Risky Business: “Subject to Mortgage” Sales Leave Floridians With Debt and No Deed

In Jacksonville, News 4 just ran an I-Team investigation on homes being sold subject-to a mortgage. These so-called sub-to deals are gambles, said the reporter.

A sub-to real estate deal could be a valid method of selling your home in some situations. But this approach carries serious financial risks.

Here, we look at how that risk plays out, as Jacksonville’s TV viewers saw it.

Sounds Like a Lifeline for Struggling Homeowners…

That’s how the newscasters began the segment. But the investigative team found this style of selling leaves the seller at the mercy of the professional buyers involved.

In these deals, a buyer agrees to take ownership with the loan left on the home. The home’s owner signs the deed over to the buyer, who promises to take over the mortgage payments. But after handing the deed over, the now-former homeowner is still on the loan documents.

And what if the buyers disappear after the agreement is signed and the deed is transferred?

Then there is no one paying the mortgage company. The debt goes into default. And the home winds up in foreclosure. As you can imagine, the former deed holders will have a hard time getting a future mortgage with this default and foreclosure on their credit records.

A Jacksonville-area real estate agent tipped off the investigative news team that this is exactly what’s been going on. The agent had suggested subject-to-mortgage deals to help financially stressed-out clients sell their homes. The agent believed the arrangement could be supportive. But it wasn’t.

The news team decided to go out and explore the situation.

One Company Behind a Rash of Bad Deals

One investment group active in the Jacksonville area goes by the name BG. Its agents make contact with deed holders who owe more on their mortgages than their homes are worth. These agents present themselves as investor-buyers who will pay the mortgages off while renting out the properties they take over.

It seems ordinary enough at the start. After all, it’s not unusual for investment firms to seek out borrowers who’ve fallen behind on their mortgage payments, or borrowers who are carrying out short sales.

At closing, the struggling homeowner will receive perhaps $2,000 and the relief of breaking free from their impossible financial bind. In sub-to deals, the investment firm is supposed to send money (whether to the seller or straight to the mortgage company). That’s not how things are working out with BG, according to numerous customers.

One couple of owners sold their home, moved out of state, and learned they were facing foreclosure on a home they sold to the investment company. Another deed holder, a recently retired service member in Panama City, is now suing BG, claiming the venture investment company fraudulently induced him to transfer a deed. According to the lawsuit cited in the News 4 investigation, BG allegedly made no payments after forking out the closing funds. The frustrated vet is still making the mortgage payments on a home that’s been taken.

What Happened to These Homes?

The news team spoke to these and other people who have signed their deeds over to BG. The investigative team found these people’s homes listed on real estate sites as rental properties. That would come as no surprise to the people who signed their deeds over. In return for paying the mortgage, the company says, it’ll rent out the home, room by room. It’s called a pad split. The company says it makes its profits by taking in higher rents than it will have to pay monthly on the mortgage.

Oddly enough, the investment firm doesn’t seem to be too keen to engage with potential renters, though.

The news team noted the phone number on the listings. Reporters called, and got a recorded answer saying the call could not be completed. The team couldn’t get a hold of anyone with the firm during the course of their investigation.

One seller kept in touch with a former neighbor, and said no renters ever moved into the house.

Tragically, many of BG’s clients do not get their deeds back. Now, foreclosure filings reportedly connected with these homes are showing up in public court records.

How Is Buying Subject to a Mortgage Different From Assuming the Mortgage?

A subject-to sale is not the same thing as an assumable mortgage. In a true mortgage assumption, the lender reviews and approves the buyer, and the buyer becomes legally responsible for the loan—typically releasing the seller from liability. In a subject-to deal, by contrast, the loan usually remains in the original borrower’s name. The buyer takes title to the property, but the seller stays legally obligated on the mortgage unless the lender formally agrees otherwise.

Selling a home with a mortgage still on it can seem like a great escape route for a borrower who gets into a financial pickle. But it’s done for other reasons, too. Some people do it to keep the existing mortgage going on a home they buy. If the mortgage can stay on the home even through the sale, then the buyer doesn’t need to pay bank fees or take out a new loan at a higher interest rate.

The existing lender might find this arrangement beneficial. It’s good from a lender’s perspective that a struggling homeowner could steer clear of a default.

Or the opposite could be the case. A lender might (in this case, correctly) think that the agreement the homeowner wants to sign creates a new risk for the loan.

A lender that’s not on board could use the due-on-sale clause in the loan documents to demand that the borrower make a payment in full, immediately.

In some sales that are subject to a mortgage, the parties don’t say anything to the lender. The idea is that the lender will be fine, as long as the correct amount rolls in every month. The lender has no reason to care who’s paying it.

Usually, though, a lender does care. Why else would a due-on-sale clause exist? This is why a deed holder’s best practice is to notify the mortgage company if a deed transfer is planned. If the lender agrees to the arrangement, there will be fees for examining the buyer’s situation and going ahead with the approval. In practical terms, how likely is this to happen? Thinking about this matters. Doing this without a lawyer’s opinion is a recipe for risk.

A Word to the Wise: This Kind of Deal Is Legal But Risky

Selling a home to get out from under a mortgage can sometimes work. Particularly if your debt’s somewhere around the home’s value. And yes, it’s legal. But if you’re in heavy debt or you’re not absolutely sure how the buyer will hold up their side of the agreement? There’s obvious risk inherent in passing your debt to someone else to pay off.

Important note: This discussion is not legal advice and it’s not money advice. We offer it to you for general knowledge only. See a real estate attorney to check the deed transfer agreement and protect your interests—before you actually need an attorney.