Skip to content
Innovative Strategies

User Stats

55
Posts
47
Votes
Nathan Claire
  • Wholesaler
  • Jacksonville, FL
47
Votes |
55
Posts

The "Subject To" Strategy

Nathan Claire
  • Wholesaler
  • Jacksonville, FL
Posted Aug 23 2019, 17:12

The famous “subject to.” Investors far and wide have pondered what this mysterious term refers to and how it can be utilized in putting a quality deal together. A subject to deal refers to purchasing a property “subject to” the existing mortgage. This means that the property currently has a mortgage on it from a lender. The mortgage consists of the term or years left on the note, the interest rate, and the remaining principal balance. When taking on an existing mortgage from the seller, the loan stays in their name while the deed to the property transfers to you. The payments are now your responsibility. However, if for some reason you do default and no longer make the payments, you are not liable or at risk, the seller is. Their credit will take the hit and you’ll be relieved of your obligations.

So what makes this “subject to” thing so appealing for investors? First off, taking over payments on an existing mortgage allows you to save time by already having financing in place. You won’t have to go through underwriting with banks and deal with appraisals. You also won’t have to qualify for the loan, so your credit isn’t pulled or taken into consideration for you to obtain financing. Next, you may be able to take advantage of a low monthly payment and interest rate depending on the structure of the loan. This low monthly payment allows you to move into the property and live there for an affordable price or rent out the property and generate cashflow.

Another benefit of a “subject to” deal is possibly being able to acquire property for a low downpayment. Most sellers who are willing to let someone take over their mortgage payments are facing foreclosure and would rather walk away with something than lose their house entirely, in addition to taking a credit hit. The majority of these sellers are behind 1-3 months in payments and added fees and this amount typically isn't anything over 10-15k. They may want to walk away with some cash, and this can vary from seller to seller. I’ve seen deals where sellers only ask for 2-5k and others where they want 50k or more. This usually depends on the equity they have built in the property. If the seller is only asking for their past due payments to be covered and for a small amount of cash on top, this can be an easy deal to wholesale to a first time home buyer. This buyer may have 15-25k saved but cannot get the financing in place to purchase a property due to credit or past eviction issues. The good news for them is that you now have a property where they won’t need to secure financing in order to move into the home. They can pay the downpayment and have a place to live. Depending on the scope of repairs, you could also wholesale these deals to a flipper/rehabber.

As you can see, the “subject to” strategy has many ways in which it can be utilized and used for your own benefit. However, there are also some risks you do have to look into before assuming a mortgage. The length of the term is important, and if the loan term is set to expire in a few years, there may be a balloon payment attached to this. A balloon payment is when the bank demands for the remainder of the loan balance to be paid in full at the end of the term. Similar to this, is the due on sale clause. This clause is triggered when the mortgagee goes to sell the property. Once sold, the new buyer is required to pay the remainder of the loan balance. When looking at doing a subject to deal, make sure to understand all aspects of the loan agreement so you don’t get caught up in something you don’t want to take on. Besides this, subject to can be an awesome way to acquire property for a low up front cost and or low monthly payment, allowing you to wholesale to a first time home buyer/flipper or rent the property out for some solid cashflow.

Account Closed
  • Specialist
  • Paradise Valley, AZ
2,925
Votes |
3,447
Posts
Account Closed
  • Specialist
  • Paradise Valley, AZ
Replied Aug 23 2019, 18:44
Originally posted by @Nathan Claire:

The famous “subject to.” Investors far and wide have pondered what this mysterious term refers to and how it can be utilized in putting a quality deal together. A subject to deal refers to purchasing a property “subject to” the existing mortgage. This means that the property currently has a mortgage on it from a lender. The mortgage consists of the term or years left on the note, the interest rate, and the remaining principal balance. When taking on an existing mortgage from the seller, the loan stays in their name while the deed to the property transfers to you. The payments are now your responsibility. However, if for some reason you do default and no longer make the payments, you are not liable or at risk, the seller is. Their credit will take the hit and you’ll be relieved of your obligations.

So what makes this “subject to” thing so appealing for investors? First off, taking over payments on an existing mortgage allows you to save time by already having financing in place. You won’t have to go through underwriting with banks and deal with appraisals. You also won’t have to qualify for the loan, so your credit isn’t pulled or taken into consideration for you to obtain financing. Next, you may be able to take advantage of a low monthly payment and interest rate depending on the structure of the loan. This low monthly payment allows you to move into the property and live there for an affordable price or rent out the property and generate cashflow.

