What Is a ‘Subject To’ Deal in Real Estate Investing?

‘Subject To’ Definition

In a ‘subject to’ real estate purchase, the seller transfers the title of the property to the buyer without paying off the seller’s existing loan.

The loan stays in the seller’s name, but the buyer becomes responsible for paying it off.

‘Subject To’ Real Estate Purchase Meaning

Before we move on, let’s first address the elephant in the room by more clearly defining the meaning of a ‘subject to’ purchase.

It is an investing strategy that allows you, as the buyer, to acquire rental properties by taking over the seller’s debt.

The seller agrees to sell their property by leaving the loan in their name and deed the property to you.

A signed and notarized Special Warranty Deed transfers the title to the buyer. The signed deed needs to be recorded with the clerk of courts at the courthouse.

It officially means that you legally own the property, but you are not liable for the underlying mortgage.

You are, however, responsible for making the seller’s house payments going forward until paid in full or cashed out.

A Real Life Example

James needs to move closer to his family but he is 5 months behind on his house payment of $700.

The property is worth $120,000 but James still owes $115,000 on the mortgage that he financed 2 years earlier. The property needs a new carpet and paint that he estimates cost around $2,500.

James can’t sell the house with a realtor because he doesn’t have enough equity to pay the closing and realtor fees and therefore decides selling his home to real estate investor.

James also does not have any money saved to pay for the repairs. James receives a postcard in the mail that says “we buy houses for cash” and calls the number on the postcard.

The investor talks to James about the property and his situation. She runs her numbers on the property and decides that the property is actually worth $125,000 and could be rented for $1,000.

The investor offers to buy the property subject to the underlying mortgage by taking over his monthly payment of $700.

The investor also agrees to reinstate the loan at closing, pay James’ closing costs, buy it as-is, and close as soon as James is ready.

James agreed to accept the investor’s offer because he gets to move and sell his house.

He won’t have any out-of-pocket costs, the loan gets reinstated, and he avoids a possible foreclosure.

This is a good deal for the investor because she acquires a new property without having to get a new loan from a traditional or hard money lender.

The property also has equity and can be rented for $1,000 a month with $300 positive cash flow.

Let’s take a close look at a few of the ways you can make money on a property sold subject to mortgage.

Wholesaling

You could wholesale the property to a buy and hold investor and get paid an assignment fee at closing.

The amount of your assignment fee depends on how far behind the payments on the existing mortgage are, possible monthly cash flow, and location.

The main advantage of real estate wholesaling for the investor is not having to qualify for a bank loan to buy the property. They only need to pay your assignment fee and closing costs.

The ideal buyer will either turn the property into a traditional rental or sell to a lease option tenant-buyer.

Be careful, however, with wholesaling short sale properties. There are legal intricacies to be aware of.

Short-Term Rental

Investing in short term rentals is another great way to make money by using the ‘subject to’ real estate strategy to acquire properties.

The property could be turned into a vacation or another type of short-term rental and listed on sites like AirBnb.

Keep in mind that there will be an initial upfront cost to getting the property ready. However, it can be cash flow heavy in the right markets.

Ideally, the property should be located in a desirable area where people go to vacation or within a short commute.

Long-Term Rental

You can rent the sub-to property to tenants and become a landlord. You make money by renting the property for more than the monthly payments of the existing mortgage.

For example, if the house payments are $500 and the market rent is $800, then you would have a positive cash flow of $300.

Lease To Own

Another possible money making real estate investment exit strategy for a ‘subject to’ property is to sell on a lease to own.

By selling the property as a lease option, you get a non-refundable option fee from your tenant buyer when they move in.

Generally, the non-refundable option fee is anywhere between 3 to 7 percent of the sales price. Also, when your tenant buyer makes a rent payment, you make cash flow.

The cash flow is the difference between the existing mortgage payments and your tenant buyer’s rental payment.

When selling on a lease option, the tenant buyer is typically responsible for all repairs after the first 30 days.

The length of the lease to own contract is normally 12 to 36 months before the tenant buyer has to get their own financing and cash you out.

Seller Financing

This is where you sell the property on a wrap-around mortgage to an end buyer that can not qualify for a traditional mortgage.

The new buyer pays you a down payment between 10 to 20 percent of the sales price at closing. In addition to the down payment, you can also earn a monthly cash flow spread.

The cashflow spread is the difference between the new buyer’s interest rate and the interest rate on the existing mortgage.

With selling with owner financing, you are also able to profit on the backend. The backend profit is the difference between the underlying loan balance and the new buyer’s loan balance on the wrap-around mortgage.

It goes without saying that you should always close the ‘subject to’ transaction with either an experienced real estate attorney or title company.

As with any investment, there are advantages and disadvantages, and there is no difference with ‘subject to’ real estate investing.

