knows he needs to get the house sold and get out from under those payments so it’s a risk he’s willing to take. So, he contracts with Ivan Investor to sell the house for the full mortgage balance and knows that from here on out, whomever Ivan sells the property to gets to make the payments.
Ivan, it turns out, never actually buys Sam’s house and has no intention of buying it. Instead, he markets it on Craigslist by advertising “No Qualifying – Take Over Payments” where Barry Buyer sees it and makes a call. Barry can’t get a loan because he’s got terrible credit. But what he does have is $10,000 in cash and that’s all it takes to qualify in Ivan Investor’s eyes. They quickly put together a deal that has Ivan agreeing to sell the house for $110,000 with Barry agreeing to buy it at that price, paying $10,000 down and taking over payments on the $100,000 loan. That price is $10,000 more than what’s owed to Bank of America and $20,000 more than the house is worth, but it’s the only way Barry can get into a house with his poor credit.
So, “no credit” Barry Buyer purchases “desperation” Sam Seller’s “over-encumbered” home and pays Ivan Investor a cool $10,000 down for the privilege. Everyone involved is happy with their win-win-win deal!
• Sam Seller is finally free of that upside down house.
• Barry Buyer is the proud new owner of his very own home.
• And best of all, Ivan Investor just banked $10k!
What could possibly go wrong now? Let me tell you what…
Mortgage Assignment/Subject to has nothing to do with assigning mortgages The term “mortgage assignment” refers to a document commonly used in the mortgage industry to transfer a note and mortgage from one mortgage company to another (or from one borrower to another with an assumable mortgage, but that’s only done on rare occasions today). An “Assignment of Mortgage” is the legal document used for the transfer, and it’s signed, notarized and recorded with the county whenever a mortgage assignment takes place.
No one can assign a mortgage, or sell it, or even hypothecate it (offer it as security) or any of the things typically done with mortgages without having physical possession of the instrument itself.
So, Ivan Investor can’t really “assign” the mortgage to anyone. And since he doesn’t even own it, how could he possibly assign it? The simple answer is he can’t. It’s a Misnomer
But the really strange thing about this whole “Mortgage Assignment/Subject to Financingt” strategy is that it has nothing whatsoever to do with assigning mortgages. Using the misnomer “mortgage assignment” to describe this strategy indicates a lack of understanding by the program’s creators concerning the most basic “Real Estate 101” concepts.
In reality, Sam Seller remains on the hook for the loan because nothing Ivan Investor does changes the fact that there is a signed note in the lender’s vault with Sam’s signature on it.
Unless his loan is paid off or formally assumed by a new, qualified borrower, Sam will remain liable for the life of that loan because in this mortgage, the mortgage was never actually touched, much less assigned.
Is Mortgage Assignment/Subject to Financing Legal?
The gurus like to point to that misunderstood “subject to” section on the standard form settlement statement and say, “if it’s illegal, why is there a spot for it on the HUD-1?”
The HUD-1 settlement statement is an accounting statement showing the debits and credits in the transaction and nothing more. A place on the statement to list existing loans is there merely for the sake of convenience and in no way sanctions “sub to” deals.
Some loans, particularly existing owner-financed loans, may not have a due-on- sale clause and having a place to list them on the settlement statement is appropriate.
There’s no statute that says you cannot buy or sell a house “subject to” in most states (though not all), so why wouldn’t you have a spot to list them? In reality, violation of the due-on-sale clause is a default of a non-monetary covenant, whether there’s a spot on the HUD-1 settlement statement to list it, or not.
Who’s to Blame when the deal goes bad ( which 80% of them do)?
When foreclosure does happen, you can be sure there will be lots of people looking for someone to blame.
People like Sam Seller. You remember Sam. He only did this Mortgage Assignment/Subject to Financing deal because he was desperate, and Ivan Investor convinced him everything would turn out okay. Except it didn’t, and now Sam’s credit shows a foreclosure and is ruined for years to come. Worse, the lender didn’t just take back the house, he also received a judgment against Sam Seller for everything they lost and can now garnish his wages, levy his bank accounts and seize whatever else Sam happens to own.
