Subject To Real Estate Guide: Everything You Need to Know

In the dynamic landscape of the real estate industry, countless techniques have emerged that enable buyers and sellers to maximize the positive outcomes of their transactions. One of these strategies, known in the business as “Subject To” real estate investing, offers a different approach for people on both sides of a deal. 

As the real estate industry continues to evolve with the times, it’s crucial for buyers and sellers to have a strong understanding of this concept from back to front. With a strong base of knowledge, it allows investors to navigate the market in a more effective, versatile manner, making informed decisions along the way. We put together this blog to explain Subject To in real estate so you can feel more confident approaching deals of all kinds.

What Is Subject To in Real Estate?

So, what does Subject To mean in real estate? In and of itself, a Subject To real estate contract pertains to a property’s purchase subject to the existing financing. Instead of obtaining and forming a new financing plan, the buyer of a home takes over the seller’s existing mortgage, with the loan technically remaining in the seller’s name. 

While it might sound a little “under the table,” this type of agreement is totally legal and above board. It’s also worth noting that the property’s deed transfers to the buyer, but the loan itself does not. The buyer agrees to take on responsibility for the payments on the existing mortgage and can benefit from any appreciation in the property’s value over time.

Numerous benefits are associated with the Subject To real estate investment strategy. For one, it provides buyers with a unique opportunity to acquire properties in a completely legitimate way without having to meet the qualifications of a traditional mortgage. This can be particularly valuable for investors at the beginning of their careers or other individuals who might face challenges securing conventional financing for any number of reasons. For sellers, it offers a potentially faster exit strategy, which can be especially helpful if they’re in a tough financial period or struggling to sell their property.

However, as is the case with any real estate transaction, there are inherent risks on both ends when it comes to real estate Subject To transactions. There’s the potential for the original lender to enforce the “due-on-sale” clause, meaning the buyer would owe the full amount of the loan upon the property’s sale. Plus, if the buyer fails to make timely payments, it could cause serious damage to the seller’s credit, given that the loan remains in their name. Hence, a strong understanding of the intricacies within Subject To is crucial for both parties involved.

For a more comprehensive understanding, investors often turn to resources such as workshops dedicated to various aspects of the industry.

3 Types of Subject To Real Estate Deals

Effectively navigating the real estate market requires a solid understanding of the diverse transaction options available to buyers and sellers. While a Subject To real estate contract can be applied to a variety of situations, it can mostly be broken down into three main types of deals:

Cash-to-Loan Subject To: 

This is the most straightforward form of a Subject To real estate deal. In a Cash-to-Loan Subject To deal, the buyer provides a cash down payment and takes over the existing mortgage payments from then on. The cash down payment generally goes directly to the seller, providing them with some immediate funds, while the buyer agrees to assume responsibility for the continuing loan payments. 

It’s essentially buying the right to pay off the rest of the mortgage. 

Seller Carryback Subject To: 

In this form of transaction, the seller agrees to carry the official burden of the mortgage for the remainder of the property’s purchase price after receiving the down payment and after the first loan is taken into consideration. This essentially means the seller will become the lender for the balance, providing a viable purchase avenue for buyers who might not qualify for traditional financing but still want to secure the property. 

Deals such as these can be especially appealing to sellers who need to secure a sale but are collaborating with a buyer who faces certain financial constraints.

Wrap-Around Subject To: 

A wrap-around deal involves the creation of a new, more substantial mortgage that essentially “wraps around” the existing one. The buyer provides their payments based on this larger, wrap-around loan, while the seller continues to make the payments on the original mortgage by using these new funds. The difference between the original loan payment and the wrap-around payment becomes a consistent form of cash flow for the seller. 

This avenue can be highly advantageous for both parties, providing the seller with a potential income stream for years to come while giving the buyer access to more legitimate financing they might not otherwise be able to secure.

