Is There a Problem with Buying Properties Subject-to Existing Financing?

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Back in 1978 (I don’t want to know how many of you weren’t even born yet) my husband and I bought our very first house and we bought it the only way we could qualify; by assuming the existing financing. Assuming a loan was not only very easy, but the common practice in those days. The house was $100,000 – the seller’s balance was $40,000 – so we were able to take that over and had to come up with only the remaining $60,000.

Those were wonderful times. But wonderful times have a way of fading into a memory. Interest rates were soaring, and one fateful day the lenders woke up and thought, “Wait a minute! Homebuyers are taking over loans we’ve already created at lower interest rates. If we stop letting them assume those lower rate loans, we’ll make a fortune!!”
(Early 1971 interest rates were around seven percent and continued to increase to a peak in 1981 of more than eighteen percent.)

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Subject-To Wrench in the Gears: The Due-on-Sale Clause.

Originally, loan assumption was a state issue and many states continued to allow loan assumptions and disallow due-on-sale enforcement unless the banks could prove that the purchaser could not qualify to make the payments. In 1982, however, the Garn-St. Germain Depository Institutions Act made due-on-sale clauses a federal issue which struck fear in the heart of both buyer and seller.

Very quickly, the banks ran themselves right into the ground. Buyers could not qualify for the entire loan meaning sellers could no longer sell their homes meaning banks began getting properties back at an alarming rate. Sound familiar? This is not the first market to see banks create a housing crisis.

Even though lenders no longer work with buyers and sellers allowing loan assumptions, acquiring properties subject-to existing financing continues. Yes, it is legal. It shows up on the HUD1 on lines 203 and 503.This is an excellent way to acquire properties anytime the seller agrees to sell by transferring title to the property while leaving the financing in their name. Interestingly, we get very little push-back from homeowners when we present the facts for this type of transaction. That surprised me in the beginning; now I take it for granted.

And, we don’t have a problem from the lenders. They have so many non-performing properties on their books that they’re happy to get a payment and don’t necessarily care who it comes from. We have received letters from lenders stating that they’ve seen a change in the insurance premium and a change on the title so, while they’re not sure exactly what is going on, they want us to continue sending payments to “x” address. I’m pretty sure they know exactly what’s going on, it’s simply a matter of don’t-ask / don’t tell.

We did have one Credit Union call to say that they wouldn’t allow us to take over their existing financing so they were calling the loan due. Jim had a conversation with as many people up the ladder as it took to convince them that they had a performing asset on their hands and we were good for the loan. They let us continue and have not contacted us again since.

Source of Concern:

So, if the sellers are ok with subject-to and the lenders are thrilled to keep the asset performing, where’s the problem?

It’s the prosecutors we worry about. There are far too many hungry attorneys looking for ways to feed their families. If a seller comes back at a later date and wants “their” property back, many attorneys are only too willing to go to court in an attempt to prove the investor stole the property from their unsuspecting seller. We know several investors who spent as much as five figures in court defending that what they’d done when taking a property subject-to was perfectly legal. They were ultimately found not-guilty of any wrong doing, but nevertheless spent funds to prove their innocence – over a year of their time – and untold emotional aggravation. As a real estate investor, you are absolutely guilty until proven innocent…

* What’s the message in this story? Never “convince” a seller to sell to you this way. Make sure your seller is thrilled that you have a way to solve their problem and that they are only too happy to do whatever it takes to make the transaction work.

In our state, we have the added concern of an Attorney General who is, naturally, angered by “scammers” who take properties subject-to and don’t bother to keep up the mortgage payments, as well as any who attempt to conceal the transfer and not pay transfer taxes which our state requires. We do not conceal any part of our transaction and we do pay transfer tax on all properties we take subject-to. To say our Attorney General is not a fan of subject-to is an understatement. In our business practice, subject-to mortgages are the mortgages that are the MOST important to pay. Make sure they’re your top priority as well.

And So the Good News…

Transferring title to a property secured by a “due-on-sale” mortgage is not illegal. Turns out, there is no federal or state law which makes it a crime to violate a due-on-sale clause. The due-on-sale clause gives the lender the right to demand payment of the remaining balance of the loan when the property is sold. This is a contractual right, not a law. The lender has the “option” to call the loan but is not required to do so. In our experience and the experience of many, many investors across the country, lenders prefer to keep a performing asset on their books rather than risk the time and expense of foreclosure and holding a non-performing asset.

Besides, why would the HUD1 closing document contain appropriate spaces if it were a crime to take property subject-to an existing loan?

Going Forward

As I’ve emphasized, lenders seem to prefer keeping a performing asset on their books rather than exercising their option to call the loan due.
* Big Word of Caution however. – Once interest rates start jumping, all that may change. If you’ve taken over low interest rate loans, pay special attention to climbing rates and be prepared to refinance or pay it off if needed.

We remain very conservative and cautious when buying this way. But, when done right, subject-to purchases are a legitimate way to buy properties and work well for both the buyer and the seller.

Are you willing to take a property subject-to a mortgage containing a due-on-sale clause?

Photo: roarofthefour

About Author

karen rittenhouse

Karen Rittenhouse has been investing in real estate full time since January 2005. In that time, she has purchased hundreds of single family properties, opened a full-service real estate company, a property management company, a coaching/training business, and written three books on real estate.


  1. This is probably the BEST article on Sub2 or subject to existing financing for both the new and experienced REIs.

    A few comments…

    Land trusts are not mentioned for privacy. Karen do you use them?

    I have heard the FBI and the AG of many states getting involved with equity skimming and sub2s done on the kitchen table. Do you use an attorney to create the docs and to close?

