When it comes to real estate deals, traditional methods of buying and selling take a lot of time and money. That's why real estate investors look for creative ways to buy and sell property without financial risks and in less time. One unconventional method is a subject to property sale. In real estate investing, a subject to is a real estate deal subject to its existing financing. There are advantages to subject to real estate, but also disadvantages, which we will discuss, as well as how to find subject to deals.
What is Subject To Real Estate?
In a subject to deal, the investor obtains the title to the property but the existing loan stays with the seller. Without notifying the lender, the buyer pays the monthly payment to the seller, and the subject to sale is the contractual understanding that the seller will make on-time mortgage payments.
The buyer owns the deed to the house, same as any other sale, but they benefit from paying less money, lower interest rates, and forgoing closing costs.
How does a Subject To Deal Work?
The terms of a subject to real estate transaction vary, but most times the buyer makes a down payment in cash to the seller and takes over mortgage payments. The remaining balance of the loan figures into the purchase price.
There are three ways to structure a subject to sale.
A Straight Subject To (Cash to Loan)
A straight subject to deal is the seller's existing loan balance plus any cash to equal the agreed-upon purchase price.
An example: you purchase a property for $150,000. The seller owes $130,000 on their mortgage loan. You agree to make payments and give the seller $20,000 in cash (the difference between the loan and sales price).
A Straight Subject To with Seller Carryback
The seller offers owner financing for a portion of the sales price.
An example: same scenario, only you have $10,000 of the $20,000 in cash, so the seller finances the $10,000 due in the form of a second mortgage or land contract. You essentially owe two loan payments: the existing mortgage balance and the seller financing.
A Wrap Around Subject To
In this scenario, the seller offers an owner financed loan for the $10,000 you still owe, but this wraps around the seller's current mortgage and often has a higher interest rate.
An example: you agree to purchase the property for $150,000, and you pay $10,000, leaving a difference of $140,000 to be paid to the seller. The seller offers you a single owner financed loan for the outstanding balance, BUT they'll make additional profits by charging a higher interest rate than what their existing mortgage carries.
How is a Subject To Different from a Loan Assumption?
In a loan assumption, the buyer assumes financial responsibility for the existing mortgage and pays to the lender. The seller's name is removed from the loan, and they are out of the equation.
The buyer goes through loan qualifications, but keeps the original interest rate and term, and pays closing costs. The seller's lender may require a title search but may forgo the appraisal, depending on the loan to value ratio.
FHA loans and other government loan programs allow loan assumptions, but a traditional loan does not typically have the option, in which case a subject to is the only way to take over conventional loan types.
Why would a Real Estate Investor Want a Subject To?
Subject to is the fastest, easiest, most affordable and least complicated way to acquire property. The advantages of a subject to, for real estate investors, are as follows:
- Lower cash investment
- Saves you time on mortgage approval and spares your credit
- There's no need for good credit, because you owe the seller, not a loan office
- Seller may carry a lower interest rate while current interest rates rise
- Fast closing and no closing costs or broker fees
- Potential profits from increased equity or potential rental income
- Opportunity to turn a small investment into a much large payoff
As you can infer, a lot of good can be said about subject to deals; however, there are still inherent risks.
What are the Risks or Disadvantages in Subject To Real Estate?
The majority of risks in a subject to deal lie with the seller's liability for the mortgage or trust deed.
- If the mortgage has a due on sale clause, the seller's mortgage company, upon discovering the deed has been transferred to a new owner, can demand the entire loan be paid immediately, or they'll foreclose on the property.
- To be clear, a lender may look the other way, so as not to lose interest payments, so long as the mortgage payments are made on time and the loan is not in default.
- Should the seller file a chapter 7 bankruptcy, the property can be seized as collateral on the mortgage loan, and you'll lose all your equity.
- If the seller defaults or runs off with the money, the bank can foreclose on the house.
- A change in policyholders for property insurance can trigger a loan acceleration; it is better, then, to add the buyer to the original policy.
In real estate investing, there are always risks, and it's up to the investor or wholesaler to determine if creative financing is really worth it. Here are a few considerations before moving on a subject to real estate deal:
- Review existing loan terms carefully: note fixed-rate or adjustable-rate, penalties, "due on" clauses, and modifications
- Research local laws: subject to deals are subject to state and local laws in how they're conducted
- Run the numbers: not every subject to is a good deal; look at market rents and calculate the ARV for a rehab
- Hire a real estate attorney: without a broker or title agent, you and the buyer both need legal assistance to draw up the purchase contract
Depending on the seller and buyer, and the particulars of the deal, the subject to process can be completed in relatively short time.
How to Find Subject To Properties
Most subject to deals are distressed properties. The most common situation is a seller in foreclosure, who has very little equity, and they're looking for a way out. If the real estate market is in bad shape, and loan officers demand cash in a traditional sale, the seller is more inclined to do a subject to deal.
Another scenario is a seller who cannot afford repairs and is struggling to make their mortgage payments. A subject to sale lets them move on without taking a hit to their credit score.
Investors can find motivated sellers by searching online, via the MLS or the Mashvisor Property Marketplace, with its large database of distressed properties. Others buy lists from providers who sell to everyone, so the lists no longer have value. Some investors drive-for-dollars or market their service via direct mail or digital channels, but a campaign demands time and consistency.
Your best option to find subject to properties is to gain access to market exclusive data (if your market is still available) through GoForClose. We manage the three powerhouses for real estate investing success: skip tracing, list stacking, and lead scoring, building you an exclusive motivated sellers list based on your needs and requirements.
But before you start looking for leads, look first for the most desirable areas for flipping and wholesaling. You can do this by using our free Hottest Zip Code Finder, which helps you narrow down your search to the most profitable real estate markets across the United States, pinpointing, right down to the zip codes, where sellers are motivated to sell and cash buyers are buying.
GoForClose’s Marketing Platform for Real Estate Investors
In addition to lead generation and list building, GoForClose offers a specialized team and marketing platform to market to potential leads in your market. Our outbound tactics include cold calling, text messaging (SMS), ringless voicemail (RVM), and email. Plus, you'll have a dedicated Inside Sales Associate (ISA) who live answers and nurtures leads, prequalifies and provides a warm transfer to you when the lead is ready to sell. We do the marketing, so you can focus on closing real estate deals.
If you have questions or are curious to know more, request a free consultation below.