Benefits of Subject To for Buyers and Sellers

Subject To deals, while a little complicated, can offer a plethora of benefits for both sides of the transaction:

For Buyers/Investors:

Accessibility to Property: Subject To real estate investing is a clever form of creative financing, especially for those who might not qualify for traditional mortgages. For many, it’s nearly impossible to secure traditional financing because of existing credit issues or ongoing financial challenges. Subject To deals provide an alternative avenue to property ownership.

Reduced Closing Costs: Since a brand-new mortgage isn’t being originated for the household, the massive costs often linked with traditional home purchases might be reduced or eliminated.

Potential for Immediate Equity: If the property is acquired under market value, which is often the case in these sorts of deals, buyers can benefit from immediate equity in the home.

For Sellers:

Faster Sales Process: In the increasingly common scenarios where the property has been on the market for extended, above-average periods, offering it as a Subject To sale might attract more buyers, thus making the sales process faster and more efficient.

Relief from Monthly Payments: Sellers who might be facing financial constraints can find relief from their monthly mortgage payments when a buyer takes on that responsibility. Note: for this to really help, the seller would need somewhere to go. 

Potential for Higher Sales Price: The terms of a Subject To transaction being flexible and attractive to buyers means that sellers might command a higher sales price than they would in a traditional sale. This is comparable to how sales can be made for lower prices; it just depends on the circumstances. 

Preserving Credit: For sellers at risk of their home being foreclosed on, selling Subject To allows them to avoid the significant hit to their credit that a foreclosure would cause. This leaves their options more open going forward.

Clearly, there can be plenty of advantages to these sorts of deals on both sides of the table, but it’s not enough to know that alone—you should also be sure of how to do a Subject To real estate deal.

How Does Subject To Work in Real Estate?

Subject To real estate, while increasingly popular, remains a mystery to many investors and sellers alike. Understanding how it functions, particularly the processes and implications of every stage, is essential for anyone considering this path into property transactions. We’ve put together a Subject To real estate step-by-step guide so you can feel confident when planning your next deal:

The Process of Buying Property “Subject To”:

Locating a Suitable Property: As with any real estate transaction, the first step is finding the right property. In the Subject To world, these are often properties where the seller may be in financial distress or needs to move the property quickly.

Negotiation: Once a suitable property is identified and intentions are expressed, it’s time for the terms to be negotiated. This includes carefully determining a fair price for the down payment, if any is to be made, along with establishing how the existing mortgage payments will be handled moving forward.

Due Diligence: Doing your due diligence is essential before completing any real estate deal. In the case of Subject To deals, this involves researching the property’s existing loan details, ensuring no clauses will jeopardize the deal, and ascertaining that the property has no liens or other entanglements.

Contract Signing: After completing your research, a purchase agreement needs to be drafted. This should explicitly state that the property is being bought subject to the existing financing. This agreement will highlight the terms discussed and protect both parties from overtly negative outcomes.

Change of Insurance: The insurance policy associated with the property will need to be adjusted since the property deed will be changing hands, even if the mortgage won’t be. The buyer should get a new insurance policy with themselves as the primarily insured party and the seller and lender as additional insured parties.

Closing the Deal: At the closing table of the deal, the property deed transfers to the buyer for good, with the original loan staying in the seller’s name. The buyer then starts making the agreed-upon payments and using the property however they choose.

Risks and Considerations of Subject To Real Estate

While Subject To real estate offers unique advantages to buyers and sellers, it’s not a process devoid of unique risks. As with any real estate investment strategy, the potential for reward is accompanied by the inherent challenges that come with it. Understanding the risks of Subject To transactions and how to effectively navigate them is the key to a successful transaction.

Potential Risks and Drawbacks:

Due-On-Sale Clause Enforcement: As mentioned earlier, this clause allows lenders, whoever they may be, to demand repayment of the loan in its entirety upon a property’s sale. Though this clause is rarely invoked, its enforcement could lead to the buyer needing to refinance, face foreclosure, or simply walk away from the deal.

Seller’s Credit Risks: Since the original loan remains in the seller’s name, any defaults or failure to pay by the buyer impacts the seller’s credit. Any seller must be confident that they’re selling their property to a safe pair of hands. 