    There was recent appeals court in CA that ruled if a lender accepted 4 or more payments they have agreed in principle not to call the loan due, I will find that case and post it. The Sub2 investor had paid over 20 payments in that case.

    Bottom line, there is no due on sale jail.
    Just be prudent and aware of the climate with mortgage interest rates and local prosecutors!

    Wonderful article, Karen, thanks so much!


    • karen rittenhouse

      Hi Brian:
      Yes, we buy our properties in trusts for privacy and for estate planning purposes.
      Yes, we close all deals with attorneys – everything.

      Thanks for your praise of the article! So many people warn us we shouldn’t be buying properties subject-to. When I ask “why?”, they’re never quite sure.

      To your success!

      • If interest rates go up, and the bank decides they want their money now, rather than later, don’t you think it would be prudent to be able to cover it?

        Your loan may not be “locked in” so the numbers that make the deal work now could change.

        That’s one reason why I wouldn’t do it, but I suppose your not taking any credit risk right? It’s the seller taking the credit risk with these subject 2 deals?

        Because that risk is there, I feel personally, it’s not 100% ethical, due to the fact that if the numbers go upside down for you, the investor, how long are you likely to keep performing, and not screw the seller? Maybe I don’t fully understand these deals, but that’s what I’m getting out of it.

        • Jason:
          Absolutely, it would be prudent to be able to cover the loan if the bank calls it. Or have enough equity to be able to sell to get out of it. We never buy unless the property has equity AND good cash flow, just like we require for any other type of purchase.

          By, “the loan may not be locked-in”, you mean interest rate? That’s true, which is why I recommend not assuming variable rates. We have negotiated with lenders to “fix” the rates before we take over for that very reason. In the recent past, many loans with adjustables have adjusted down (sweet!) but that is, no doubt, about to change!

          It is or is not ethical depending upon the ethics of the investor taking over the loan because, as you say, the loan risk remains with the seller. Our contracts also add that, should we not be able to make the payments, once payments become 30 days past due, the seller is able to take the property back which includes all of the repairs and principle pay down since we’ve owned it. These mortgages should always receive top priority and I would hope anyone taking a loan subject-to would take only properties they can afford and never let default.

          Anyone not comfortable with subject-to should absolutely not do them.

      • Matt Lennander

        Hi Karen,

        Do you have any posts on Land Trusts? We covered them at the last REIA meeting, but needless to say I still have a lot of questions. They sound great, but the presenter brought up one case where the bank would only issue money from a sale of a property to the trustee because they couldn’t figure out who the private beneficiary was. Thankfully the trustee and beneficiary had a good trusting relationship and were both in real estate, otherwise the trustee could’ve pocketed about $400k. Granted the trustee has a written agreement to do what’s in the best interest of the beneficiary. I would love to hear more about how you use them 🙂


        • karen rittenhouse

          Hi Matt:
          The trustee is bound by the paperwork to do only what they’re instructed to do by the beneficiary. Obviously, you only use someone you can trust, often your attorney.

          No, I haven’t written anything on land trusts because it is so extensive. We put our properties into trusts mostly to keep our names off public record. There are negatives in working through a trustee for all transactions, but most properties sit for a long time with no action on them anyway. And our paperwork allows us to replace trustee at any time with a single document. We’ve done this a lot when the trustee is not available for closings, etc.

          We have found that the benefits far outweigh any hassles. For flips and wholesales, we don’t bother. All of our holds, however, are in trusts.

          Thanks for asking!

        • Yvonne Mazzulo

          Is there one state that is better to have your land trust in?

          Also do you need a new land trust for every property you buy ? Someone told me you should name each trust after each property seller

          Thank you Yvonne

      • Rick Santasiere

        Hi Karen. I am contemplating a Sub 2 deal in CT with a woman who just wants “out.” There is not a large margin of equity (or future profit), but enough to get me engaged in determining if it makes sense. I definitely don’t want to spend $$ defending something that is legal, so is there a way that a legal clause can be added to a contract that states that the seller(s) can never sue, or try to take legal action? It would actually be a deal for her (she want’s out), and I could either lease option to someone over two years and gain the equity buildup/small profit. Would love to pick your brain a little if you had time. I have a decent amount of experience in most facets of the biz, but this is one piece I have never done.

        • karen rittenhouse

          Hi Rick:

          Nope, sorry. If there was a legal, defendable clause that we could put in contracts to prevent the other party from ever suing, we’d all be using it!

          Great idea, however….

    • Do you know if there is some sort of “statute of limitations” for triggering the due on sale clause in other states? Whenever the title passes this triggers the due on sale clause because this is breach of contract and puts the property in technical default. You said that in California courts have ruled that if the lender accepts four payments that this is an acceptance of the change of title, and the lender loses the right to foreclose on the property. Are there any other instances where the lender would be waiving the right to foreclose so the investor could eliminate the uncertainty of buying subject to existing financing?

      • karen rittenhouse

        Hi Peter:

        I know of no “statute of limitations.” @BrianGibbons mentioned the issue in the state of California which was interesting news to me!

        Check your state laws, always. As I’ve said, we have no problem talking with the lenders and getting their permission to take the loan subject-to. We’ve even re-negotiated terms and interest rates on the subject-to mortgages. Lenders are not as opposed to this transaction as many here seem to think.

    • Jonathan kanner on

      Hi Karen

      Here is my question so the loan is in the property owners name still, what happens when you decide time to sell this property before the mortgage is paid off? Does the lender let you satify since you have title? Or do you have to call the original owner you took over from to sign documents?

