“Subject To” Real Estate Deals: Everything Your Need to Know

In the world of real estate investing, creative financing strategies can provide investors with unique opportunities to get properties at a discount, often without the need for traditional loans. One of the most powerful methods for achieving this is through subject-to-deals. Whether you’re an investor looking for a fast, cost-effective way to get property or a distressed homeowner seeking relief from mortgage debt, subject to real estate deals can be a win-win solution.

But what exactly is a subject to deal, how does it compare to mortgage assumption, and what are the potential risks and benefits for both buyers and sellers? In this article, we will explore these topics in detail to provide a comprehensive guide on the subject, specially tailored for investors and distressed sellers.

What is a “Subject To” Real Estate Deal?

A “subject to” deal refers to the process where a buyer purchases a property subject to the existing mortgage on the property. This means the buyer agrees to make the mortgage payments, but the mortgage remains in the seller’s name. The key difference from a typical home sale is that in a subject to deal, only the title to the property changes hands, while the original loan stays under the seller’s name.

Simplified Example of a Subject To Deal:

• A homeowner with a $300,000 mortgage has $200,000 remaining on the loan. They agree to sell the property for $100,000, subject to. The buyer then pays the seller $100,000 and assumes responsibility for paying off the remaining $200,000 mortgage balance.

Why Sellers Choose Subject To:

Sellers may opt for subject to deals when facing foreclosure, bankruptcy, or when they owe more on the mortgage than the property is worth (i.e., underwater). In such cases, a subject to deal provides a fast exit from the property without the need for complicated refinancing or a short sale.

Subject To vs. Mortgage Assumption

Though subject to deals and mortgage assumptions are often confused, they are fundamentally different.

• Subject To: In this scenario, the buyer takes over the mortgage payments, but the seller remains responsible for the mortgage. The lender is usually not notified, and the original loan terms stay in place.
• Mortgage Assumption: Here, the buyer assumes the mortgage with the lender’s approval. The buyer must meet the lender’s qualifications, and the seller is released from further liability once the assumption is completed.

Why Sellers Opt for Subject To Instead of Assumption:

• Sellers who are underwater on their mortgage, where they owe more than the property’s value, may find that a mortgage assumption requires them to pay off the difference in cash. In contrast, a subject to deal bypasses this issue and provides a quicker exit strategy.

Three Types of Subject Deals

There are three main types of subject-to-real estate deals, each with unique structures to accommodate both buyers and sellers.

Cash-to-Loan Subject To

• In this arrangement, the buyer pays a part of the buy price in cash and takes over the remaining mortgage balance.
• Example: If a home is sold for $300,000 and the seller owes $200,000, the buyer pays $100,000 in cash and continues the payments on the $200,000 loan.

Seller Carryback Subject To

• Here, the seller finances part of the sale price, known as a seller carryback loan. The buyer assumes the existing mortgage and takes on a second loan from the seller.
• Example: A buyer with $30,000 in cash agrees to take over the seller’s $200,000 mortgage but finances the remaining $70,000 directly through the seller. The buyer then pays off two loans.

Wrap-Around Subject To

• This is a more complex arrangement where the seller combines the existing mortgage with a loan to cover the full buy price. The buyer makes one payment to the seller, who in turn pays the original mortgage and pockets the rest.
• Example: A buyer agrees to pay $270,000 (after providing $30,000 in cash). If the original mortgage has an interest rate of 3%, and the seller charges 4%, the seller profits from the 1% difference on the existing loan while earning 4% on the $70,000.

Benefits of Subject To Deals

Benefits for Buyers

• Easier Financing: Buyers avoid the need for traditional financing, which means no credit checks, lengthy approval processes, or high down payments.
• Lower Initial Investment: Buyers save on traditional closing costs such as loan origination fees, appraisals, and other fees associated with new mortgages.
• Favorable Interest Rates: In a rising interest rate environment, buyers can take advantage of the seller’s potentially lower interest rate on the original mortgage.
• Faster Closings: Since no lenders are involved, subject to deals tend to close much faster than traditional real estate transactions.

Benefits for Sellers

• Quick Sale: Sellers in financial distress or facing foreclosure can avoid damaging their credit through a subject to deal, as it provides immediate relief from mortgage payments.
• No Repairs Necessary: Buyers may be willing to sell the property as-is, saving the seller from costly repairs.
• Potential for Profit: In a wrap-around deal, sellers can set a higher interest rate and earn extra profit from the financing.

Risks and Considerations for Subject Deals

While there are many advantages to subject to deals, both buyers & sellers need to be aware of the risks.

Risks for Buyers

1. Due-on-Sale Clause

Most mortgages include a due-on-sale clause, which allows the lender to demand full repayment of the loan if the property is sold or transferred. While this clause is rarely enforced, it still presents a risk that buyers should be aware of. If enforced, the buyer may be forced to either pay off the entire mortgage or risk losing the property.

Mitigating the Risk: To avoid triggering the due-on-sale clause, buyers can use creative strategies like executory contracts or lease options.

