What Does Transfer of Deed Mean in Real Estate Investing
A transfer of deed is when a seller agrees to sell you their property by transferring the deed to you but remains on the mortgage. This is another way you can get the seller to participate in a purchase real estate transaction. You can get them to do what is called a transfer of deed or a subject to transaction.
What that means is a seller transfers the title to you.
What happens is you will negotiate with them to transfer the property or to transfer the deed to you, to sell you the property subject to them staying on the mortgage. It’s kind of an interesting situation and everybody thinks it’s really weird. And it probably is. But what happens is the owner is selling you the property and you purchase it without any type of financing. You are then going to service the mortgage for that seller.
The seller is still on the mortgage for the property, but no longer owns it.
The banks aren’t crazy about this. There is usually a mortgage due-on-sale clause. This essentially means that whenever the property is sold, the mortgage is automatically due on sale. Meaning the owner has to pay off the mortgage.
Some lawyers will not execute a subject to the transaction because of the due-on-sale clause.
The end result is that you now own the property. You are on the title. You are the sole owner of that property.
The mortgage for that property is still on that property. But the owner of that mortgage, the mortgagor of that property, is the seller who has no rights to that property anymore.
It’s kind of a strange situation. What you then do is you approach the mortgage holder or the bank or whoever is the mortgage holder for that property, and you start paying them directly. You can get the seller to do it, or you can do it yourself. Just contact the bank and say I’d like to change the monthly payments to come out of this bank account.
I’ve never seen a bank execute the due-on-sale clause. The banks will allow it as long as you continue to make payments. The bank does not need to know that this situation exists, where you are now the owner, but you are not on the mortgage documents.
It is critical that you continue to make those mortgage payments.
The problem with this scenario is if the seller ever declares bankruptcy or if there is ever a problem with their financial situation, then when the creditors have to go after the property, there is going to be an issue because you own the property and not the seller. But the mortgage on the property is still in their names.
It becomes kind of messy. I’ve never seen those situations happen or happen to me. So I don’t know the details about what would happen in that situation, but it’s just something to keep in mind.
So, when negotiating with the seller, and they say I just want to get rid of this property, this is when you suggest a transfer of deed. Usually, these sellers are people that were transferred for their job or it’s people that are investors. They just don’t know what to do.
Again, you just take over their mortgage payments and you become the owner of the property, but they stay on the mortgage.