  2. Boy Karen; that is a blast from the past.

    When I bought my second house we were thrilled to assume the existing mortgage. It was about 7 1/2 % which was a steal when the interest rates were at 14-15%. It was a great way to buy a house then and like you said it was pretty common.

    I have bought several houses with “subject to” financing. It worked seamlessly every time. I always had an attorney close the deal so there was never a question of whether or not they knew what we were doing.

    Anyone that can buy a house today with these historically low rates should buy now. You really can’t imagine what a big gift this is if you haven’t been a part of historically high interest rates. Just think about how much less house you could buy with rates of even 7 or 8% not to mention 14 or 15%.


    • karen rittenhouse


      When I talk to our students about the “recent” double digit interest rates, so many look totally confused. It really wasn’t that long ago! Truly, today we can borrow free money from the banks.

      Thanks for taking the time to comment.

      • Quincy Williams

        Hello Karen. How did you find your attorney? Every attorney and title company is turning me down because they never heard of it or are simply uncomfortable closing one. I am in PA. Do you know any attorneys in PA or licensed in PA that would close a sub to deal?

  3. James Hiddle on

    The biggest risk is those who take over the property Sub2 but can’t qualify for a standard loan. If interest rates go up than they’re now in hot water because if they can’t qualify for a standard loan than surely they can’t qualify for a refi.

    That can be both an investor or the average joe. Something to think about.

  4. The best way to avoid the due on sale clause and also keep the lender from demanding payment when future interest rates hit the stratosphere is the deed the property from the owner into a trust.

    If done in this manner the lender is sent a letter from the owner (former) instructing the lender to deal only with the named trustee period. The owner (former) transfers his 100% beneficial interest in the property to the new beneficiary (you). Under my State and local laws, transfer tax is not due if a property is moved into a trust, but as normal course and not wanting to fight City hall I pay transfer taxes.

    So in the future is the lender going to call a loan due that is on the surface controlled by the same owner?

    The former owner is not just allowed to walk away without also signing a irrevocable power of attorney concerning this property, which is executed. Believe me there is no way the former owner is going to make a case they didn’t know what was going to happen. I also have the former owner in his own handwriting explain what is happening in this transaction and how he asked me to take over his deed, this letter is also executed.

    My deals with owners are all above board, at this time in my life an owner in trouble is going to need to get down on his knees and beg me to buy his house in some areas of my City.

    • karen rittenhouse

      Hi Dennis:

      Like you, we also have our properties in trust. The concern with the scenario you describe is that the seller is named in the trust. According to Garn St. Germain, an owner may transfer his/her property into trust without prompting the due on sale clause. Once that title is transferred, however, Garn St. Germain is no longer in effect and the due on sale is activated.

      Be sure to read the Garn St. Germain act and you may need to tweak your method slightly.

      Thanks for commenting.

      • From what I’ve read, you can transfer the property into a trust, but as soon as you transfer the beneficial interest of the trust to someone else, you will have triggered the “due on sale” clause. This may very well hide said transaction from the bank, but I cannot in good conscience do something that wouldn’t withstand full disclosure to all interested parties and sleep at night.

        • karen rittenhouse

          100% correct. Doing this is exactly what our Attorney General looks for and considers fraudulent. He deems it attempting to conceal the true transaction (concealment of the transfer).

  5. Jeff Brown

    I completely disagree. When interest rates reach whatever level triggers lenders’ ire, they will repeat the slaughter of the late 70s and early 80s. The only difference is that this time they have precedent, federal law, and Supreme Court rulings in their favor. It’s gonna be a massacre.

    ‘Course, that opinion, my experience, and $10 bucks will get us coffee ‘n cookies, right?

  6. I purchased two properties sunject to existing financing inside a land contract in the last 18 months. I just finished up refinancing out of both of them. I learned a lot along the way as one had some wrinkles involving an estate and a partnership. That one was also an adjustable rate mortgage which gave us not troubles at all, I was happy as can be to pay 2.75% on an investment loan. I love this strategy buy it must be done with eyes wide open with full understanding of the risks and challenges involved. Great post!!

    • karen rittenhouse

      Wow, Kyle, you’ve already financed out of both? What was your reason for doing that?

      Adjustable rate mortgages are perfectly fine in this economy. For the last few years, in fact, they have only been adjusting down (sweet!). My warning about taking over adjustables at this time is because rates are almost guaranteed to jump significantly in the next 5 years, and I don’t want anyone taking over a property that they ultimately won’t be able to afford making payments on.

      Thanks for commenting and congratulations to you on the two successes!

      • I set them up to balloon in a year on one and 18 months on the other. I was able to get the price I wanted then as well as put money into rehab instead of downpayment. Then when I refinanced I was able to have the option to pull cash out or keep a low monthly payment. I havn’t attempted to purchase a property subject to existing mortgage to keep that financing for a long time.

  7. Hi Karen

    So the gist of the argument is that buying subject-to is a great way to buy properties if you don’t really need to buy properties subject-to and can refinance in a flash when the lender comes a-knockin.

    Fair enough. My only concern is that I mostly see subject-to deals being done by the “no money, no credit” crowd. So when the interest rates rise, and they will rise, there will be trouble for the majority of them.

    Thanks for sharing the story. That experience is invaluable.

    • karen rittenhouse

      Hi Erion:

      Maybe. But we typically buy subject-to the same way we buy any property, with plenty of equity and good cash flow. We buy with multiple exit strategies and won’t take on a property that we can’t sell or partner with in a flash. (With as many as we own, refinance is probably not an option!)

