what is a subject to?

22 Replies

i have been learning about real estate and i saw a few posts on here but i am a little confused. can someone go more in depth about what the whole process is and what the purpose of it is?

Subject to is basically assuming the previous owners mortgage.  That is a very simple and basic explanation.     

Joe owns a house worth 150k with a 120k mortgage and you buy the house by taking over the 120k mortgage "subject to" the old mortgage.

@Greg Behan

i thought the mortgage stays in his name though. and why would i want to do that? do i give him any money or anything along with that?

how do i analyze to see if it is a good subject to deal?

yes it stays in his name.  It is totally specific to the deal whether or not you'd give them any money.  You would want to do it because the financing for the property is already in place. The only way to tell if it's a good deal is by running your numbers on it and running them thoroughly.

@Greg Behan

how do the numbers differ from an all cash transaction? and how much money is typically needed?

@Jack Rengold

   Honestly there are no two deals alike in real estate....  It really depends on the big picture.

@Greg Behan

well with all cash i need to consider all the holding and closing costs. is that the same with a sub2?

if i am fixing up a house am i still responsibile for paying the mortgage?

do i stll need to take out a loan

  • "Subject To" means that you are taking title to a property without assuming the loan into your own name.
  • In other words, you are taking title to the property "Subject To" the existing financing.
  • This is also commonly referred to as "Getting The Deed".

Sellers Who Will Walk Away You may wonder why someone would deed you their house while the property still has a loan against it in their name. Taking a property "Subject To" the mortgage is usually done when

  • a homeowner is facing foreclosure or is
  • highly motivated for some other reason.
  • It is especially easy to accomplish if the seller is already behind on their mortgage payments and facing foreclosure.

Many owners in foreclosure are ready to walk away and most likely already have one foot out the door, ready to abandon the property. This type of seller either has no concern for their credit, or they are concerned enough for their credit that they will do whatever it takes to get somebody else to make the mortgage payments for them.

  • Sometimes their motivation to get rid of their house exceeds their common sense or reason of logic, and they are willing to do just about anything to get rid of their problem.
  • Some owners want to get rid of their house and whatever it takes, is what it takes.

The seller's main concern may not be whose name the loan is in but rather who is making the payment on that loan.

  • Many sellers will be very happy that you solved their problem and gave them debt relief.
  • The fact that you will be helping to save their credit may also mean a great deal to the seller.
  • They may feel that without you, they have no other solution and will ultimately lose the property in foreclosure anyway.
  • The "Subject To" solution gives them a way out of the property and a feeling that they did not just give up and totally abandon their responsibilities.

By you taking over, they have continued to fulfill their responsibilities and have been given a sense of closure. When the seller deeds you the house, the loan will still remain in their name and on their credit.

  • Because of this, some sellers will be concerned about you not making the monthly payment on time and they may be concerned about their credit rating.
  • However, some sellers are in the position that if you don't do something to solve their problem, they are going to lose the house to the bank which will affect their credit rating anyway.
Note  subject who is not for rookies or broke people, there is a due on sale clause  you should be able to either refinance with traditional or nontraditional funding if the loan gets called Always make sure the house is perfect in condition and you're buying some equity otherwise don't do it

I'm assuming you are planning on doing a flip with a subject to?

Regardless of how you finance a flip there are holding costs associated with the deal, and yes, you always calculate those into your numbers.  

Simply put I calculate my offer for a flip like this.

After Rehab Value - Selling costs - Rehab Costs - Holding costs (for 6 months) - buying costs - profit

If it is a subject to acquisition you will be paying the mortgage, the buying costs might be slightly different because I believe it would just be a legal contract fee instead of the usual costs but I certainly could be wrong on that I haven't done many subject to deals.  I have no idea if you have to take out a loan..   It totally depends on the deal

"Subject to" puzzles me, too. How does the buyer get around the common, maybe almost universal, due-on-sale clauses in mortgages?

I suppose many loan servicers don't pay attention to a change in ownership as long as the mortgage is paid on time, but I would not want to buy the house and count on the presumably favorable terms of the seller's mortgage, only to be forced to pay it off a month or two later. What prevents that?

I suppose, too, that in some states there is a danger to the seller if the property value could become less than the amount owed. In a recourse state, if a lender foreclosed and received less than the remaining principal, the lender could ask the former owner to pay the balance of the loan.

@Bob H.

apparently it is very rarely called as long as the mortgage is being paid off

@Bob H.

Sub2 purchase, if the exit is to resell, even if the bank calls the loan due, the bank will wait generally. In 30 yrs I have yet to have a sub2, with re sale in 6 months, ever called.

I NEVER buy sub2 and wrap as an exit.

Sub2 is a quick strategy, not buy and hold.

@Brian Gibbons

Is it reasonable to look at using sub 2 to buy a multi family complex of 40+ units? I have an opportunity in my area to buy a 40+ units complex if I can put the financing together. Not sure that it would initially pass inspections for a traditional loan right now, it's in decent shape but has not been properly cared for, thus I'm sure there are a few issues to correct before using a portfolio lender to refi. It's listed as a 600k deal, probably could negotiate it down some. Many vacant units due to poor management and under market rents. I know I could fill most vacant units in 60-90 days and due to local activity have rents far above market rent rates for likely a year or more.

Would be looking at obtaining financing at the 1 year mark or shortly after if I bought it sub 2 or lease option etc etc.

Thanks for any input!

@Brian Gibbons very awesome explanation. I was ready to ask you about if the lender called the note, and then I saw you last paragraph.

Most "gurus" keep selling the idea of doing that long term and I honestly was starting to fall for it.

So in your opinion that should be a short term strategy. I have a few follow up questions that I would love if you could answer them:

1) When negotiating a subject to, should there be a contract between the seller and I (buyer)? Or simply just transfer the deed to my name?

2) Do you usually ask the seller to give online access to the lender/mortgage to make payments and such? What is the best way to track it?

3) If one wants to refi out of the subject to, are there any seasoning requirements? I am assuming that it must be just like a regular purchase and now you the new owner you need a cash out refi to pay that mortgage...

Thank you!!!

@John Santos

1. Yes, a sale and purchase sub2 contract, and a title holding trust.

2. Yes, online access to mortgage co. I use a mortgage servicing co that goes payment to PITI and any excess to seller.

3. No seasoning, title is in your name, loan is in sellers' name.

Docs Usually in a Sub2:

Addendum To Purchase And Sale Agreement

Quit Claim Deed To Trustee (Property Trust)

Authorization To Release Mortgage Information (from lender)

Limited Power Of Attorney Regarding Real Estate

Insurance Letter (Adding Additionally Insured)

Escrow Letter (seller sign a letter stating they want any remaining escrow balance to be credited towards the loan balance at the time of payoff)

@Brian Gibbons
Thank you so much for the rundown.
Ok so I execute a standard purchase and sales agreement plus a "subject to" addendum...
Do you know where I can find a MA and FL "subject to" contract/addendum?

So you said about transferring property to a holding trust. Should I have the seller transfer to a newly formed trust and then put me as the trustee and beneficiary?
I have never done a trust, so I'm not even sure how to go about it.

Thank you for all of the help.

Thank you!!!

@Brian Gibbons
I watched the Video – Sub2 – How Does It Work?
Really good stuff, thank you for the link to the videos. I'll be watching most tomorrow :)

Is there a link on your website for the forms you go over in the video?

Thank you!

Embarrassing to say but I don't know how to do it. Unless it isn't an option on the iPhone app. I can try tomorrow from my desktop, or feel free to PM me.

@Brian Gibbons

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