Buying a house "Subject To"
As real estate investors one of the tools in our tool belt is buying a house “Subject To.” As investors, we advertise that if you want to sell fast, we are the people to call. Using the “Subject To” strategy is sometimes the best win-win situation for everyone.
What is buying a house "Subject To"?
Buying “subject to” means buying a home subject to the existing mortgage.
It means the seller is not paying off the existing mortgage and the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer's purchase price.
"Subject To"works like this. The investor evaluates the property, sees what needs to be done to the house (repair estimate) to meet today’s buyers' or renters' needs, and makes an offer. The investor and the seller come to an agreement on the price and terms, at closing the house is deeded over to the investor, but the mortgage remains in the seller’s name. The investor makes all future mortgage payments along with any missed payments. Curing the default saves the house from foreclosure and saves the credit of the seller. Many sellers like the idea of not only having their credit scores fixed by catching up late payments, but building continuous credit by having someone else make payments on their loan as well!
Why would any seller convey the deed?
Charlie France of CRE Online tells us, “The two main reasons are "time" and "debt relief." If someone is being transferred, divorcing, buying a new home, or financially strapped,we can buy TODAY, so you can move tomorrow.
How is “subject to” different than assuming a mortgage. Assuming a mortgage means more than taking over the loan. If you assume the loan the bank will make you qualify for the loan and restrict the amount of money you can borrow in the future.
There is a risk that the bank could call the loan due since most mortgages do not allow for transfer of title without paying off the mortgage (Due on Sale Clause). But this almost never happens since the bank is happy because they are getting paid their principle and interest payments. I have never spoken to any other investors or bankers who have heard of the Due on Sale Clause being enforced because of a Subject To deal that is current on monthly payments.
Other "down sides" of buying Subject To are 1) you cannot depreciate the house and 2) the seller gets to write off the loan interest (not the investor) since the loan is in the seller's name (another benefit for the seller).
This strategy has been proven to be extremely successful for me when dealing with sellers who want to repair or build credit and are not purchasing another house right away. I then refinance the house in a year or two, maybe even pull some cash out and rinse and repeat!