      And neither we nor our students nor the investors we know across the nation are part of the “no money, no credit” crowd, so let me change your perception! Subject-to is an amazing way to buy for any investor.

      But I did want to put in that word of caution. Especially about taking over adjustables in this economy. ANY purchase should be done conservatively, subject-to or not.

      Thanks for reading and commenting!

      • Erion Shehaj


        I wasn’t suggesting that you our your investors were part of that crowd. I just said that the deals I see done that way are done by investors who cannot buy property any other way.

        Multiple exit strategies would be required for sure and it seems like you’ve got that handled.

        • karen rittenhouse

          Oh, Erion, I didn’t think you were including us in that statement! 🙂

          I just want to be sure you’re not ignoring that buying strategy by categorizing it for only “buyers in need.” It’s such a great way to buy!

  8. Be wary of naming the prior owner as a first insured, as many carriers will issue claims checks to all named. If you do handle the insurance with them named, ensure your PoA (or whatever appropriate documents) allows you to endorse the claim check(s). Last thin you want is to chase them down for an endorsement to repair damages on your house. We’ve yet to have a lender push back on the method I described. Thanks!

  9. Thanks for the excellent primer, Karen. I listened to your podcast where this was brought up as well. All good information. I’ve listened to the BP audio summit’s role-playing session and there was a segment where they touched on buying properties subject-to. Can you share some of your techniques or ways you broach the subject of buying a property subject-to? Not sure I know what that initial “hook” is. Thanks and keep up the great content!

    • karen rittenhouse

      Hi Brandon:
      I supposed the best initial “hook” is that, naturally, we can pay more for a property where we don’t have to go out and acquire our own financing. The money and effort saved by taking over the existing financing is passed on to the seller. I like to give multiple offers with this one as the highest offer, down to our cash offer which is substantially lower.

      To your success!

  10. Great article! I actually found a newspaper recently from 1966 and there were several ads in there with sellers advertising the buyers taking over the existing GI loans. 4.5% to 5.75% were the rates mentioned. (Now that was before I was born!)

  11. Jeff Brown

    In a subject-to transaction, the seller is knowingly violating the contract by which they agreed to abide. They’re recruiting the buyer to conspire with them to do it. In court they will lose. Most of the time the buyer will not suffer, as they’re not on the note. And yeah, I know how the subject-to buyer proponents go outa their way to inform sellers of these facts.

    The fact remains, the buyer and seller are conspiring to violate a contract to the detriment of one of the parties to that contract. We can debate ’til the cows come home, but that’s what it is from Day 1, and that’s what the courts will rule. The rest is HappyTalk.

    • karen rittenhouse

      Hi Jeff:
      Not necessarily. As I wrote, the due-on-sale is a right, not a law.

      And we have no problem bringing the lenders into the conversation. As I commented to @TimNorris above, “In the last 90 days, we have had 3 lenders insist that both we and the sellers be on the insurance as “primary insured.” (Yes, our lenders know we’re taking over the payments. Talk about full disclosure!) ”

      We’ve even contacted lenders, renegotiated interest rates, and they still kept the loan in the seller’s name. They didn’t have a problem with it at all.

      Now, there are people out there trying to do things that are deceptive in many different types of transactions, not only subject-to. But just because it’s a subject-to does not mean it is a contract violation. I have known buyers who went to court over this issue and every one was ultimately deemed a legal transaction.

      • Jeff Brown

        Hey Karen — When it happened before, as you so accurately mentioned in the post, the lenders won in a route, without the help of much court precedent, any specific federal statute, or a favorable Supreme Court ruling. They now have all three in spades.

        I never said it was ‘illegal’. I said in court it will be relatively easily shown as a clear and inarguable breach of contract. It’ll be in civil court, not criminal. The properties lost buy buyers, and the financial harm to the sellers will be significant, to say the least. In the end, a breach of contract is a breach of contract no matter what it’s called, or how it’s camoflauged.

        This is one of those times when we’ll agree to disagree and go have a beer together. 🙂

        • karen rittenhouse

          Thanks for that, Greg.
          I don’t like the title “getting around due on sale clauses.” 🙁
          Immediately sounds fishy when it doesn’t need to be at all.

          If the seller doesn’t want it and the lender doesn’t want it, I don’t want to do it, for sure!

          Yes, when interest rates soar, I would expect lenders to go back after the low interest rates that have been “assumed”. There are, apparently, some court cases showing they waive their right to do that after they’ve accepted a certain number of payments from the new payee. I have no intention of testing that theory, but some probably will.

          And, as suggested in your article, those who can’t afford the property have no right to take it over subject-to in the first place.

    • I don’t get the feeling that you have ever taken Title subject to the existing financing, which means you have no experience other than hearsay……for what that’s worth.

      Our company has closed over 21 homes in the last three years and taking Title subject to the existing financing without any legal problems. Our Agreement is State Approved by our Law Firm, and we provide both the Lender and Seller with full-disclosure documentation in advance. The Lender receives our written request for “a waiver of the loans acceleration clause” and our contract stipulates that it will become null and void unless we have the Lender(s) permission in writing. This is also a requirement of our Title Company and their Underwriter.

      Two lenders did require additional details prior to issuing their waiver letter. In a majority of cases the Seller’s were in financial trouble and the Lender was very happy to have their loan redeemed.

      Where is the conspiracy you speak of ?

  12. Karen,

    Do you have a book written on this topic? It would be great if you could have a step-by step on all the forms, documents, etc. needed and how to discuss with sellers? I think this would be a great book!

      • How did you figure out what forms, documents, and steps were right for your state then? Did you work with an attorney on this or learn from someone else in your state who was doing this?

