Should I Do A Title Search?
by Vena Jones-Cox
Q. A Seller has called me and says that he will walk away from his property if I want to take over payments. He says they'll sign over the deed. Other than doing a title search and making sure title is good and recording his signed deed, do we really need to go thru the expense of going through settlement since all insurance and taxes are escrowed anyway? And how long will it be before the owner of the property gets annoyed to still have the mortgage showing against his name if you're doing a lease/purchase or land installment to and end buyer? I can't imagine he would let me keep a mortgage for 5 or 10 years. Please advise. —C. L. Baltimore via Email
A. Taking over a property “subject to” the existing mortgage—the technique you describe—is deceptively simple. However, like all real estate transactions, an improperly handled “subject” to deal can be expensive in terms of time, money, and liability.
I strongly advise that you do spend the money (or better yet, have your seller spend the money) to do a formal closing. There are several reasons for this:
▪ Without a professional title search, you can't know for certain that the title is good
▪ The mortgage you're assuming is the only debt against the property
▪ Whether the guy purporting to be the seller is the actual owner of the house.
Yes, you can buy a title search without doing an actual closing, but when you buy title insurance (which I STRONGLY recommend for any deal that you're getting the deed), closing costs are often significantly cheaper.
Another reason to do a formal closing is to assure that no mistakes are made in the drawing up of the deed, proration of the taxes, etc. or that if there are, there is a heavily licensed and bonded professional who's responsible for fixing them.
Who would you prefer be held liable for any mistake, you or the closing agent? Finally, a real "closing with an attorney or title agent makes the deal feel "real" to the seller in a way that a kitchen table closing can't. And this can become invaluable to you in the future when the seller changes his mind about selling or decides he wants more money or any of the other nutty things sellers do.
In addition to the normal paperwork (deed, closing statement, etc) there are a few other things you'll need to get at a “subject to” closing:
▪ A limited power of attorney for insurance, which allows you to deal with the seller's insurance company in case of a claim (you'll also need to have the seller convert his policy to non-owner occupied and name you as co- insured).
▪ A letter from the seller to his lender letting them know that you have taken over management of the property and that all further correspondence should be sent to you. Include the seller's loan number and social security number and have the seller sign.
▪ A second, undated letter from the seller requesting a payoff, again including loan number and signature, so that you won't have to track the seller down again when you are ready to sell the property.
▪ Finally, have the seller write a letter in his own handwriting stating that he understands that he is selling his home to you and that you do not intend to pay off the mortgage. (see next page for sample letter)
The reason for this letter is, of course, to counter the exact problem that you mention. It is absolutely the case that a seller who lets you take over his loan today will want you to pay it off a year from now. Every single time I've done a Subject. To deal, this has happened to me.
At the time of the closing, the seller is grateful as all get-out that you "saved" him from losing his property, or at least from having to make the next payment. But after some time has passed and he's gotten his life back together, he'll want to buy a new house and suddenly you're the bad guy for making his payments every month (never mind that if YOU hadn't been improving HIS credit, there would be no way he could got another loan!)
Having a letter in the seller's handwriting can go a long way toward reminding him of your original deal. And it's a good thing to have in court if, as happened to a colleague of mine, the seller later tries to say he didn't realize that he was selling the house at all, but thought that he was getting a loan!
The long and short of it is, don't think of Subject To financing as a permanent situation. Use a shorter-term exit strategy (selling on lease/ option or land contract) or plan to refinance the property within five years.
Knowing the challenges before you go in—and, of course, doing the deal right—can alleviate many of the potential problems, and assure that your deal goes smoothly.
Have the seller write the letter below in his own handwriting:
I understand that:
1. I am selling my house to [insert your company name]
2. My mortgage is not being paid off.
3. [Insert your company name] will continue to make my mortgage payments until they sell the house.
4. [Insert your company name] does not know when the house will be sold, and that this mortgage might remain in my name until the final payment is made.
5. Having this mortgage in my name could keep me from getting another mortgage
Witness: _______________________________ Date:_________________
©Copyright 2001 Vena Jones-Cox. Taken from “The Real Deal.” Reprinted by Permission. National Speaker Vena Jones-Cox has appeared at past MREIA meetings and has been a full-time real estate investor since 1989. She focuses on high-profit, low-hassle strategies that leave her the time and freedom to enjoy financial independence. All told, she’s bought over 600 properties. Vena is also the host of public radio’s “Real Life Real Estate Investing” (Wednesdays at 5 pm est at wnku.org), a live weekly program that addresses all aspects of real estate investing. She is past president of Cincinnati REIA, Ohio. Email: email@example.com or visit www.regoddess.com