In a Subject To deal, a buyer takes ownership of a property subject to the existing financing that the seller has in place. This means the buyer takes over payments on the seller’s mortgage, but the mortgage remains in the seller’s name. The buyer does not assume the loan; instead, the existing loan continues to remain the responsibility of the seller, even though the buyer is now controlling the property.
Key Characteristics
- The mortgage stays in the seller’s name, but the buyer gets the title to the property.
- The buyer makes the payments on the seller’s existing loan.
- The buyer takes on all the responsibilities of the property (insurance, taxes, maintenance, etc.).
Why Sellers Agree to Subject To Deals
- Financial Distress: Sellers who are behind on payments or facing foreclosure might want to offload the property quickly to avoid damaging their credit further.
- Avoiding Foreclosure: By selling “subject to,” the seller can avoid foreclosure, preserve their credit, and move on from a property they can’t afford.
- Tired Landlords: Some landlords want to get out of the business and might agree to a Subject To deal to avoid the hassle of selling through traditional means.
- Limited Equity: In cases where sellers have little equity in the home, a Subject To transaction can allow them to get out from under the mortgage without bringing money to the closing table.
Why Buyers Use Subject To Deals
- No Credit Check or Loan Qualification: Buyers don’t have to qualify for a new mortgage, making it attractive for investors with poor credit.
- Little or No Money Down: Many Subject To deals require minimal upfront cash.
- Faster Process: These deals can close quickly because there’s no need to wait for bank approvals or underwriting.
- Control Over the Property: Buyers gain full control of the property and its potential equity growth, often at a good price.
The Process of a Subject To Transaction
Negotiation
The buyer and seller agree on terms, including:
- How much the buyer will pay upfront (if any).
- Future payments the seller might receive.
- Whether the loan is current or requires catching up on missed payments.
Paperwork
Key documents include:
- Purchase Agreement: Outlines the terms of the sale.
- Warranty Deed or Grant Deed: Transfers ownership to the buyer.
- Trust or LLC: May provide additional protection.
- Power of Attorney: Allows communication with the mortgage lender.
- Disclosure Documents: Ensure the seller understands the risks involved.
Closing
The focus is on transferring the title while keeping the seller’s mortgage in place.
Take Over Payments
The buyer begins making payments on the seller’s mortgage. Communication between the buyer and seller remains essential.
Risks and Challenges
Due-on-Sale Clause
- What It Is: Lenders may demand full payment if the property is sold or transferred.
- Risk: Although rare, the lender could call the loan due.
- Mitigation: Investors may use a land trust to reduce this risk.
Seller Risk
- Credit Impact: The seller’s credit could suffer if payments are missed.
- Future Borrowing: Sellers may have difficulty qualifying for another mortgage.
- Trust Issue: The seller must trust the buyer to continue payments.
Buyer Risk
- Equity Risk: If the market drops, the property may lack sufficient equity.
- Access to Mortgage Information: The buyer relies on the seller for mortgage details.
- Insurance and Taxes: The buyer must ensure proper insurance coverage and tax payments.
Benefits of Subject To for Investors
- Leveraging Existing Financing: Take advantage of existing favorable loan terms.
- Creative Financing: Offers flexibility without traditional mortgage qualifications.
- Cash Flow: Can provide immediate rental income with minimal investment.
- Long-Term Appreciation: Investors benefit from future property appreciation.
Structuring a Subject To Deal
- Down Payment: Negotiate upfront payment amounts.
- Loan Balance: Understand the remaining loan balance and terms.
- Equity Considerations: Decide how any existing equity will be handled.
- Exit Strategy: Have a plan if the lender enforces the due-on-sale clause.
Best Practices for a Subject To Deal
- Title Search: Ensure there are no hidden liens or encumbrances.
- Communicate with the Seller: Keep open lines of communication.
- Use a Land Trust or LLC: Minimize risks by using protective entities.
- Attorney Involvement: Always involve a knowledgeable real estate attorney.
Alternatives to Subject To Deals
- Assumable Mortgage: The buyer officially takes over the mortgage with lender approval.
- Seller Financing: The seller finances the purchase, and the buyer makes payments directly to the seller.
Conclusion
Subject To deals are a powerful tool in real estate investing, allowing buyers to control properties with minimal upfront costs and without traditional mortgage qualifications. However, they come with risks, especially concerning the due-on-sale clause and the seller’s ongoing liability.
With proper structuring, legal guidance, and a thorough understanding of the risks involved, Subject To deals can be an excellent way to build wealth, particularly in appreciating markets.
You can see online discussions on Bigger Pockets here: https://www.biggerpockets.com/forums/48/topics/1124602-subject-to-deals
See more Real Estate Investing posts here: https://coachbrownsclass.com/category/real-estate-investing