        • karen rittenhouse

          Heard a national guru, went home and checked state and local laws with 3 different legal firms. We alter our contracts every time state laws change. State amendments used to happen annually – now change seems to happen randomly!

          It definitely takes time and effort to stay abreast of regulations. We spend a great deal of time and effort working with our state legislators.

  13. I’ve never done a sub2 but read a book where the authors suggested contacting the lender and just tell them what’s going on. If they agree to it, get written authorization. Document your notice to them. In the event they don’t respond or later come back to enforce the due on sale clause, you’ll be in much better shape/ Anyone tried being up front with the lender at the on-set?

    • Hi Carl:
      We’ve been up front with the lender on a lot of the deals we’ve done subject-to. Mostly when there was an issue we needed to confirm or clear up. And, we’ve contacted them when the seller is behind in payments saying we want to take over the loan if they’ll agree.

      We’ve also contacted them when we want to take over a loan but the interest rate is too high. If they agree to lower the rate, we agree to take over payments. Yes, we have gotten approval for this.

      As I’ve mentioned in the post, taking over a loan subject-to is not illegal so don’t know that you need to do this every time. And, don’t know that their written authorization gives you any ultimate security. I would be of the mindset that they can call the loan later if they decide to.

  14. Great Post. and Great information in the comments. Thank all of you above.
    I am on the side of transparency and disclosure when it comes to using this technique to buy houses. I have to be.
    Would someone tell me when is it best notify the lender? Would you notify BEFORE execution of the contract or AFTER recording the warranty deed?.
    Also, I would like to know if any of you are licensed real estate agents ?

    • De:
      If you plan to notify the lender, you want to do it BEFORE closing on the transaction to confirm their approval. If you notify them AFTER recording the deed and they decide to call the loan due, it could ruin your whole day…

      I am not a licensed real estate agent, but I own a brokerage and employ licensed agents.

  15. Does anyone have any advice on how current sub2’s in my rental portfolio will affect my ability to get a new conventional mortgage in my name? Will the lender frown upon this? And will it be considered in my debt/income ratio? Any guidance is appreciated.

    • Ci:
      It does not count against the number of loans you can get because it is not in your name.

      It does, however, count against your debt to income ratio because it is still debt. It is counted just like any other rental property in that they consider the income against the debt.

      Let me know how it goes!

  16. I buy subject to the existing financing on 95% of the deals I do.

    However, I recently have developed a better understanding on how banks and the monetary system really work and based on that, it is highly unlikely for a lender to call a performing (conventional) loan due because it limits their ability to lend money.

    I was explaining to someone recently that the mortgage or loan is based on the persons ability to pay on the note and not based on the house.

    The house is collateral against the loan.

    The bank could care less about the house. They care about the performing loan and their ability to use that as a reserve based on the fractional reserve system to lend even more money.

    I highly recommend watch a documentary “Money as debt” to get a better idea of the true nature of banking and lending.

  17. In the rising rate scenario, it seems very possible that a bank (or more likely, a servicer, or Fannie Mae, or a trustee for a mortgage-backed security holding the loan) that becomes aware of assumptions in these notes (and yes they’ll have great incentive to look) will attempt to compel a refinance/reset to current market rates. They have absolutely nothing to lose by doing so, and everything to gain, and they hold a lot of cards.

    You have to consider how loans are valued by Wall Street in the secondary market (where the vast majority of them end up). Consider a loan made at 4% for $150K, with 25 yrs remaining to maturity. Intuitively we know that as rates rise, the current value of that loan goes down; an investor will pay less for a 4% coupon rate in order to earn the now higher market rates. Each 1% rise in rates causes Wall Street to decrease the value of this existing loan by 10-12%. So if market rates rise from 4% to 8%, then the value of the loan would drop by around 40%. If the lender can force the loan to be retired/refinanced at full price, and a new loan taken out at market rates, they just “earned” $60K (real cash in the secondary market) for very little effort.

    They wouldn’t want to force anyone into foreclosure, however, so it would be a game of cat-and-mouse and threats, which would be very stressful to the seller who is still on the loan. The lender would likely offer a streamlined refinance to market rates, perhaps with both seller and buyer named on the loan under the new higher rate.

    I think an entire boutique industry would likely spring up to track these situations down, through insurance policies and tax assessor data.

    • Absolutely right, David, could happen.
      And, maybe not.

      We all certainly need to be prepared in case it does happen. Our average rate loan is about 6% so it will be a bit before the banks have the time or the staff to look for them. And, the case you laid out is a logical one. Logic is not what we’ve seen from lenders in the past.

      At any rate, we personally got while the getting was good. We’re now in the flipping business paying all of these loans off at a very accelerated rate and prepared to pay off any that may be called in the future.

      Thanks for taking the time to write that great response.

  18. I am currently getting into the sub 2 market in Seattle and it has so far been difficult to find motivated sellers due to the current market (low inventory, many buyers, houses sell fast traditionally). I am also marketing to slightly underwater homes and selling/holding for cash flow, but still hard to find motivated sellers.

    Karen, what “type” of homes/owners are you marketing to in your neighborhoods? I am pulling lists and sending yellow letters, may start with the post cards as a follow up, but my list criteria has not produced the leads that I was expecting. Was hoping for 15% call back, 5% offer, 1% deal and am getting way less than that.

    • Hi Brian:
      To begin with, this is truly a numbers game. You have to market to enough buyers and hit them probably 7 times to begin getting calls. It takes more hits than ever because of the amount of ads we are all exposed to today. Try to count the number of ads on Facebook alone!

