Subject to

2 Replies

I'm new to investing and haven't done my first deal yet, but I'm trying to understand how the subject to contract works.  Can someone explain?  

Thanks so much!! :)

I will give you my understanding of the, Subject to contract", but I do hope someone with allot of experience doing (subject to) jumps in here and will provide a better understanding than I may do. First, Subject To means your offer is Subject to the existing financing staying in place, in other words you are only taking over the payments but the existing owner is still on the hook for the loan, their name remains on the loan, not yours. 

The potential pitfall is that the lending company or current and existing mortgage company or holder can call in the full amount of the outstanding loan once ownership changes hands. Many say that this rarely if ever happens and those that do use subject to are said to never worry about that possibility happening because the mortgage holder wants to keep on getting payments made on time on the loan vs foreclosing on the loan. 

You can take it as a given that those that will accept a Subject to deal will be very motivated sellers and very few people would accept their name remaining on the loan which the property stands in as the collateral for the loan. You will be in a position to affect their credit if for any reason you do not make sure the payments are made on time. 

If the property and loan are foreclosed on of course your credit is not affected nor does the foreclosure go against you but it will against the current owner as they are ultimately responsible for making sure the loan payments are made on time. 

Personally I think the subject to contract and deals are better left to those that have plenty of experience using it and are well healed financially and could actually buy the home , that is pay off the loan if they had to. 

Assuming you do not want to buy the house to live in yourself you would want to pick a deal in which there is plenty of equity on the house vs the loan balance and the current payment. That is you want the payment to be low compared to what you could rent or lease the house for. You would be looking at refinancing at the earliest date possible where you will finance it or whoever you lease the property to could be able to qualify for a new loan on a lease option from you. 

I caution that you think of subject to as being a short term solution as allot can happen over an extended period of time. I would advise consulting a local real estate attorney before ever embarking on attempting to close on a subject to contract. 

Read as much as you can about what those that know about and have used subject to contracts to close on real estate deals have to say about it. 

Think of who might be motivated enough to accept a subject to offer from you. Chances are they will be someone that has fallen behind on their payments or the house is in disrepair so you will need money to bring the payments current and effect needed repairs before you could use the house as a rental or property to be leased so it may not present you with a situation where you are not putting skin into the deal. Now you are in it and more heavy vested having put your own money into the house. Remember that even though ownership has transferred over to you the house still remains as collateral for the existing loan. 

This is a very basic understanding of the Subject to Contract but there is allot , allot, allot more you should understand about it before seriously considering using it to close on a real estate deal. To my mind there are unique situations in which the subject to contract would be the right tool to use and that does not include simply a seller accepting to sign and close on a subject to contract in which case even then it will be a very small percentage of the time. 

@Krista Campbell 

Subject to is included along with stipulations within a contract.......it is not the title of a contract.

For example, within a contract could be the phrase, "subject to financing"; "subject to partner(s) approval"; "subject to buyer's inspection"; and "subject to (whatever your stipulation).

One could say that "subject to" phrases are exit strategies to "help" the person making the offer get out of the contract if the contract is unable to be closed. On the other hand the seller, and other parties could have input with contractural clauses if the contract is drawn up through a collective effort, because each party has a stipulation.

The important thing to remember in your investing efforts is to always use an experienced real estate attorney. Let them guide you! Ask the attorney what could be included based on your unique situation.

I hope this helped.

All The Best,

Anthony Davis