When talking about creative, no money, real estate investing strategies, the first thing that comes in mind is “Subject To” deals. This way of investing in real estate is something all investors should know about and have in their arsenal. It is a great way of purchasing a house with very little money.
Especially, when poor credit stops you from acquiring a traditional mortgage or when you stumble upon distressed homeowners who want to be relived of the hassle their properties have put them in.
What Does Buying A House
Subject To Mean?
Buying a house Subject To means purchasing it subject to the existing mortgage. Basically, the seller stops paying off the existing mortgage and instead the buyer is taking over the seller’s mortgage payments, in exchange for the deed of the property.
The seller deeds the property to the buyer, and the buyer takes over making the payments to the lending institution. The buyer does not formally assume the loan, but is given the deed in return for making payments.
The terms of Subject To deals are unique to each situation and are decided between the seller and buyer. You do not need an attorney present when deciding on the terms of the agreement, but I strongly recommend having a real estate attorney look through all contracts when purchasing a property, using any exit strategy.
When acquiring a property Subject To, the seller and buyer do not report this transaction to the existing lender. As long as the lender/bank gets their payments on time, they do not really care who is paying the mortgage.
Is It Difficult To Find Subject To Deals?
Finding a seller who would agree to selling his/her house by Subject To is not as hard as it seems. There are many distressed homeowners out there who are eager to be relived of their property, which may have become a hassle to them.
Life happens sometimes and it can be cruel. The homeowner may not be able to keep up with mortgage payments because of divorce, loss of work, poor health and illness, and welcomes the relief.
If the homeowner cannot make the mortgage payments on time, the bank can foreclose and take the house back, which makes pre-foreclosure leads one of the best leads to process for Subject To deals.
You can read more about pre-foreclosure leads and why they are good for finding Subject To deals in prior article:
When reaching out to people in pre-foreclosure, with the Subject To exit strategy, you would not only become a homeowner for close to nothing, but you would also save the seller from 7 to 10 years of destroyed credit and possibly a life in ruins.
They do not call foreclosure a death sentence for nothing!
With a foreclosure on the credit report, the homeowner may not be able to rent a new home (the homeowner is always forced to move after a foreclosure auction), lease/buy a new car, acquire any type of mortgage, and may even have difficulties in getting employment.
Now, you probably understand why a homeowner would agree to a Subject To deal.
Any Risks With Subject To Deals?
Like any type of investing, there are risks with purchasing a property Subject To, even that the risks are few.
First of all, the buyer would not want to be unscrupulous in his/her dealings with the seller he/she made the agreement with. The buyer is responsible to pay the monthly mortgage payments in a timely matter.
The seller’s name is still on the mortgage, so the seller’s credit will be destroyed, if the buyer is not honoring the agreement. If the seller feels worried about the mortgage payments and whether they would be paid in time, both seller and buyer can have access online to track this.
Another option, is to formulate a clause that the deed of the property goes back to the seller if the buyer does not honor making the payments. The contract made between the parties is always enforceable in court.
If you are wholesaling the Subject To deal to another investor for an assignment fee, you must make sure to vet the investor, so they are good for making future mortgage payments or can pay off the total balance all at once.
Read more about wholesaling real estate in prior article:
The Due On Sale Clause
The lender/bank has the right due to the acceleration clause in the mortgage or trust deed, which can make it a bit risky for the buyer. With other words, the lender/bank can call the loan due and the buyer will be forced to pay off the mortgage balance within 30 days. If the buyer would not be able to pay off the mortgage balance, the lender/bank could initiate foreclosure.
Most likely, the bank will not go through with the foreclose on a homeowner. Some people have managed to live for years in their homes, without making mortgage payments, because the bank rather not foreclose.
It is not fun, nor profitable for a bank to foreclose. The bank is not intended to be in the real estate business and will need to hire a realtor to list and sell the house. It may take months to resell the house and the holding costs add up fast. The average costs per property for a bank is $40K.
In most situations, the lender/bank is simply happy that somebody (anybody) is making the payments.
What Does Assuming The Mortgage Mean?
If the buyer does a loan assumption, he/she formally assumes the loan with the lender/bank’s permission. This means the seller’s name is removed from the loan, and the buyer qualifies for the loan, just like any other purchase money loan.
Generally, banks charge the buyer an assumption fee to process a loan assumption, but the fee is much less than the fees to obtain a conventional loan. FHA loans allow for a loan assumption, but most conventional loans do not.
Pros With Buying A House Subject To
Pro #1. Cash Flow and Equity – Provided the right steps have been taken, the property can very easily award buyers with cash flow and the chance to build equity. In a Subject To, the buyer takes control of the home, while the seller “owns” the loan. That means the benefits of real estate fall directly to the buyer, once they take control.
