What is a Subject-To Real Estate Deal?
A Subject-To deal is another tool in your real estate investment toolbox. Subject-To is the process of buying property with the previous owner's name staying on the mortgage. You as the buyer, or investor, take over the payments of the home, and the equity of the home.
Here is a little more detail on the process and concerns involved in a subject-to deal.
You've located a motivated home seller, who needs to move the property fast, either due to a need to move, or possibly because they are behind in payments. They may be needing some immediate cash for the move, or to take care of other obligations.
You, as the investor, offer to take over the payments of their home loan, while they maintain the liability of the loan, since it remains in their name. Depending on the equity in the home, you may offer them cash up front as part of the incentive to sell in a subject-to deal.
Why would the home owner agree to give up their equity in the home in a subject-to deal? If they need to sell the home fast or are behind in payments, giving up some of the equity may sound like a great deal, rather than losing all of the equity to foreclosure. By selling in a subject-to deal, their credit will likely improve as consistent payments are made on the property.
Why would you as the investor want to complete a subject-to deal? You are purchasing the property, without going through the process of acquiring a new loan, and the normal closing processes, and costs. You may be getting a lower interest rate on the existing loan than you could get through a new application. Plus, you may be taking over some existing equity in the home. Subject-to deals give you leverage, you are buying property without using much of your own cash.
There are some risks involved for both the home owner and the investor. For the home owner, you still retain the liability of the loan, it is in your name. You will need to make sure the buyer is responsible and use a method of verification that payments are being made.
For the investor, you take on the risk of discovery. Most home loans state "Due on Sale", meaning upon change in ownership, the lender expects full and complete payment on the loan. If you are careful to make every payment on time, and do not give the lender reasons to process paperwork, you will stay off of their radar, and will not have any problems. Many banks are not pursuing the "Due on Sale" clause during these economic times, as long as they are receiving payments on time every month.
Both the investor and the seller need to work together to have a plan to reduce each others risk, to plan for the changes required in insurance, and to make a deal that satisfies the profit needs of the investor, and urgency needs of the seller. A Subject-To deal can be a win-win situation for both seller and investor.