How to Buy a Property Subject-To

By: Loreal Loftus

Buying Subject-To properties can be a great strategy for real estate investors, as it allows you to acquire a property without needing to qualify for a new loan. Instead, you purchase the property "subject-to" the existing financing, meaning you take control of the property and its mortgage without officially assuming the loan. Here's a step-by-step guide on how to buy Subject To properties:

1. Understand the "Subject-To" Strategy

• What does it mean? When you buy a property "subject to" the existing financing, you are taking title to the property but not assuming the loan. The existing mortgage remains in the seller's name, but you make the payments.
• Why it works: This strategy works well when a seller wants to get out from under a property (due to financial difficulties, divorce, relocation, etc.) but still has a mortgage they can't or don’t want to pay off. Investors can take advantage of the existing financing, which might include favorable terms, and assume control of the property without needing a new mortgage.

2. Find Potential Properties

• Motivated Sellers: Look for motivated sellers who need to sell quickly, such as homeowners facing foreclosure, financial hardship, divorce, or relocation. These types of sellers may be more open to a "Subject To" deal.
• Marketing Strategies: Use direct mail, online ads, bandit signs, or networking within local real estate groups to find sellers in these situations. Some investors also find success with public records searches (foreclosures, pre-foreclosures, divorces, etc.).

3. Approach the Seller

• Build Trust and Understand Their Situation: The key to a successful Subject To deal is building trust. Take the time to understand the seller’s needs and why they want to sell. Explain how the "Subject To" strategy works and how it benefits both parties.
• Be Transparent: It's important to explain that you will take over the mortgage payments, but the loan will remain in the seller’s name. Some sellers may have concerns about their credit, so reassure them about how this will work to help them feel more comfortable.

4. Get the Seller’s Authorization

• Seller’s Consent: You must get the seller's written consent to allow you to take control of the property and make the payments on their behalf. This often involves signing a purchase agreement that clearly states the terms of the transaction.
• Full Disclosure: Be sure that the seller understands they are not relieved from their original mortgage obligation. The loan remains in their name, but you will handle the payments. Attend Mike's training to learn more about this and how to handle these motivated sellers.

5. Title and Deed Transfer

• Title Transfer: In a Subject To deal, the title of the property is transferred to you, but the mortgage stays in the seller’s name. The deed is typically transferred through a quitclaim deed or a warranty deed, depending on the state laws.
• Escrow and Title Company: It’s a good idea to work with a title company or real estate attorney to ensure that the title is properly transferred and to verify that there are no other liens or issues with the property that could complicate the deal. Attend Mike's training and learn how important getting an O & E Report is when buying a property subject-to.

6. Negotiate Terms

• Loan Terms: In many Subject-To deals, the seller may agree to leave the mortgage in place, but you’ll need to negotiate how the property will be handled and what, if any, equity the seller will receive.
• Down Payment: In some cases, you may offer the seller a small down payment to motivate them to move forward with the deal. In others, you may be able to negotiate a no-money-down transaction depending on the seller's situation.

7. Verify the Mortgage Details

• Due-on-Sale Clause: One important consideration when buying Subject To is the due-on-sale clause, which is a provision in many mortgage agreements that allows the lender to call the full loan balance due upon transfer of the property. While this can be a concern, many investors successfully navigate it by making the mortgage payments on time and not notifying the lender about the transfer. However, there is always a risk that the lender could invoke the clause. This doesn't mean they WILL call the loan due, but that they CAN. You will want to attend more training about this to fully understand what the due-on-sales clause is and how it works with subject-to deals. Don't shy away from a deal because of the fear of a lender calling the loan due. Seriously, attend Mike's training and learn all about the due-on-sales clause and how it relates to purchasing a subject-to deal.
• Loan Balance and Terms: Understand the current balance of the loan, interest rate, monthly payment, and any potential fees for late payments. Also, make sure to review the lender’s policies and any relevant restrictions on the mortgage.

8. Structure the Deal

• Monthly Payments: You will begin making the mortgage payments directly to the lender. Often, you will set up a system to handle this, either through the seller or a third-party servicer.
• Equity Position: If the seller has equity in the property, you can negotiate payment for that equity upfront or agree to pay it later in the form of a lump sum or installment payments. Alternatively, you may buy the property at a price that reflects the existing loan balance.
• Renting or Selling: After closing, you can choose to either rent out the property (especially if the monthly payments are lower than market rent) or sell it for a profit, potentially making a profit on both the sale price and the equity in the property.

9. Record the Transaction

• Public Records: Be sure to record the deed transfer with the local county recorder’s office to make your ownership official.
• Insurance: You should also ensure that property insurance is updated to reflect your ownership of the property.

10. Maintain the Property and Payments

• Property Management: As the new owner of the property, you’ll need to manage it, whether that means fixing up the property, renting it out, or preparing it for resale.
• Mortgage Payments: Continue making the mortgage payments to the lender on behalf of the seller. If you plan to rent out the property, you can use the rental income to cover the mortgage payments, and the rest can be profitable.

Buying a property Subject-To can be a great way to acquire real estate with little upfront investment, especially if the seller is in a situation where they need to get rid of the property quickly. However, it’s a complex strategy and involves some risk, so It’s important to do your due diligence, work with professionals (attorneys, title companies), and understand the terms of the existing mortgage to ensure the transaction goes smoothly.

If you're new to this strategy, consider working with an experienced real estate investor or mentor who has done Subject-To deals before.