Another benefit of a “subject to” deal is possibly being able to acquire property for a low downpayment. Most sellers who are willing to let someone take over their mortgage payments are facing foreclosure and would rather walk away with something than lose their house entirely, in addition to taking a credit hit. The majority of these sellers are behind 1-3 months in payments and added fees and this amount typically isn't anything over 10-15k. They may want to walk away with some cash, and this can vary from seller to seller. I’ve seen deals where sellers only ask for 2-5k and others where they want 50k or more. This usually depends on the equity they have built in the property. If the seller is only asking for their past due payments to be covered and for a small amount of cash on top, this can be an easy deal to wholesale to a first time home buyer. This buyer may have 15-25k saved but cannot get the financing in place to purchase a property due to credit or past eviction issues. The good news for them is that you now have a property where they won’t need to secure financing in order to move into the home. They can pay the downpayment and have a place to live. Depending on the scope of repairs, you could also wholesale these deals to a flipper/rehabber.

As you can see, the “subject to” strategy has many ways in which it can be utilized and used for your own benefit. However, there are also some risks you do have to look into before assuming a mortgage. The length of the term is important, and if the loan term is set to expire in a few years, there may be a balloon payment attached to this. A balloon payment is when the bank demands for the remainder of the loan balance to be paid in full at the end of the term. Similar to this, is the due on sale clause. This clause is triggered when the mortgagee goes to sell the property. Once sold, the new buyer is required to pay the remainder of the loan balance. When looking at doing a subject to deal, make sure to understand all aspects of the loan agreement so you don’t get caught up in something you don’t want to take on. Besides this, subject to can be an awesome way to acquire property for a low up front cost and or low monthly payment, allowing you to wholesale to a first time home buyer/flipper or rent the property out for some solid cashflow.

 I've heard of it. Does it work? Are there any pitfalls?

User Stats

32
Posts
20
Votes
Replied Nov 3 2022, 10:00

Hmm, not a hotly discussed topic.  My question if anyone can speak to it is how does the strategy not trip the due on close clause and how both parties protect them selves.  I might like to sell my house using my really good interest rate and arbitrage to make some money.

BiggerPockets logo
Meet Investor-Friendly Agents
|
BiggerPockets
Network with top investor-friendly agents who can help you find, analyze, and close your next deal.

User Stats

4,935
Posts
7,050
Votes
Don Konipol
Pro Member
#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
7,050
Votes |
4,935
Posts
Don Konipol
Pro Member
#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
Replied Nov 6 2022, 19:47
Quote from @Justin Buswell:

Hmm, not a hotly discussed topic.  My question if anyone can speak to it is how does the strategy not trip the due on close clause and how both parties protect them selves.  I might like to sell my house using my really good interest rate and arbitrage to make some money.

The strategy DOES trip the due on sale clause.  Up until 1979 most mortgages did not contain due on sale clauses; even when they began putting them into conventional mortgage the government guaranteed mortgages didn’t contain them.  After 1980 and a Supreme Court ruling, due on sale became the standard.  So, subject to was fairly straightforward with mortgage made before 1980. Those are of course long paid off.  Things are a lot more dicey now.
However, subject to sales are still being done.  But, a lot more hoops need to be jumped through.  Both parties should be made aware, even to the degree of signing a waiver and/or obtaining legal advice, or the serious issues that could occur.  There are so,e safeguards available; third party loan servicers, escrow agents, using joint bank accounts, etc.  But the possibility of foreclosure and ruined credit for the seller who thought (hoped) he was out of the property is always a possibility. 

User Stats

95
Posts
79
Votes
Evans Wright
  • Rental Property Investor
  • Charlotte, NC
79
Votes |
95
Posts
Evans Wright
  • Rental Property Investor
  • Charlotte, NC
Replied Nov 7 2022, 12:47
Quote from @Justin Buswell:

Hmm, not a hotly discussed topic.  My question if anyone can speak to it is how does the strategy not trip the due on close clause and how both parties protect them selves.  I might like to sell my house using my really good interest rate and arbitrage to make some money.


 To not trip the due on sale clause, you would want to call the lending company that services the seller's loan and verify that there will be no issues with the deed being transferred into your entity. You can also seek out an attorney to help set you up with a land trust account and inform the mortgage company that you or a servicing company will be handling the affairs of the estate and paying it off. There are a few moving parts to making this type of deal happen but today's market will present many opportunities to capitalize on deals that involve creative financing such as subject to.