• Executory Contracts: In this arrangement, the buyer takes possession of the property but doesn’t receive the deed until the mortgage is fully paid off, keeping the lender in the dark about the transaction.
• Lease Options: The buyer leases the property with the option to buy it later, giving them control over the property without immediately transferring the deed. This minimizes the risk of the lender becoming aware of the sale.

These strategies can help ensure the deal proceeds smoothly without alerting the lender.

2. Seller Bankruptcy

If the seller files for bankruptcy after the subject to transaction, the property may be seized by creditors, since the mortgage remains in the seller’s name. This could leave the buyer vulnerable.

Mitigating the Risk: A performance mortgage or deed of trust can offer protection. These legal documents create a lien on the property in favor of the buyer. If the seller declares bankruptcy, the buyer’s interest is secured, making it difficult for creditors to seize the property without recognizing the buyer’s rights.

3. Insurance Issues

Changing the name on the property insurance from the seller to the buyer could trigger loan acceleration and notify the lender of the sale, enforcing the due-on-sale clause.

Mitigating the Risk: It’s best to keep the seller’s name on the insurance policy and add the buyer as more insured. This approach ensures the property is covered without formally notifying the lender, reducing the risk of loan acceleration.

4. Legal Complexity

Subject to deals are legally complex and must thorough documentation to ensure all aspects of the transaction are covered, including payments, taxes, and ongoing obligations.

Mitigating the Risk: It is crucial to work with a real estate attorney familiar with creative financing. They can help draft and review the contracts, ensuring everything is sound and that both parties are protected.

Risks for Sellers

1. Mortgage Liability

Even though the seller no longer owns the property, they remain liable for the mortgage. If the buyer defaults on payments, the seller’s credit could be negatively affected, and they may face foreclosure.

Solution: To protect themselves, sellers can include a reversion clause in the contract. This clause allows the seller to take back ownership of the property quickly without going through foreclosure if the buyer defaults. Additionally, securing a significant down payment from the buyer offers extra security, as it discourages the buyer from walking away from the deal.

For properties used as long-term rentals, the buyer has a strong incentive to maintain payments, as the rent can cover the mortgage. This makes it unlikely the buyer would miss payments and lose a profitable asset.

2. Trust Issues

Sellers must trust that the buyer will make regular payments. If the buyer defaults, the seller’s financial health could be at risk.

Solution: Sellers should work with experienced investors and ensure the deal is documented clearly. Using escrow services can provide a layer of protection, ensuring that payments are made on time. Proper documentation outlining responsibilities and recourse in case of default can help build trust.

3. Complex Legalities

Like buyers, sellers face complex legal obligations when entering into a subject to deal. These include ongoing mortgage liability, tax obligations, and ensuring the deal is structured to protect their interests.

Solution: Sellers should consult a real estate attorney to help them understand the legal ramifications of the deal and draft proper contracts that protect them from potential pitfalls.

Steps to Complete a Subject To Deal

Successfully executing a subject-to-deal requires careful planning and attention to legal details. Here are the key steps involved:

1. Educate Yourself: Learn local real estate laws and consult with professionals.
2. Find a Suitable Property: Target-motivated sellers, especially those in financial distress.
3. Conduct Due Diligence: Investigate the property’s condition, outstanding liens, and the remaining mortgage balance.
4. Run the Numbers: Ensure the deal meets your investment goals and offers a strong return on investment (ROI).
5. Negotiate Terms: Agree on the buy price, existing loan details, insurance responsibilities, and other terms with the seller.
6. Draft and Sign Contracts: Work with an attorney to draft a contract that protects both parties.
7. Close the Deal: Complete the paperwork, transfer the title, and start making mortgage payments.

How to Find Subject To Real Estate Opportunities

Investors looking for subject-to-deals often seek out motivated sellers, particularly those in financial distress. Here’s how you can find these opportunities:

• Search for Foreclosures: Homeowners nearing them are often eager to make a quick deal to avoid losing their homes.
• Target Expired Listings: Listings that fail to sell on the open market may represent potential subject to opportunities.
  
• Use Real Estate Tools: Platforms like PropStream provide access to millions of property records, helping investors identify potential deals based on filters such as mortgage status and foreclosure.

Final Thoughts on Subject To Real Estate Transactions

Subject to real estate offers significant advantages for both investors and distressed sellers. For investors, these deals provide a fast and affordable way to get properties without navigating the complexities of traditional financing. For sellers, they offer a way to escape financial distress without resorting to foreclosure or short sales.

While these deals can be beneficial, they do come with risks. It’s crucial for both parties to test the terms, reduce potential challenges, and work with professionals to ensure a successful transaction.

If you’re a homeowner looking to sell your property quickly, contact us today to explore how a subject-to-deal could be the solution you need. We work with experienced attorneys who specialize in these types of transactions, ensuring the process is smooth and sound.

For investors, we have access to excellent deals that fit your buy box. Reach out to us for potential opportunities that align with your investment strategy. With our legal team experienced in subject to deals, you can invest with confidence knowing your interests are fully protected.

Frequently Asked Questions: