Possible "Subject To" Deal

6 Replies

I have a few questions about "subject to" the existing mortgage and a deal that really only makes sense to me using this type of financing.  If any "subject to" experts or those with experience would help me out I would appreciate it.  In my case, I would be buying a house subject to the current owners financing and adding it to my buy and hold inventory to rent out.

1.  What about the taxes?  The title will convert to my name along with the tax bill I would assume.  As long as the taxes continued to get paid out of escrow then it shouldn't be an issue, correct?

2.  Income taxes: Since the seller still holds the mortgage, pays the taxes and insurance out of escrow, who gets to deduct these expenses on their income taxes?  I am really the one paying them but the 1098 will still go to the person who sold me the house. 

3. Future sale of the property: Let's assume I hold the property for the next 10 years and sell. Will the previous seller need to be involved in the transaction since their bank holds the lien on the property? Or can I just sell the house outright, include the lien on the HUD and take the equity built up in the house via a check?

Now to the deal:

Estimate home value: $210k

Loan Amount: $180k

I think I can structure the deal so that I purchase the home for $180k and help the seller with the closing costs, they really just want out of the house and don't want to be a landlord.  I like the idea of getting equity up front and cash flowing on the property.  

The house will rent for $1800 a month and will produce $150 per month in cash flow right away.

I understand the risks of "subject to" with the loan possibly being called so no need to get into that here unless you have some wisdom to share with someone who has never gone down this road before.  Thanks!

Any Sub2 pros out there?


I'm assuming that you will be transferring title via warranty deed into an LLC or personal name and not via land trust? If not, do the former and avoid the latter.

If the lender is holding the escrow payments then nothing will change with regard to how taxes/insurance are paid. Something to consider; it doesn't happen all the time but it has happened to me on a few of my transactions: there is a possibility that the homeowner's exemption will fall off the property, which will/can escalate your monthly by 25-50%.  So, what the monthly payment on the mortgage is now could increase if the assessor sees the transfer and wants to enforce that it's no longer owner occupied.  I'm sure that there are some ways to dispute, however that would be up to you.  Point being keep that in mind when figuring your numbers.  Anticipate there being no HOE.

Income taxes: You will have an expense to the property with the debt/mortgage obligation.  You will not be able to (at least I haven't, nor my CPA) deduct the mortgage interest from the property. It is in their name so they get it.  There may be some tax experts on here that could better answer the question.

Future Sale: Along with all of your disclosures, make sure to obtain POAs (power of attorney) for the seller/mortgagee. I go overboard and have 4 different POAs signed specifying all matters that could arise with the property. Also, keep in mind that POA generally are only good for 1 year. I put wording in the property specific POA that states it is good for the duration/life of the loan, or until paid in full. Haven't had an issue as of yet. Just being more specific so if a issue does arise I have a basis. Another option is to set up a long term escrow with a title company that can hold all of those documents so when you do go to close they have everything. The POAs should clear up the majority of the issues that you may run into. This also eliminates having to try and track down your seller, which could be a difficult task. The last thing you want 3,5,10 years down the road is telling your original owner that you need them to sign off on something from their old property, especially if you've accumulated a boat load of equity. Never know what that "greed gland" may take over and do.

Hope that helps.  PM me if you have any further questions.

@Dan Walters  

  Great point on the HOE  out here on the west coast we do not have that.  Tax's are figured on purchase price and in some cases the assessor will come out and take a look and establish value then you get assessed.

In many states I have worked in tax's can double or more when you take the HOE away.

@Dan Walters   Thanks for the response, some great points and answered my questions.  The current owner is renting the house out and no longer want to be absentee landlords.  However, that doesn't mean they don't still have a HOE on the house.  I will ask now, great point and I just assumed there wasn't one.  The tax bill will come to me correct? So I should be able to deduct the property taxes on my income taxes but not the mortgage interest.  Is that right or since it all comes out of escrow she gets it?  

Record a warranty deed in your/your company name to show legal title. I would assume that the lender is holding escrow for insurance and taxes. If so, the tax bill will be taken care of by the lender. If not then you certainly want to make sure the assessor has the new info. Not sure how your state/county/municipality assessor works with regard to sending your tax bill. Where I am, the county assessor mails out to the titled owner. You can certainly notify them of the change. We haven't had to but you may. That's where a POA comes in handy as well.

I'm not a CPA, nor do I pretend to be one, but I have not pulled my previous returns to see how my CPA deducted my expenses on the sub2 props.  My "thought" would be that yes you could deduct the property taxes if you have a tax bill in your name, and if you are paying them independently from the lender.  Let me check into it and let you know.  Certainly run it by your CPA and get their interpretation.  Mortgage interest, I would say absolutely not, just due to the fact you have the loan in someone else's name and to justify that to an auditor may be difficult.

PM me if you have any further questions.

Make sue you let the seller know the lender could call the note do if you do a subject2.

Joe Gore

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