And you can be sure Barry Buyer isn’t happy either. He put up $10,000, made all the payments as agreed, and the lender took the home from him anyway. Do you suppose he wants his $10,000 back, not to mention every last nickel he’s put into the property since? Yes, he does, and so today he’s out filing complaints with the Attorney General and the Better Business Bureau and every other agency he can think of, asking them to help get his house or money back.
Once those agencies take on Barry Buyer’s case and get copies of files and see the problems these Mortgage Assignment deals created for buyers and sellers and lenders and everyone else, who do you think they’re going to blame? Sam Seller? Nope, he was desperate, unsophisticated, and convinced it would all turn out okay. He did whatever he was told, signed whatever papers put in front of him, and he thought that was the end of it. Besides, he didn’t get a nickel from the sale. He can be called dumb, but that’s about it. He’s not to be blamed.
Then how about Barry Buyer? Nope, he thought he was doing a deal that made sense, considering his credit situation, and he was willing to pay a premium price to get into a home of his own without having to qualify. That’s all he knew about buying a house. Besides, he paid $10,000 in cash to make it happen. He’s not to blame for this mess, either.
In a three-party deal transaction that goes horribly bad, where two of the parties are unsophisticated and lose everything, the odds are pretty good that third party is the one who screwed it up or got all the money… or both.
And if that third party happens to be an investor who had no interest in the property he sold, who acted as an unlicensed agent in the process, and who walked away with all of the money on the table, odds are pretty good he gets fingered as the one to blame.
“But I did these Mortgage Assignment/Subject to Financing deals just like they told me to do them!
Let’s just hope our friend Ivan Investor hasn’t been really good at them– because if he’s done a bunch, he’ll have a lot of explaining to do… the kind of explaining that happens under (1) oath, (2) the penalty of perjury, and (3) a very bright light.
Mortgage Assignment/Subject to Financing has a fundamental problem that cannot be easily fixed… there’s an investor in the middle of things where no investor should be. He’s an opportunist, providing little real value and extracting whatever profit he can from the unsophisticated sellers and buyers involved. Providing little or no value is the real problem. To make $10k in any transaction, be it real estate or anything else, you first need to deliver at least $10k in value. You won’t find that value anywhere in this type of deal.
What you will find is the tired old “sub to” strategy that brings together all the usual suspects found in the kinds of real deals experienced investors won’t touch.
Doing Deals That “Bite Back”
We recognize that deals involving desperate sellers, bad credit buyers, and upside down properties almost always end badly. Add to it an investor with a total disregard for the outcome of the people he’s supposedly helping and you have disaster waiting to happen. Right, wrong or somewhere in the middle, these deals are indefensible. Worse, when one goes bad… they all tend to go bad. Mortgage Assignment/Subject to Financing is risky for sellers and buyers, but most of all it’s risky for investors. I would never do one of these deals no matter how much money I thought I could make.
Better Things to Do
And do you know why? I wouldn’t do one because I know that any money I make won’t be mine to keep, at least not in the long run. These are deals that bite back nearly every time. Maybe it doesn’t happen tomorrow, or next month, or maybe not even next year, but bite back it will. And I know whatever money I make today on one of these deals will get snapped up down the road when it comes time to pay an attorney to defend it, or worse… defend me. And, I’m pretty sure I’ll have much better things to do.
DO YOU WANT THE REAL SHOCKING TRUTH ???
An audio of JACK STERNBERG interviewing a retired HUD Investigator and current Mortgage Compliance Training Officer and an attorney (Jeff Watson). READ the report below and GET the audio interview..
The gurus who promoted this either dont care about you, or they dont know anything about real estate. If you received an email from any guru promoting this.. please put their name in the comment form so others can know about their lack of expertise.!
We hope you read this carefully. Please let us know what you think… My advice , Do NOT do Mortgage Assignment/Subject to Financing Transactions! Lease Options are a better way to go! They may not be “sexy’ and lease option courses are not expensive to buy. Yes, there are going to be some real estate information marketing gurus mad at me once again for exposing their crap.. BUT I DO NOT CARE! I am telling you the truth, and I am looking out for you. I don’t need your money. I will do the right thing and rather have a good name then put you at risk for losing big time with this strategy.
A big thanks to Jack Sternberg (a financial and real estate savant) for helping me bring the harmful potential of mortgage assignments out into the open.