Writing The Offer
A subject-to offer is like any other written offer to purchase real estate. It uses the same general purchase and sale agreement. There is no special contract form required for subject-to transactions. The buyer merely wants to spell out the exact terms of the existing mortgage, along with any other terms or conditions that the buyer is offering.
When writing "subject-to" offers, you'll need to get the seller to provide you with a copy of the current mortgage terms. You will want to include these terms in your offer, so that they are spelled out to the letter.
Below is an example:
"Offer price $100,000 dollars, subject-to existing mortgage payoff of $95,780, with payments of $789 per month, principal and interest, (the sellers current payment terms) interest rate 5.5%, for 24 months. Within 24 months, buyer will obtain new financing and payoff existing mortgage balance. Buyer also agrees to pay seller $4120 cash at payoff".Â
So we are going to carry this note for up to two years, and when we either sell or get new financing, we will pay off the sellers existing loan, and we will owe the seller an additional $4120 in cash. We sold the property for $125,000 to the new buyer and pocketed about $20K.
You can put in any terms you and the seller agree to. It just depends on the situation and the needed time frame. When the market is slow, it may take longer to get a new buyer qualified for a loan. I like the two year time frame, as it allows for enough turn around time in most cases.
If the sellers payment also includes an amount for taxes and insurance, you would want to specify that too. You want to be sure you clearly document the exact terms of the existing mortgage. The buyer will need property insurance in your name, since the title will transfer to you. Discuss this with your closing attorney to be sure you handle this correctly.Â
The payment and interest rate are taken directly from the sellers existing loan terms. You are merely documenting them in the offer, so that you are clear on how much you are paying each month. If there are additional arrangements, such as a second mortgage, or other terms or conditions that you and the seller agree to, you should make sure that they are also clearly documented in the offer.Â
Writing a good offer is really just a matter of making sure every specific detail of your agreement is stated in terms that are clear. Should you ever wind up in court over contract, a crucial issue will be the clarity of the terms in the agreement.Â
You should always have your attorney review the terms of an offer before the buyer and seller sign it, to insure things are correctly stated. It is pretty basic stuff, but if you need advice, get it BEFORE a contract is signed by both parties. Don't risk making a mistake if you are not sure how to word an offer. This article is not intended to be a substitute for legal advice.Â
Closing a subject-to deal is like closing any other deal. Your attorney of title company will handle the closing. Discuss details of a subject-to with a local attorney or title company before you do your first subject-to deal. They can provide valuable guidance on your states laws. Some states may not allow this type of closing or may require that it be done a specific way. Only a local attorney or title company will be qualified to give you the best guidance for your state.
There is a long standing argument about whether "subject-to" deals trigger the "due on sale" clause commonly found in virtually all mortgages. This clause says that the lender can call the loan due if they find that the title to the property has changed hands without their knowledge.
There are many people on both sides of this argument, but to be honest, this is a change of title without the lenders direct knowledge, and in my opinion, this would trigger the due on sale clause. But this almost never happens as long as the payments remain current.Â And again, in the present market, with high foreclosure rates, it just doesn't make sense for the lender to call the loan due as long as the payments are current.
In part 3 we'll examine the issues that concern real etate investors. The exit strategy, and the handling of a subject-to deal after the closing.
The author has permitted the reprinting and redistribution of this article.