Getting Started With Subject To Real Estate Investing

“Subject To” real estate deals can be like hitting the jackpot for real estate investors. This creative real estate investing method lets you buy or sell a property while keeping the existing mortgage. 

You take over the property, but the seller keeps their mortgage. You make the monthly payments to the lender for the seller. The lender doesn’t know the property changed hands.

These deals can generate huge profits and help grow your rental portfolio quickly. But how exactly do they work? And how do you find these opportunities?

In this article, we’ll go into the details on Subject To real estate transactions. You’ll learn the step-by-step process and how to find and spot prime opportunities.

What is a “Subject To” in Real Estate?

A subject to real estate transaction is when the buyer doesn’t get a traditional mortgage but instead makes payments on the seller’s existing loan. This version of seller financing involves the real estate investor negotiating a purchase price and committing to covering the mortgage payments on the seller’s behalf.

This deal structure benefits investors as it’s a way to generate cash flow with very little investment. It also benefits homeowners with financial difficulties who don’t want to impact their credit report.

How Subject to Real Estate Deals Works?

The steps for subject to real estate include finding opportunities, conducting due diligence, negotiating terms, putting contracts in place, transferring title, and managing mortgage payments.

Finding Opportunities

Look for properties where the seller is likely motivated to transfer ownership subject to the existing loan balance. Examples include homeowners who are behind in payments or are in pre-foreclosure, absentee owners, or non-owner occupied properties that landlords may be looking to off-load their property and get out of the rental business.

Market Research

Use property research tools to find potential leads for marketing strategies.

Regularly search real estate listing websites, such as Zillow, Realtor.com, or local Multiple Listing Services, using specific keywords like subject to  or “take over mortgage.”

Additionally, explore websites and platforms that connect buyers and sellers of creative financing deals, such as owner financing or lease options.

Marketing

Leverage CRM and communication tools to track leads through calls, email, and text messages so you can respond quickly when you hear back from a lead.

Consider traditional marketing methods like placing bandit signs and distributing flyers in neighborhoods.

Develop marketing campaigns to find potential sellers using direct mail, bandit signs, and online advertising platforms or social media.

Networking

Build connections by attending local real estate investor meetups, networking events, or joining online forums and groups. Also, meet with a real estate agent who can help find deals.

Conduct Due Diligence

Conduct due diligence on the opportunity, including verifying the existing mortgage and loan balance status, assessing the property’s condition, and identifying potential legal or financial risks

Negotiate Terms

Negotiate with the seller an agreement on the purchase price, terms, and conditions subject to the sale of the deal. Determine the monthly mortgage payment amount and any other agreements related to the current loan.

Typically, the buyer pays the closing costs, repair costs, and any back payments to bring the remaining mortgage back to good standing.

Draft legal documentation

Work with a real estate attorney or legal professional to draft legal documents that you can leverage for subject to real estate transactions.

Transfer Property Ownership

Once both parties have signed the legal contracts, transfer the property’s ownership from the seller to the buyer. It typically involves recording the title and appropriate documents with the local government or county office.

Manage Mortgage Payments

As the buyer, assume responsibility for making the monthly mortgage payments directly to the lender. Set up a payment system to assure timely and consistent payments to protect both the buyer’s and the seller’s interests and avoid foreclosure.

Plan an Exit Strategy

Develop an exit strategy for the subject to deal. Options could include:

• Refinancing the property.
• Selling it to a new buyer.
• Paying the mortgage balance in full.

4 Types of Subject to Real Estate Deals

There are several types of subject to transactions in real estate investing, but the best structures allow the buyer to control payments to the mortgage company.

Traditional Subject To:

The most common type of subject to deal is where the buyer takes over the existing mortgage from the seller and assumes responsibility for making the payments. The buyer gains ownership of the property while the mortgage remains in the seller’s name.

Lease Option Subject To:

With a lease option, the investor leases the property from the seller with an option to purchase in the future. The buyer may take over the existing mortgage payments as part of the lease agreement.

Wraparound Mortgage Subject To:

In a wraparound mortgage, the buyer takes over the original mortgage loan but creates a new note to cover the delta between the current mortgage balance and the purchase price. The buyer makes one consolidated payment to the seller, who uses it to pay the existing and new mortgages.

Seller Carryback Subject To:

In this deal structure, the seller helps finance the purchase. The buyer agrees to take over the seller’s existing mortgage and make payments directly to the lender.  

In addition to assuming the seller’s mortgage, the buyer may borrow extra funds from the seller if the existing mortgage doesn’t cover the purchase price or if additional financing is needed.  So, in a “Seller Carryback Subject To” deal, the buyer makes two payments: one to the original lender and one to the seller.

Benefits of “Subject To” Real Estate Strategy for Buyers and Sellers

Subject to deals can generate cash flow on very little investment and help you build a rental portfolio quickly. Key benefits include:

Acquiring investment property with limited funds:

Investors can control properties with minimal upfront costs and don’t need to qualify for a new loan or provide a large down payment.

Leveraging existing financing:

Real estate investors can take advantage of favorable loan terms, such as low-interest rates or long amortization periods, that the seller has already negotiated.

Immediate cash flow:

Buyers can start earning cash flow from day one if the property generates rental income. Subject to deals have a significant Return on Investment (ROI) and Internal Rate of Return (IRR).

Risks and considerations

While subject to deals offer numerous advantages, you should also be aware of the risks, which include:

Loan default: The real estate investor must make regular mortgage payments to ensure the loan doesn’t default and impact the seller’s credit. If you have a subject to deal with the seller making payments, they could also default on the loan. Be sure to work with an attorney on a real estate contract that covers these scenarios.

Due-on-sale clause: Lenders may have a due-on-sale clause that allows them to accelerate the full repayment of the loan if the property ownership changes.

Liability and responsibility: Sellers may be liable for the mortgage if the buyer misses payments or engages in unethical practices.

Consult legal professionals to ensure compliance with laws and reduce potential risks.

Conclusion

Subject to real estate is a creative financing strategy worth exploring. Investors successfully use this strategy to grow rental portfolios with minimal capital investment — even in today’s market. If you’re not interested in building a rental portfolio, you can still earn finder’s fees from real estate investors for these deals.