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A common question I get all the time pays what happens if I default or the buyer defaults on a subject to loan? Well, one of my favorite things in the world to do is actually do zooms with people to actually understand the question, but this question came from somebody in our YouTube comments, I’m going to do my best to answer it. Okay, question is paced. What happens if you default on a subject to loan?
Well, not much different than if you default on any loan, first and foremost, your piece of cake because you’re not paying your bill. So let’s just get that straight out of the gate. The reality is, number one, if I’m buying any property as a real estate investor, and I’m not Dave Ramsey, because Dave Ramsey is going to tell you to save your entire life until you’re 81 years old to make your first million dollars. If I’m Dave Ramsey, I’m buying houses with cash. And that’s stupid. I’m telling you, it’s incredibly dumb to pay houses with cash, it’s dumb, it’s dumb.
If you’re not utilizing leverage, you’re not getting to where you need to be. So if you are smart, and you’re not listening to Dave Ramsey, then you’ve probably gone out and gotten multiple loans to buy multiple rental properties. Okay, so let’s ask the question, even if I go down to Chase, Bank of America, Wells Fargo, Quicken Loans, whatever the big box store lender is, and I get a loan from them. What happens if I default on those loans, basically, you’ll get foreclosed on the bank will have to hire a trustee or an attorney to go and legally take the property back through a judicial proceeding called a foreclosure or a trustee sale.
And that happens all the time. In Arizona, there’s currently 1800 active foreclosures, so that has nothing to do with sub two has nothing to do with seller finance. That’s just regular people getting regular loans on regular houses losing their home because they lost their regular job, or they just decided I’m not going to make these payments or they died or they got a divorce. And now they only have one income, whatever the reason is, there’s 1800 current people in foreclosure right now in Phoenix, Arizona alone, think about nationwide, so a lot of people so those people are going to lose their house to foreclosure when the bank decides we want that house back.
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Okay, first thing that happens. Second thing that happens a lot of times as those banks because they don’t want to go through the full legal proceeding, of hiring a trustee going to the auction saying who the highest bidder is and selling that property, they will actually do something called Cash for Keys or deed in lieu in lieu means instead of so deed means I’m going to give the property back to you through a document called a deed or proof of ownership. I’m going to transfer the proof of ownership from me the borrower to you the bank, in lieu of you foreclosing on me.
That’s why we call it a deed in lieu. Okay. Does that make sense? Eric says that makes sense. So that definitely is the right description. So the bank can come to me and go, Hey, paste your deadbeat peace. You’re not making your payments, we’re going to go hire an attorney. Oh, no. Hey, how about you give me 3500 bucks or $5,000? Sometimes Cash for Keys is $500. It just depends on the house and where you live. If you’re in Mississippi or Louisiana, I’m sure it’s like $17 They’ll give you if you’re in Los Angeles, who knows?
Maybe give a couple 1000 bucks, okay, just depends on where you’re at bank gives you money and says please move out. And we will ask you to deed the property to us in lieu of us going through a full blown foreclosure. Okay, so one foreclosure to deed in lieu of foreclosure. And the third thing is people can do a short sale, okay, they can short sale, meaning they can go to the bank and go I am underwater, because the market crash and I have no equity and I want to blah, blah, blah, a fourth thing they can do is they can do a loan modification, okay, they can go to the bank and go, let’s modify this loan, let’s restructure it so I can keep the property.
And the fifth thing that the sellers can do is they can just sell it on the open market, if there’s enough equity to pay realtor fees, and all that kind of stuff. Okay, now, you now understand what happens if somebody doesn’t make their payment, it doesn’t matter that it’s also a subject to deal if I own a property, it doesn’t matter if the mortgage is in my name, or the mortgage is not in my name, which is what subject two is all about. I acquired that property without having to qualify, assume or do anything to a loan, but I still am the owner.