Homeowner Alert: The Risks of Selling Your Home 

“Subject To”

Are you considering selling your home? In today’s market, some homes aren’t moving as fast as they used to, causing homeowners to feel stressed about getting their homes sold quickly. This is especially true in situations involving income or job changes, divorce, and other big life decisions. While there are plenty of legitimate investors out there that are looking for a deal, there are also unfortunately lots of ‘wannabe’ investors who are looking to take advantage of a seller that may be in distress.

Recently, a fresh type of scam has been circulating through real estate markets. While it's not an illegal practice in most states and can sometimes work out for a seller that is in distress, it's becoming a new trend for scammers in Florida. It’s called, ‘selling your home subject-to’ and it’s often bad news for sellers, especially when they don't know much about the potential "buyer". At the Sandy Hartmann Group, these so called "buyers" have recently approached us and even our sellers, trying to score a deal that will cost the buyer practically nothing, while leaving sellers with everything to lose. Read below to find out how this scam works and why it’s bad news for sellers:

So What Exactly is Selling Your House “Subject To?”

Basically, this is when a seller agrees to sell their house "subject to" the existing mortgage staying in place on the home's title. What does this mean? To further explain, it means the home will change ownership on the deed, but the existing mortgage loan will stay in place on the home, in the seller's name, after the sale of the house takes place to the buyer. The property deed transfers to the buyer’s name, but the loan stays in the name of the seller. The buyer agrees to continue making the monthly payments on the seller’s loan after the closing takes place.

Why this Can be Bad News for Sellers

• Basically, the seller relinquishes ownership rights to the property, but doesn’t clear out the original mortgage loan from their name.

• Since the loan will still show up on the seller’s credit score, it will be included as a monthly expense when creditors are deciding if they can afford another home loan, car loan, etc.

• This also means that if the new buyer stops making the payments on the existing mortgage loan, or makes a late payment, or causes the loan to default for any reason, the seller is the one at risk.

• If and when the loan defaults, the seller’s credit score will be affected. They could have lawsuits from the lender brought against them and/or have trouble getting another loan in the future.

• Once the seller’s credit score is affected, the rates they are offered on future loans could also be less competitive, costing the seller more money in the long run.

• Basically, the seller takes on all the risk, with  no guarantee that the buyer will pay off the loan that remains in their name. 

Why Would a Seller Agree to Sell Their Home “Subject To?”

These sometimes sketchy “investors” focus on finding sellers in distress. They even target sellers with their homes listed by Realtors in the MLS. They call the sellers, offer them an ‘easy way’ to get rid of their home by signing the deed over to them. They sometimes even offer to give them a lump sum of cash as well (our sellers have been offered up to $10k). They make it simple for the sellers, assuring them their company will take over the loan and that the “Subject to” clause in the mortgage allows them to do this legally. Some even tell sellers that they negotiated with their lender in advance to let them out of the loan as soon as they take possession of the property. It's important to note that traditional lenders don't negotiate with potential buyers on a loan that's in the seller's name unless it's for an *assumable loan. 

*Assumable loans are a completely different scenario than a "subject to" transaction. When a loan is "assumable" it is legally allowed to be transferred into the name of another qualified buyer. The lender is fully involved and qualifies the buyer (just like they would for any other loan) to determine their creditworthiness to pay back the loan. If the buyer is approved by the lender, they assume the loan and sign loan docs at the closing, removing the existing loan from the seller's name. The seller would then have zero risk in terms of the buyer's loan repayment in this scenario. Not all loans are assumable, however FHA and VA loans often are and this is a good way for buyers to assume a lower interest rate when rates are high. 

In a 'Subject to" scam, the worst scammers convince the seller to transfer the deed into their name, then never make a payment after the transfer. However, they immediately rent out the home, collect rent payments every month, and just bet on the foreclosure process taking a year or more before the tenants find out and get evicted. It ends up being a sad situation for the tenants (who get evicted by the foreclosing bank) and the sellers (who now have a foreclosure on their credit report), while the buyer pocketed months of rental income. Secondly, there is also a clause in many mortgage loans that says if the property transfers ownership, the lender has the right to 'call in' the balance of the loan. This means the lender could require the loan be paid off immediately if they find out about the deed transfer, again putting the seller's credit at risk when the bank eventually forecloses if the mortgage isn't paid off in full. 

While not all buyers trying to purchase a home in a "subject to" transactions are scammers, this is sadly a type of transaction that many scammers have taken advantage of recently. If you ever do decide to sell your home in this type of transaction, our advice is to seek legal counsel before doing so. We also recommend that homeowners or their attorneys review the creditworthiness of anyone offering to do this type of transaction with you. If its a company or investor calling you, another good step is to get a list of homes in their name and have a title attorney check to see if there are any lis pendens or foreclosure proceedings on the other homes they've done this with previously. If the investor won't provide this info or refuses to allow you to use a real estate attorney (that you choose, not them) to do the transaction, run.

Summary

While a slower housing market may feel stressful, sellers should remember that the Tampa Bay real estate market is still one of the strongest in the nation in 2024. As a homeowner, if you are worried about selling your home, the first step is to use an experienced Realtor who will know how to properly price and stage your home for success, while also protecting you from scams like the one above.

Have questions about buying or selling a home?

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