No Equity Building for Buyers: Buyers don’t build any meaningful equity through mortgage reduction, as they’re merely paying down the seller’s loan. Equity only comes from the property deed itself. 

Incomplete Documentation: As with any real estate transaction, Subject To deals can be risky if not adequately documented. One or two misplaced signatures, and there can be potential for major legal disputes down the road.

Interest Rate Risks: If the existing mortgage has a variable interest rate, fluctuating over time for any number of reasons, the buyer could face higher payments in the future than they initially expected.

Insurance Challenges: Ensuring the transition, transference, and maintenance of insurance is properly handled can be a hurdle to overcome. Failure to do so could leave both parties vulnerable to financial danger.

Working with Experienced Professionals:

The intricacies of Subject To real estate underscore the need to work with knowledgeable professionals at every stage of the process. An experienced real estate agent or attorney can help in a variety of ways, such as:

• Accurately navigating the complexities of contracts and negotiations 
• Ensuring all correct paperwork is properly filled out and in place
• Offering guidance on due diligence, making certain there are no hidden issues with the property or existing financing

We would always recommend seeking a professional to help in the process of buying or selling a property, but it’s especially important in Subject To deals that are less common. 

How to Mitigate These Risks:

Comprehensive Due Diligence: It’s vital that you research every property thoroughly, from ensuring there are no liens on the contract to understanding the details of the existing loan.

Clear Agreements: Everything should be documented in clear, concise, and legally binding contracts that detail all responsibilities and actions in potential default scenarios.

Insurance Transition: Ensure insurance policies are properly transitioned and maintained across the board, with the buyer, seller, and lender adequately covered in case of extenuating circumstances.

Stay Informed: Regularly check the status of the existing mortgage before agreeing to take it on, ensuring all payments are up to date and no unexpected changes have occurred.

Open Communication: Maintaining an open and honest line of communication between buyer and seller helps to pre-empt potential issues. A sense of true transparency helps address all necessary concerns before they become significant problems; dishonesty leaves too much in the hands of fate.

Escrow Accounts: Consider using an escrow service to manage your mortgage payments. This ensures payments are made on time every time, reducing risks for both parties.

Final Thoughts

Taking a “Subject To” approach in real estate can be advantageous to parties on both sides of a deal, but it’s vital that everyone approaches these sorts of transactions in a well-informed and prepared manner. By understanding the risks and how to mitigate them, buyers and sellers can maximize the benefits of these transactions. To recap on the Subject To method, we’ve abridged the contents of this blog.

• “Subject To” refers to purchasing property subject to the existing financing—the buyer takes over the seller’s existing mortgage payments without a formal assumption or obtaining a new loan. 
• The primary types of Subject To deals include Cash-to-Loan, Seller Carryback, and Wrap-Around arrangements, each offering unique advantages based on the buyer’s and seller’s needs. 
• Both buyers and sellers stand to gain from Subject To real estate deals. Buyers can access properties without traditional financing, while sellers can achieve quicker sales and potential financial relief.

However, the method comes with its challenges, including the uncommon but not unheard of due-on-sale clause, the potential for credit impacts on sellers, and the necessity for meticulous documentation at every stage. With these challenges in mind, it’s paramount to partner with experienced real estate professionals throughout the process to effectively navigate these murky waters. Mitigation strategies, such as taking a meticulous approach to due diligence, making clear contractual agreements in writing, and maintaining open communication lines, can significantly reduce the inherent risks. There’s no reason why the transaction can’t be smooth for all parties involved. Whether you’re a seasoned investor, in the early stages of your career, or someone looking to find a new family home, considering Subject To real estate deals can open doors to properties previously out of reach.  Hopefully, with this guide, you should feel more confident that opting for Subject To real estate is a viable option for your career. By employing the principles outlined in this blog, there’s no reason why you can’t leverage this technique to your advantage.  For more guidance on the real estate industry, check out our blog today.