Subject-to as a creative strategy for real estate investors can be very lucrative, can help home sellers in a time of need, and is one of the least understood methods used by savvy investors. The term subject-to refers to taking over ownership to a property subject to the existing mortgage. This article is meant to be a general overview explaining how subject-to transactions work and how they can benefit both investors and sellers.
Buying a house Subject to or sub2 is actually a fairly simple strategy. The basic idea is, a homeowner sells their house by deeding a property to a buyer. However, the homeowner does not pay off the underlying mortgage. The buyer now begins making the mortgage payments to the bank. The mortgage remains in the original seller’s name until the mortgage is either refinanced or paid off in full. Simple right?
Yes, subject-to real estate transactions can be simple however, complicating factors are present. For this reason, real estate investors who wish to use this creative strategy must be knowledgeable in what they are doing. As an investor, taking a mortgage over subject to comes with some serious responsibility. You are asking a person to keep a mortgage in their name while relying on you to make the payments. You must be serious about making these payments. No matter what your exit strategy is, those payments must be made. Real estate news has featured investors who get themselves into trouble by taking advantage of sellers in these situations.
Why Would Homeowners Sell Subject To?
Well, there could be many different answers to that question. Commonly, subject to transactions happen when some form of the following are present.
- Little to no equity
- Behind on payments
- Upside down in equity
- Stagnant listing but must sell
- Pending foreclosure
- Job loss
- Moving out of state quickly
Often, subject to transactions involve low or no equity along with some other motivating factor. In this case, homeowners will often consult with several realtors who will explain their commissions and fees and then recommend a sales price that isn’t feasible based on the current mortgage balance. Add in a pending foreclosure, or simply behind on mortgage payments and you have a scenario when a homeowner might be willing to deed an investor a house subject to the existing mortgage.
A subject to purchase offer from an investor’s standpoint would be framed as a way for the homeowner to avoid foreclosure, bring back payments current, and even improve their credit score by having payments made in a timely fashion until the loan is taken out of their name. These can be attractive selling points in the mind of a homeowner facing this type of situation. These along with any combination of other motivating factors could be reasons why a homeowner would ultimately put their mortgage in the hands of a stranger. At the end of the day, most homeowners who are willing to sell subject to were ready to walk away from the house beforehand and this option gives them hope in what the thought was a hopeless situation.
Subject To For Real Estate Investors: How The Transaction Actually Works
While most transactions are handled through title companies, escrow offices, or attorney offices, subject to transactions are slightly different. A title search is needed so the investor is aware of any potential undisclosed liens that could affect clear title in the future. However, on a subject to transaction with low or no back payments being made, a title insurance policy can be optional and can be left up to each investor to decide if they wish to obtain a title policy. A subject to closing is typically handled differently as well. They can be as simple as what is sometimes referred to as a kitchen table closing with a notary but are most often handled at an attorney’s office. A prudent investor will have an attorney complete a thorough title search, as well as prepare disclosure and liability documents for both the seller and the buyer to sign. The seller will also likely sign a limited power of attorney authorizing the buyer to contact the bank about payments and loan information. Additionally, the buyer will want to make sure and confirm payment amounts, escrow amounts, and past due balance amounts with the bank. Additionally, the buyer doesn’t have to change the insurance but if they don’t, they would be wise to be added as an additional beneficiary to the existing policy. Care should be taken not to alert the bank about the sale of the house. This leads us to our next topic.
Due On Sale Clause And Subject To Investing
The due on sale clause is a clause that mortgagors or banks insert into deeds of trusts or loan documents. What this clause states is that the entire balance of the loan is due immediately upon the sale or deed transfer of the underlying asset. In this case, the house. This is done for obvious reasons. If the owner of the home decides to sell, the bank requires they receive the balance of the loan that they are owed in order to release their lien on the property. However, in a subject to transaction, the mortgage is staying in place. For this reason, an investor would not want to alert the bank that the deed transfer is taking place. An investor does not want the bank to invoke the due on sale clause. One thing to keep in mind. Banks and mortgage servicing companies are not looking at who makes payments on their loan. They do not care who writes the check or from what bank accounts the loan payments are drafted from. What they do care about, is that the payments are made and made on time. It is not in the bank’s best interest to investigate who is paying the mortgages. The due on sale is rarely invoked on loans that are currently being paid. Ask any investor who is actively using this strategy and they will tell you this is of little concern. However, the buyer and especially the seller should be made aware of the due on sale clause and all its ramifications. A document should be created by an attorney and signed by all parties acknowledging the potential for the due on sale clause to be exercised by the bank.
Subject To VS Loan Assumption
Buying a house subject to for real estate investors is very different than assuming a mortgage. Purchasing a house subject to is in fact much different. An assumption means that the buyer is going to the bank or mortgage holder and asking for permission to take over the mortgage. What happens next is the bank will put the buyer through the standard loan qualification process. This includes credit checks, income verification, debt to income ratio checks, and a whole host of other qualification requirements. Additionally, the mortgage will now be under the buyer’s name and show up on all credit reports as a debt obligation. For an investor, this is not usually ideal for a variety of reasons.
Subject To Exit Strategies
Purchasing homes using subject to creates many exit possibilities for real estate investors. Each subject to transaction will have its own unique scenario that will shape the exit strategy. Things like needed repairs, monthly payment amount, ARV, rent rates, location, how much it takes to bring the mortgage current are all factors that will play a role in determining the exit strategy. Exit strategies with subject to purchase commonly include
- Flip and sell
- Owner finance
- Wrap
- Long term rental
- Rent to own
- Lease option
- And many more
Some investors may be limited in their exit strategy options based on their state and local regulations. As with any type of investment strategy, investors should only use strategies that are 100% legal in their respective states.
Buying houses subject to for real estate investors can be fun, profitable, and ultimately provide win-win solutions for home sellers as well as investors. Subject to investing in real estate is a creative way to solve unique problems where more traditional home-buying avenues simply won’t work. In these specific scenarios, subject to house buying can be a valuable tool in the real estate investor’s tool belt.
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