      We marketed to one large area every month for over a year before we got the first call. Just when Jim said he was giving up marketing that area, we bought 4 houses there in one month. You must be consistent.

      We market to neighborhoods and pick the criteria we want specifically. We started with single family houses, 10 years old or newer (we didn’t have the money for repairs), minimum 3 bedroom 2 bath (2 bedrooms are harder to rent), no condos (we thought harder to rent and for sure they don’t appreciate like SFH). Neighborhoods had to be median price point or below (where most of the population wants to live) and good schools.

      Be sure to check for neighborhood newsletters. They usually let you advertise or write articles for free. Hit the houses as often as you can in as many different ways as you can. They need to keep thinking, “there’s that company again.”

      Good luck and keep me posted!

  19. Andre Davis

    Hi @Karen Rittenhouse, I think your knowledge and practicality on this subject is incredibly helpful. Thank you for sharing. Karen can you comment on the caveats for both buyers and sellers as well as exit strategies? I’m thinking about starting out with this strategy but with a fix and flip mentality. I have saved some money but my credit is still a work in progress that I’m building on by driving a cab on the weekends. Any feedback or direction would be greatly appreciated. Thanks again

    • karen rittenhouse

      For buyers, the advantages are obvious – you don’t have to find financing and your name is not on the mortgage. One of the advantages for sellers is that we can pay more for their property when we don’t have to pay for financing.

      It’s most important that you find a closing attorney in your area who is comfortable doing subject-to deals as laws can vary state to state and not every attorney is willing to close a subject-to property.

      Thanks for asking and best of luck to you!

  20. Julian Robinson

    Hey Karen,
    In regards to the subject – to following the Dodd Frank Act and Due on Sale Clause, would seller financing be a viable option still when approaching FSBO’s to have as a property of your own(owner-occupied)? Or rather would this niche only be appropriate when searching for motivated sellers. ?

    • karen rittenhouse

      Hi Julian:
      I’m not sure I understand the question. But seller financing is one of our favorite ways to buy. If a seller has a lot of equity or even owns the property free-and-clear, we love to have the seller carry back the financing rather than finding another funding source.

      Hope this helps answer your question!

  21. Seth C.

    Correct me if I am wrong, but isn’t “Due on Sale” just a clause in the contract. Thus “subject to” is not a breach of contract, but simply governed by part of it. There should even be a way to get some lenders to sign a waiver so that there is nothing hanging over your head…

    • karen rittenhouse

      You’re absolutely correct, Seth. Due on Sale gives the bank an option to call the loan but it is not a law. We have negotiated with the banks plenty of times to keep the loan as-is. They don’t really care too much who makes the payments so long as the payments are being made. When interest rates go back up, they may begin to call the low interest rate loans that have changed hands.

      As far as getting lenders to sign any type of release, we always ask and have never had one agree to do that. Why should they? That would be giving up control and that is of no benefit to them.

      So, if you take a property subject-to existing financing, be sure you’re able to pay it off or refinance if needed. Better safe than sorry!

      Thanks for taking the time to leave a comment.

  22. Gabriel Ramirez


    thanks for sharing your invaluable experience here. I love the concept of subject to, You mentioned in this post a few techniques used to “hook” sellers with subject to, can you elaborate further about this techniques.

    Also, what are your trigger questions when you get a call from your marketing? I am guessing you have a script well elaborated, you mind sharing ? some of those questions used, i guess, to qualify the seller.

    Thanks in advance for replying.

    • karen rittenhouse

      Hi Gabriel:

      I was asked about a “hook” earlier in this Q&A chain, but I don’t actually consider anything I do or say a “hook”. Here’s my quote above which was a response to a question from Brandon Foken:
      I supposed the best initial “hook” is that, naturally, we can pay more for a property where we don’t have to go out and acquire our own financing. The money and effort saved by taking over the existing financing is passed on to the seller. I like to give multiple offers with this one as the highest offer, down to our cash offer which is substantially lower.

      No script. I simply ask questions about the property and ask a lot about why the seller is needing to sell. There’s always a reason. I then set out to solve the seller’s problem by creating a solution. One solution may be to simply take over their payments.

      Thanks for your question.

  23. Victor Silva

    Karen, listened to the podcast you did a few a few years back on this topic this morning and been researching this all day, thank you for all the content.
    Have you had any problems flipping any homes with a loan outstanding? Or do you tend to hold these properties for passive income?

    • karen rittenhouse

      Hi Victor:
      Any properties that we take subject-to, we prefer to sell rather than hold. That being said, we have held some for a very long time!

      Nope, no problem selling with a loan, just like any loan in your name. The loan is simply paid off at closing. Thanks for asking!

  24. Danny Duran

    Karen – I loved your podcast episode. I think I’ve listened to it over 3 times! I am just getting started as an assistant to a wholesaler in Chicago. I currently have an owner who is open to the concept of selling to me with subject-to financing. Owner’s loan balance is $42K; he wants an additional 10 – 15K in cash (to be negotiated).

    I have never done this before. in this blog post, you stress the importance of getting an attorney who is experienced and comfortable closing a subject-to deal. I just reached out to my RE attorney to ask him if he’s experienced/comfortable.

    In the Q&A section, above, I see that you state: “…we have no problem talking with the lenders and getting their permission to take the loan subject-to.”

    Who should I be talking to at the lender to get permission? Is this permission just something that you accept verbally, or, do they give you something in writing? If it’s only a verbal commitment to not exercise the due on sale clause, how do you handle the instance where your point of contact separates their employment with the bank in question?

