When legitimate, it's called a "Subject To" (or "Sub 2") transaction. Here's how it works:
First, keep in mind that a mortgage and a deed are two separate items. A mortgage is the IOU that you signed promising to pay the lender for the property. The deed is the document saying you own the house. Normally, they "travel" together. You buy a house: You receive the deed and you're responsible for the mortgage. A "Subject To" separates them.
In a "Subject To," you deed your property to someone else, but remain responsible for the mortgage. That is, the investor acquires your house "subject to" the existing financing. The investor promises to take over payments, cover any back payments owed, and ultimate sell or refinance the property, eliminating the current mortgage.
It can be totally legitimate. I know investors who do this. The benefit to you is that the investor makes up your back payments, takes over payments, and ultimately sells/refinances, removing you from the mortgage. The benefit to the investor--when there's equity in the property--is that the investor acquires the property for only the amount he/she has to pay in back payments and arrearages. The investor hopes to rent your house out to someone who will pay more than the current mortgage payments, thereby picking up some cash flow. And, when the investor sells the property, he/she receives the equity in the property.
It's risky for you because you're giving up ownership of the property but remaining responsible for making payments on it. You've got to trust that the investor will live up to his/her end of the deal.
Regarding the due on sale clause: Subject Tos violate the due on sale clause. If your mortgage contains a due on sale clause (and most due), and if the lender finds out that equitable interest in the property has been transferred without its approval, then the lender has the right to call the mortgage due and payable. No doubt about it.
Will the lender find out? Probably not, if the investor knows what he/she is doing. If the lender does find out, will it call the mortgage immediately due and payable? During the recent hot market, a few would. Many wouldn't. Today, very few will. After all, from the lender's perspective, which is better: An investor who made up the arrearages and is paying the mortgage on time, or calling the loan, possibly leading to a foreclosure and a bank-owned property. Many will "look the other way" and let someone, anyone, keep making the payments.
If you consider going that route, ask the investor for references. That means several people/owners who've participated in similar transactions with the investor. Also, as far as references, ask the investor for the names of his lawyer and accountant. And check with the investor community in your area. In most areas, many investors know each other. Reputations--good and bad--spread fast. Other investors will know who the scammers are, and who the legitimate ones are.
Hope that helps.
Unfortunately, along with the short sales and foreclosures, there are a lot of people out there trying to take advantage of the situation and really pry on people who are distressed, discouraged and scared. Some might be legitimate proposals, but many are scams of which people dream up to take advantage of the situation.
Just remember that when things sound too good to be true, it might be too good to be true. Be very careful of what the specific offer and conditions are and make sure you don't' sign away titles or give people power of attorney to represent you in a way they should not be.
I just encountered one case where the seller provided his attorney agent/mortgage broker him power of attorney for his house and almost signed away his house; my buyers almost signed the contract, but I sensed trouble and advised them not to go forward. Luckily, the seller's wife refused to sign power of attorney and give title away to the attorney/mortgage broker team. He got wise and saw through the whole scam and got out of that agreement before losing everything. He finally negotiated a loan modification program and is on his way back, slowly but cautiously.
Good luck and be extra careful Make sure you find a reputable Realtor to represent you!
Granted, there are alot of con artists in the world that would take advantage of distressed home owners, but by that same token there are alot of car dealerships that are ripoffs, there are some banks that are ripoffs, etc....so I say this to say that in every line of business there are con artists, not just real estate.
My company has done atleast 50 of these transactions and have fulfilled the contractual obligations in each circumstance. In many cases the service is conducted free to the home owner, so its in the investors best interest to fulfil the contract, because that is when payment occurs.
We also contact the bank on each transaction to advise them that the transaction has occured. There is no need in hiding it, because the deed has to be filed with the county clerks office as public information
In many foreclosure situations it is the most viable alternative. The debt of the property is transferred to a family who has proven financial stability enough to pay for the debt, honestly, if this method were a bit more mainstream there would be less foreclosures, as there are millions of would be home owners who are looking for a home purchase, but due to the extreme credit necessities, it is an impossibility.
It is true, the mortgage would have to stay in your name until the the property is able to be sold at market value, because its unlawful to sell a property above market value. So then the question comes down to this: Which do you prefer: Foreclosure, in which you can kiss your financial future goodbye (good luck finding decent living quaters- or "subject to".......Life is a gamble either way you look at it, but ai guarantee if you find the right company, the odds of success greatly increase by doing subjec to, to stop foreclosure , especially if you have negative equity. Good luck.
2. BUT, DON'T LET IT STOP YOU! We have been very successful over the last 15 years, and a big part of it is from taking over payments on investment properties from people who just wanted to walk away. We paid their mortgage on time, so their credit stayed strong, and we got all the appreciation when prices finally started going up. We made a TON of money. A lot of the people I am always reading who give a lot of negative real estate advice, are people who have not invested in much real estate. Invest for the long term, make sure the rent will cover the total carrying cost (principal, interest, taxes, insurance, homeowners dues (if any), maintenance/repair & vacancy), or if it won't, that you can afford to pay the difference. Most properties won't meet that requirement, but a few will and that's all you need. We've done it many times. It's a huge blessing.
As already mentioned I would be very careful. Unfortunately with the level of foreclosure across the state there are those who are taking advantage of people in this stressful situation.
As Don mentioned below this can be a valid transaction, but there are very real risks associated with it and you really need to trust the person on the other end. It sounds like it is too good to be true and just be aware.
Alain Pinel Realtors
There is a legitimate way to do this, however, today few loans (OK, none that I know of anyway) are written to cover this scenario. Back in the '80's, this was referred to as "Assuming the loan" or "Subject to" - meaning the new buyer could come in and be qualified by the lender and accept all of the conditions of the current loan subject to lender approval rather than being forced to get a new loan. Most loans today are written with a "due on sale" clause, meaning if the property is sold, the loan is immediately due for payment.
Also check with your local district attorney's fraud unit to see if any of the actual people involved have a record of fraud.