11.25.2024 PropStream
Disclaimer: PropStream does not offer financial advice. Before pursuing a subject to deal or any other deal in real estate, we recommend doing your due diligence and consulting an attorney.
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Running out of real estate financing options? Then, it’s time to get creative. As a real estate investor, there are many ways to close a deal, some lesser-known than others.
In this article, we’ll explain what a “subject to” deal is, how this niche financing method works, its pros and cons, how to perform one, and more.
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Definition of Subject To in Real Estate
In real estate, a “subject to” deal refers to buying a property subject to the existing mortgage. In other words, the buyer agrees to make the seller’s mortgage payments.
This is different from a typical home sale, in which the buyer secures their own financing or uses cash to acquire the property, and the seller uses the sale proceeds to pay off their existing mortgage and pockets the difference.
In a “subject to” deal, the seller’s mortgage stays in the seller’s name—only the property deed and title change hands. Consequently, the seller remains liable for the mortgage, even though the buyer agrees to pay it. Should the buyer fail to do so, it could jeopardize the seller’s credit and lead to foreclosure on the home—a poor outcome for both parties and one they are motivated to prevent as a result.
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Here’s an example of a subject to deal: A homeowner has a $300,000 mortgage, on which they still owe $200,000. They choose to sell the property for $100,000, subject to. In this case, the buyer must hand over $100,000 and make payments on the remaining $200,000 loan. |
Subject To vs. Mortgage Assumption
Though often confused, a subject to sale is different from a mortgage assumption.
In the former, the mortgage never officially changes hands, so the lender isn’t involved. In the latter, however, the seller’s mortgage is legally transferred to the buyer with the lender’s approval. Therefore, the buyer must apply for the assumable loan with the lender and meet their credit requirements. If approved, the buyer becomes legally responsible for the existing mortgage.
3 Types of Subject To Deals
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There are three main types of subject to deals:
Cash-to-Loan Subject To
In a cash-to-loan subject to deal, the buyer pays the existing mortgage balance plus any cash to equal the agreed-upon purchase price.
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For example: If the sale price is $300,000 and the seller owes $200,000 on their mortgage, you’d take over the $200,000 loan and pay the seller $100,000 in cash. |
Cash-to-loan is the most common form of subject to.
Seller Carryback Subject To
In seller carryback subject to, the seller offers to finance a portion of the sale price.
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Take the previous example: But assume the buyer only has $30,000 in cash to put toward the purchase. In this case, the seller can offer to finance the outstanding $70,000, leaving the buyer with two loans to pay: the existing $200,000 mortgage and a second $70,000 owner-financed loan. |
The “seller carryback” is the amount financed by the seller.
Wrap-Around Subject To
Wrap-around subject to involves wrapping the existing mortgage and any remaining amount needed to reach the sales price into a new owner-financed loan for the buyer.
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Using our previous example: Imagine the seller offers owner financing on the entire purchase price less the $30,000 the buyer can put forward, i.e., $270,000. That way, the seller can cover the existing mortgage and pocket anything left over. Furthermore, if the seller sets an interest rate higher than the rate on their existing mortgage, they stand to profit. For instance, if the existing mortgage has an interest rate of 3% and the seller charges 4%, they’ll make 1% on the existing $200,000 mortgage and 4% on the remaining $70,000. |
Consequently, a wrap-around subject to deal can be a creative investment for sellers.
Benefits of Subject To Deals
Now that you know how subject to deals work, here are their benefits, starting with those for buyers:
Benefits for Buyers
Easier financing. Because you are taking over an existing mortgage, you don’t have to apply for financing elsewhere, relieving you of the need for good credit and potentially a large down payment.
Lower initial investment. Without lender closing costs—such as commission, loan origination, appraisal, and other lender fees—your upfront investment will be lower.
Potential lower interest rate. Now that average mortgage rates are up from 2-4% in 2020 and 2021, you may be able to take advantage of a seller’s low interest rate and preserve other advantageous financing terms.
Faster close. Since no lender is involved, subject to deals tend to close faster, giving you more time to flip the property or pursue your next deal.
Benefits for Sellers
Here are the benefits for sellers:
Quick sale. A subject to deal can help you exit an investment quickly and move on to a better one. This is especially helpful if you are in a distressed situation and need capital.
Sell property as-is. Since the buyer doesn’t have to get approved for a mortgage, they may be open to buying the property as-is, eliminating the seller’s need to make repairs.
Extra profit potential. If the seller opts for a wrap-around subject to deal, they may earn a profit by setting a higher interest rate on their owner-financed loan than the rate on their existing mortgage.
Risks and Considerations for Subject To Deals
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Of course, subject to deals involve potential risks. Here are some to consider, starting with those for buyers:
Risks for Buyers
Due-on-sale clause. Most mortgage agreements include a due-on-sale clause, which gives the lender the right to demand the remaining loan balance if the property is sold. This puts the buyer in a challenging situation. Either they pay off the mortgage or risk letting the lender seize the property, which still serves as collateral on the original loan.
Note: Many lenders won’t exercise their right to accelerate the loan because they’d rather receive steady mortgage payments than initiate a lengthy and costly foreclosure.
Seller bankruptcy. If the seller goes bankrupt, the property could be seized as collateral on the mortgage.
Legal complexity. The complex nature of subject to deals can make them challenging to structure correctly. Consult an experienced real estate attorney who can help you avoid costly mistakes and protect your interests.
Insurance challenges. Insuring a property acquired through the subject to method can be challenging. For example, a change in policyholders may trigger a loan acceleration. Consequently, it’s often best for buyers to be added to the seller’s existing policy.
Risks for Sellers
Here are the potential risks for sellers:
Mortgage liability. While the seller may no longer own the property, they’re still liable for the mortgage. That means if the buyer doesn’t keep up with the mortgage payments, the seller could face foreclosure, significantly hurting their credit.
Legal complexity. As with buyers, subject to deals can be complex for sellers. To avoid costly mistakes and protect your interests, consult a real estate attorney.
7 Steps to Complete a Subject To Deal
- Educate yourself. Ensure you understand local real estate transaction laws and consult professionals to ensure you comply with them.
- Find a suitable property. Look for motivated sellers in your market—such as those in financial distress or experiencing an abrupt life change. They’re usually more willing to consider selling subject to.
- Conduct due diligence. As with any investment, assess the property’s condition and value. Don’t forget to run a title search to check for any outstanding liens.
- Run the numbers. Calculate the property’s potential ROI and make sure it meets your goals. Compare the deal to other investment opportunities in your market.
- Negotiate terms with the seller. These include the purchase price, existing loan details, home insurance, and more. Review the terms carefully.
- Draft and sign the contract. Hire a lawyer to draft a purchase and sale agreement that complies with local regulations and protects your interests. Then sign.
- Close the deal. Ensure both parties sign all relevant documents, including disclosures, bills of sale, and title documents. Then, obtain the deed to the property.
How To Find Subject To Opportunities
Ready to find a subject to opportunity? Two words: PropStream It!
Our database of over 155 million properties and hundreds of search filters can help you quickly identify potential subject to opportunities in your market.