    What advice can you give me about properly proceeding with this subject-to strategy?

    I’d really appreciate any help you can offer.

  25. Dane Huntsman

    Hi Karen. Thank you for your intriguing article and comments on Buying Subject-to. I have found them insightful and quite honest.
    I am new to REI, but bring 15 years experience on the residential building side (new residential and remodeling).
    Could you please point me in the right direction on some questions and concerns pertaining to the Subject-to concept?
    – What are the main functions of a trust? Are they costly to create?
    – Is the creation of a contract a costly endeavor with a RE attorney? Is it difficult to find a good attorney? Any suggestions?
    – Please help me with the idea that your subject-to offer is the highest offer of several offers put forth, and that it allows you to offer a higher price to the seller. How does this work when assuming payments on the loan? What is this based on, what are the numbers? I don’t quite understand this concept since there is no payout. The loan stays in the seller’s name, but buyer owns it with the transfer of deed. So, what was the selling price? Could you please use a hypothetical that carries it through from beginning to end?
    – Would/do you ever pay a seller a down payment? I would assume not because they are motivated by other forces to sell quickly. Is there a conceivable situation where this would make sense based on potential equity? If so, what is typical?
    – Is saving a seller from auction and foreclosure and 7 years of credit problems a sufficient reason to offer a subject-to purchase (assuming it makes sense for the buyer)? Or does it need to go beyond that?
    – Do lenders ever require proof that you can pay off the loan if necessary? (Credit worthiness, cash, etc?) Considering that this is a strategy used by those who lack cash or credit, my assumption is that these investors could not get traditional re-fi financing if they needed to, and that a lender may want prior proof of ability to refinance. Have you seen lenders require this? Often?
    – You mentioned that you use this method to flip homes, but that you hold some of them as well. Are your buy and hold properties intentionally held, or are they just on hold waiting to flip? What would be a scenario where you would intentionally hold onto a property instead of flipping it. And for how long? Do you rent properties while making payments? How long is typical to hold a property, flipping and holding?
    – Could you please expound more on exit strategies?
    Wow. My list really grew! Thank you for considering these questions!

  26. karen rittenhouse

    Hi Dane:
    Ha! As your questions suggests, subject-to is not for a novice. In fact, we no longer purchase this way as there are so many new laws and regulations regarding subject-to. Plus, it was easy after the crash of 2008 – banks didn’t care who was on title so long as someone was making the payments.

    The biggest problem with subject-to is sellers coming back later wanting their property back. Consumer protection laws are quick to say the investor took advantage. If these properties ever get to court, you have to prove innocence as you’re immediately presumed guilty.

    You really need to find somewhere to take a course in subject-to to get all these answers. We no longer teach this buying strategy. And, yes, you do need an attorney who is comfortable doing them, has the correct paperwork, and will defend you in a court of law.

    I appreciate your interest in this, but suggest you stick to more traditional methods of buying. Easier and safer.

    • Dane Huntsman

      Thank you for your reply, Karen! I just have to follow up… 🙂
      Curious, has a lot changed since the your previous reply in March of this year? I am a bit surprised to hear that it may not be such a good avenue anymore (at least for a novice). My intent would be to partner with a good RE attorney to give me what I lack in experience. I have found a local attorney who actively invests in RE and is an expert in all of all of the seller-financing strategies, including subject-to. And he teaches courses as well.
      Do you think it would still make sense these days to use subject-to if done carefully? I have good (not great) credit, and don’t have quite enough cash down to use conventional lending — close on both counts but not quite there. I have looked at private lenders also. With their higher rates and points, that avenue doesn’t quite work either. Most of the deals I have hoped to do come close to working, but not quite. Subject-to looked like a good fit that would allow me to get started while I am building my credit back to excellent, and would supply me with more cash reserves to close deals using more traditional strategies (post flipping a subject-to deal).
      Is it still do-able with the help of an RE attorney to write up the contract, create a trust, and back me up legally? Or has it become significantly more risky recently?
      It seems that it still holds true that it is good for the homeowner (who is about to lose their entire investment to a bank and end up with a 7-year foreclosure on their credit), as long as the contract is ethical. With a strategy to buy and flip, a home with good equity should be sold fairly quickly, realizing a profit and satisfying the original loan.
      I have considered offering the seller an appropriate part of the equity to make it more appealing (something attractive, but not too much). Would this ever make sense if there is room to do so? The seller gets the foreclosure to go away and gets a profit when the home sells vs. nothing-at-all and a credit rating nightmare. And the bank gets consistent payments and avoids a foreclosure on its books and the high costs of foreclosing.
      Could you please give me your insights on this? Can it still work if done right with the well-being of all parties involved considered? Do banks still go for these deals in order to keep the loan healthy? Has the attitude of lenders toward using this method changed much recently? If so, to what degree?
      Thanks for your feedback and consideration!
      – Dane

      • karen rittenhouse

        I’m not an attorney so please have your attorney guide you with answers.

        Nothing is ever a problem in real estate unless you get into court. In that case, you’re in a bad situation with subject-to, even if you do it right.

        No, I would not offer the seller part of your profit as I don’t think a bank would look kindly on them losing the house to you but still profiting. Many unknowns here but real estate is tricky enough without opening unnecessary Pandora’s boxes. If the seller wants to make money off the deal, they’re not ready for subject-to. You’re taking a lot of risk so you have to be sure, first and foremost, that the seller is nothing but thrilled that you’re taking their sinking ship off their hands.

