By Blackwell M. Brogden, Jr.
Deputy Legal Counsel
Since real estate being offered for sale is often encumbered by a lien (usually in the form of a deed of trust or mortgage securing a loan), it is important for real estate agents to be aware of the responsibilities and liabilities of the parties in transactions where these encumbrances will not be paid off at closing.
The Real Estate Commission has discovered two major areas of concern with regard to these transactions: (1) Misunderstandings by the parties over the meaning of terms used in such purchases; and (2) concealment from lien holders of the true facts of the transactions by the parties and the real estate agents.
"Assumption" vs. "Subject To"
According to the North Carolina Court of Appeals, "...the difference between a sale of real property with an assumption (emphasis added) of the indebtedness and a sale subject to (emphasis added) an indebtedness is well enough known in this state..." While this may be true of experienced homebuyers and other people with special real estate knowledge, the precise legal meaning of these terms may escape the average consumer.
The term "assumption," as defined by Black's Law Dictionary, is used when a buyer incurs personal liability for an existing deed of trust; as contrasted to the term "taking subject to" when the buyer incurs no liability to repay the loan. But whether the loan is "assumed" by the purchaser, or the property is taken "subject to" an existing loan, the seller continues to remain personally liable to repay the loan unless and until released by the lender (usually by a separate "release of liability" document). And if the seller previously assumed the loan from someone else, he may also remain liable to the previous owner.
The agent should be aware of these consequences and not contribute to any misunderstanding between the parties by the improper use or application of these terms. In fact, when the use of existing financing is being considered, the agent would be well-advised to recommend that the seller consult his or her attorney for a complete assessment of the risks involved in such transactions.
Agent Disclosures
Because of constantly changing interest rates and the need to know the financial standing and ability of their borrowers, the current trend among lenders is to regulate assumption and transfer rights by inserting "due on sale" clauses in their deeds of trust. In doing so, they limit the ability of borrowers to transfer their property without their consent.
However, the Commission has discovered an alarming number of incidents of real estate brokers and salesmen counseling, procuring or assisting sellers and purchasers in arranging a transfer of property in violation of these due on sale clauses. Licensees should be aware that to conceal material facts from the lender or to assist others in such actions will not only subject them to disciplinary action by the Commission but also civil liability.