Pro #2. No Large Down Payments – Subject To financing strategies allow buyers to acquire properties, without having to pay large down payments, which banks enforce. Often, the buyer will take over a mortgage with lower interest than a new mortgage would offer, which can make a huge difference in the amount of monthly payments
Pro #3. No Or Bad Credit Is Okay – A Subject To transaction does not show up on the buyer’s credit report, which makes it possible to acquire an additional mortgage simultaniously. The seller is also unlikely to demand good credit and is not basing the transaction solely on the buyer’s credit history.
Cons With Buying A House Subject To
Con #1. The Loan May Be Called Due – There is a slight risk that the lender/bank can call the loan due if they realize the home has been transferred. In that case, the lender may require the mortgage to be paid in full within 30 days. However, in most cases the bank does not care who makes the mortgage payments, as long as they receive them.
Con #2. Insurance Requirements – You will need to obtain a new insurance policy naming you or your company as the insured on the policy. It can be good to transfer this to a trust. More about land trust is explained further down in the purchase process.
Con #3. The Deal Is Final – For better or for worse, Subject To transactions are final. Provided everything goes well, it is an advantage, but there is always a chance the market will change. In the event things take a turn, there is no turning back.
Con #4. Credit Risk For The Seller – Like mentioned earlier, over the course of a Subject To deal, you have an ethical responsibility to the seller. If you do not make payments on time, you can hurt the seller’s credit, and risk foreclosure.
The Subject To Purchase Process
Disclaimer: This is only an overview of the process of purchasing a house Subject To. I am not an attorney or legal advisor. Do your own due diligence about the Subject To purchase process, before using this strategy.
Step #1. For starters, the seller and buyer have to fill out the Purchase And Sale Agreement. There should be a clause(s) for the buyer to do his/her due diligence, a so called option or inspection period. In the state of Texas, buyers automatically have a 30 day option period.
Step #2. Get the seller to sign an Authorization To Release Information To A Third Party Agreement. Use this authorization to talk to the seller’s lender and to see the mortgage payoff statement. With this, you will also find out if there are delinquent payments.
Step #3. Make a title search with a title company and make sure the house has clean title. Investigate for tax liens, or other liens, and market value.
Step #4. Do proper due diligence. It is important to determine if the house needs repairs and the costs of them, if so. The buyer can do this, if qualified, but it is advised to use experts. There is a better chance of accurate estimates when using experts. To underestimate repairs can be risky when wholesaling a Subject To deal, and may negatively impact your reputation as a wholesaler.
Step #5. It is recommended to use a land trust, when acquiring a Subject To deal. It offers some protection for the buyer. A land trust holds title to real property and is commonly used by homeowners for tax purposes and estate planning. The homeowner/seller would be the beneficiary and the buyer becomes the trustee, who carries out orders and controls the property. The trust owns the property and the beneficiaries own the trust.
Step #6. The trust is also good, when dealing with insurance, which the buyer HAS TO have. The homeowner/seller’s policy is only good for 30 days after the transfer, so for starters, the buyer can call or write the insurance company with the existing policy and ask to be added to the policy. Although, the best option is to create a new policy in the buyer’s name and have the property double insured for a period.
Step #7. Sign a Letter Of Agreement And Addendum with the seller. It reiterates the understanding reached between the seller and buyer and becomes a part of the file for the property.
Step #8. Get a Mortgage Change Letter. This, advises the lender the property has been put into a trust and that the checks will be coming from the trustee.
Step #9. Get a Limited Power Of Attorney. This document allows the buyer, or buyer’s company, to sign on behalf of the seller.
Step #10. Confirm there were no extenuating circumstances surrounding the agreement to sell the property with a Seller Disclosure Letter.
Step #11. Get copies (or in some cases) originals of the mortgage coupon book or online payments, the original Deed and mortgage, the survey and title insurance policy, appraisal, possible alarm codes, garage door openers and keys to the property.
I need to repeat that although many use this strategy without an attorney, I would recommend to have a real estate attorney look over all contracts. It is better to be safe, than sorry.
As you can see, there are many advantages for the buyer of a Subject To deal – beyond not needing hard money – as well as lifestyle and financial advantages for the seller. I strongly recommend adding this tool to your tool belt.
Please leave me your comments and thoughts on this real estate investing strategy in the comment section below. I may have forgotten to mention something important?
Best of luck to you all acquiring many great Subject To’s!
About The Author
Stina Pettersson is originally from Sweden, but have resided in the U.S. for the past 6 years. She started her American journey in Miami, Florida, and recently moved to Austin, Texas.
Stina was active as a professional dancer for 21 years, but after ACL surgery in both knees, she was forced to slow down her dancing. She is now back to her roots, with her beloved horses, and also enjoys every day out in nature with her two adorable dogs, Max and Abigail.
Stina has the gift of being able to receive communication from the spirit and extraterrestrial world, which she also loves sharing with her readers.
“My main goal is to always maintain a flexible lifestyle, where I set my own schedule. Even that I work harder than many, I love what I do every day and have the opportunity to help other people, which is a huge gift.”
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