        Lenders no longer need these deals as properties are selling well coast to coast. They were great in 2008-2010 when nothing was selling because borrowers couldn’t get loans. You ask too many questions to do this type of purchase. These transactions are for the experienced investor. What are you going to do when your seller comes back in 12 months after you’ve solved their problems and says you took advantage and stole their home? I still advise you against this.

        • Dane Huntsman

          Thanks again for your insight and for taking the time to respond, Karen. I appreciate your conservative approach to this creative financing option. I totally agree that the seller needs to be nothing but thrilled that they can avoid foreclosure.

          Subject-to caught my attention for these reasons:
          – I lack just a little cash and credit for traditional lending routes.
          – Private money is so expensive that it becomes more risky, and it really doesn’t cost much less for a “first deal” considering terms and points.
          – I see it as a way to get started in the industry.
          – I could help someone avoid foreclosure while benefiting myself in my ability to reinvest in future projects using other methods of financing.

          I have a property in mind that is about a week away from auction. The seller re-listed it just a month before the auction date. They have apparently been too optimistic with their asking price all along and unable to sell it. The homeowner has taken a job out of town in the city, too far to commute, and cannot live at this location any longer. The homeowner also has personal reasons for leaving the home. It is a home that has been owned by a bank in the past after the 2008 market collapse. It has all of it’s “bones”, needs some rehab, but is only eight years old. Being a builder, I know how to do rehab.

          Anyway, the payoff on the home is $162,000. It needs approximately $60,000 rehab to bring it to an ARV of $400,000 and make it into a home that fits in in the neighborhood. (A comp very similar in the same neighborhood just sold for $400,000 two months ago, and similar homes are currently listed for more). Or it could be rehabbed for much less and held as a rental, then sold at a future date (more risky, I know). The bank that owned the home put in cheap materials and finished some things differently than originally planned because they took it over when 90% finished in 2008. So it needs upgrades in most rooms. This is one of the challenges the owner has had in selling it.

          Anyway, there appears to be quite a good amount of equity in the home. The thing I can”t understand is why the seller hasn’t accepted a lower offer by now, just days away from auction. The listing agent tells my agent there are NO real offers in play. Perhaps the owner is planning on taking out bankruptcy. My realtor has done a title search. There is no 2nd mortgage (confirmed by the lender as well). There is just one HOA lien of $1500. They could be walking away from this property with this much equity! Why, is the big question. Perhaps they have a large down payment tied into the loan.

          My aim would be to help all parties involved — the seller, the bank, and myself. I do realize that the bank is not concerned considering the equity. But if the seller really stands to lose that much equity to the bank, I would like to be able to offer them a way to avoid foreclosure. The owner has paid nearly eight years of mortgage payments and is expected now to accept foreclosure while walking away from their equity. They stand to lose their equity very soon at the auction as it is.

          Could you help me understand why a seller would come back and say their home was stolen from them after being able to avoid foreclosure? I don’t follow that part. I do, however understand that the bank wouldn’t want to lose the equity and could call the loan fairly quickly. But I doubt it would happen quicker than a the time it takes to do a 2-month rehab and sell in a great market.

          If I flipped it before the bank called it, wouldn’t the bank be satisfied to be repaid?

          Thanks again for your ear. Sorry to be so persistent! I will be certainly be asking my attorney these same questions. 🙂

  27. karen rittenhouse

    Hi Dane:
    Sellers say their home was stolen because they have very short memories. Once their problems have been solved and they’ve moved on with their lives, they forget the trouble and turmoil they had been in. A friend or family member tells them they were ripped off and they should go get their house back, and they agree!

    Remember, anyone can sue anyone for any reason. It doesn’t have to be right or make sense. But, the court will see you as the expert and you have to prove that you didn’t take advantage of an unsuspecting and suffering consumer.

    Yup, if you can take it, rehab and sell it quickly, that’s the best way to do a subject-to. Take title then resell before anyone has a chance to come at you for it.

    Good luck!

    • karen rittenhouse

      Hi Jarod:
      If you take over someone’s mortgage with a subject-to purchase, you are responsible for everything that is owed so, yes, you pay all back payments to stop those delinquencies.

      You catch them up or the seller catches them up – depends on what you negotiate.

      Good luck to you!

  28. Anthony Johnson

    I am working a ST deal and after reading this thread I am going to do a 15 year lease, with an option to buy, and the puchase price/strike price will always be the declining mortgage balance. Seller signs an authorization for me to handle debt and ins. and no worries from lender. This is better than the sub2 as the due on sale clause is now off the table. I could do a 10, or a 5 year, whatever, the current seller is ready to sign, but she is worried about being on the mortgage for 28 more years on her 2016 almost brand new home she is giving me the keys to. Note, on the option, I can buy the home at anytime during the multi year lease, or I can walk away, it is unilateral, one sided. Your thoughts?

  29. karen rittenhouse

    Your lease is probably the safer way to go. We have been selling all of our subject-to deals to get rid of anything where we’re not on the mortgage. Those sellers always come back and want their names off the loans.

    And I see that this seller is moving on for the same reason. Hopefully, you’ll be able to sell sooner than the 15 years, but it’s nice to have no pressure as property values may be falling over the next 5 years. I hope you’re getting equity in this deal?

    By the way, the seller must always be on the insurance as she will still be on title and the mortgage.

    Thanks for reading and adding to the conversation.

  30. Jacobus Rex

    Hi Karen et al,

    It seems that, though you are counseling against doing it these days, this is still a viable option but is inadvisable for buy-and-hold. I have always thought that to be a concern. I could see it wasn’t a concern 10 years ago, but outside that extraordinary real estate market, it surely has greater liability.

    Jim in St. Cloud

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