We will now take a closer look at the pros and cons of buying ‘subject to’ properties for investors.

‘Subject To’ Real Estate Pros:

• You need little to no cash to buy the property from the seller. Cash is only required if the seller needs an equity payment, money to move, or if the loan is behind on payments.
• You do not need to get bank financing or third party approval to buy the property. Because of this, there are no limits to how many rental properties you can buy.
• You get to work directly with the seller. You won’t be dealing with local realtors or have to pay realtor commissions.
• You are able to get a better or low interest rate and long term financing without setting foot inside of a bank.
• There are no credit checks required. You don’t need to have good credit to take over payments on the seller’s loan.
• The barriers to entry for real estate investors are low. ‘Subject to’ purchase transactions have very low closing costs, no origination fees, or broker fees.
• You are not personally liable for the debt because the loan remains in the seller’s name.
• Subject to investing is a great way to build long term wealth and passive residual income over time.
• There is an opportunity to make a profit from increased equity and positive cash flow from increased rents.

‘Subject To’ Real Estate Cons:

• The ‘due on sale clause’ gives the lender the option to call the loan due (accelerate the loan) if the property is transferred without paying the loan off.
• Landlord insurance, if set up incorrectly, could indirectly trigger the loan acceleration with the lender.
• If the seller files a chapter 7 bankruptcy and includes the property, the trustee could demand the sale of the property.
• The lender sells the mortgage to a third party, and during that process, the new lender finds out the property transferred hands. The lender could call the loan due.

Not only is ‘subject to’ investing a great way to acquire properties, but also the pros outweigh the cons.

The reality is that no type of sales transaction is perfect, and that includes real estate subject-to investing.

‘Subject to’ real estate investing strategies are great for new and experienced investors to have in their tool box of creative real estate financing.

Buying a house subject to an existing mortgage is one the few ways to buy without using cash or credit.

Now that you’re all in, let’s discuss how to find ‘subject to’ motivated sellers and distressed properties to buy.

Properties whose owners have fallen behind on their payments, are in preforeclosure, have little to no equity, or own properties in another city are ideal deals.

Now, let’s look at the different ways to find these motivated sellers and properties for ‘subject to’ investing.

#1 HouseCashin Investment Property Marketplace

The easiest way to find ‘subject to’ properties is using the resource developed specially for real estate investors — the HouseCashin marketplace to find investment properties for sale online.

Choose your target location anywhere in the United States and use the “Deal Types” filter to select “Subject to”.

You can also select “Short Sale” because underwater property owners are often willing to sell a property ‘subject to’ as a last resort to avoid foreclosure.

On the listing preview photos, look at the labels showing whether the property is listed by a wholesaler (wholesale deal) or the motivated seller (FSBO deal).

Wholesale deals may have data helpful for investors showing analysis of potential profit and expenses such as needed repairs.

#2 Real Estate Listing Websites

Real estate listing websites have sellers that are trying to sell their house as FSBO.

Many of these sellers don’t have enough equity to pay realtor commissions and closing costs. They also might not have the cash to fix up the property.

Listings marked as ‘short sale’ should also be closely considered as these sellers, trying to avoid foreclosure, are usually very motivated. Learn more about buying a short sale home from this guide.

A portion of them own properties free and clear and would consider selling on creative terms. This is good because you get to speak directly with the seller on the phone.

Before you start dialing, you should only call the vacant property listings first. You stand a better chance of talking to a motivated seller because they are detached and have mentally moved on.

#3 Driving for Dollars

Driving for dollars is also a low cost way to find distressed properties in your area with motivated sellers open to selling subject to.

All you need to get started is a car with gas and your cell phone to take pictures. Start by driving the neighborhood and look for houses that have overgrown grass and are boarded up.

Write down the address and take a picture of the property. With your list in hand, you have two options.

• Use a skip tracing service to locate the owner.
• Use the tax assessor’s website to find the correct info.

Call the owner or start sending them yellow letters.

#4 Networking

Join and attend your local real estate investment clubs and talk to investors actively buying properties.

Focus on networking with local real estate wholesalers actively finding deals. Let them know that you are looking to buy deals where the seller has very little equity and needs to sell fast.

Most active wholesalers will usually pass on these types of deals because their main end buyers need the property to have more equity for it to work.

After you close on a deal, the wholesaler will know that you can close, and you may be the only investor getting their little to no equity deals.

Now that you can define ‘subject to’ in real estate, you have the understanding that you need to start buying properties creatively.

I hope that through this article, I have shared with you enough knowledge gained from my own cash house buyer career at www.needtosellmyhousefastindenver.com to help you find and complete your first ‘subject to’ deal.

At the first glance, subject to real estate might seem intimidating, but it’s actually not too hard to get into. Both sellers and investors can mutually benefit from ‘subject to’ transactions.