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FACTS:                    

The real estate licensee represents both the buyer and seller who entered into a purchase contract for a residential four-plex.  The buyer has bad credit and cannot get financing for the transaction.  The listing agent therefore proposed alternative financing, to which the parties agreed.  The payment terms are that the buyer is going to pay $250,000 in cash at the close of escrow and take the property “subject to” the existing $800,000 promissory note secured by a deed of trust against the property. 

ISSUE:                      

Is it legal for a buyer to purchase the property and take it “subject to” an existing note and deed of trust? 

ANSWER:                

See Discussion. 

DISCUSSION:

Most loan documents contain language giving the lender the right to accelerate the full amount due under the note (due on sale clause) in the event that the property is transferred or conveyed.  Thus, even though it is probably legal for the buyer to purchase the property, “subject to” the existing note and deed of trust, the transaction is fairly risky.  The lender could demand the full amount due under the note upon learning of the conveyance.  Because the buyer has bad credit, obtaining replacement financing will likely be difficult.  If the buyer cannot pay the amount demanded, he could lose the property to foreclosure.  Additionally, a default could harm the seller’s credit score. 

The listing agent should advise both the buyer and seller in writing that they should seek the advice of independent legal counsel before closing escrow on the transaction.