Subject To Real Estate: An Investor’s Guide.

Your real estate investment career might get stalled if you have poor credit. Even if you have the cash to purchase a home or sufficient income to handle a mortgage loan, poor credit could prevent you from securing a mortgage loan. Many investors turn to subject to real estate deals to purchase properties without securing a mortgage. Subject to real estate is also a practical option for those who need to buy/sell a home quickly and cost-effectively.

What Does Subject To Mean in Real Estate?

In real estate, subject to means that you’re buying a home that’s subject to an existing mortgage. Under normal circumstances, what happens when a homeowner sells a property in which the mortgage hasn’t been fully paid off? Most often, the proceeds of the sale are used to pay off the remaining mortgage, and the seller pockets the rest. Or, the buyer may take over the remaining mortgage, a process called “mortgage assumption.” Subject to is a middle-ground between both options. Under a subject to, the buyer agrees to make payments to the seller’s mortgage company until the mortgage is fully paid off. The mortgage remains in the original owner’s name, but the buyer pays it off. Sometimes, the buyer may be required to pay off the remaining mortgage balance within a short period, but the buyer may also make recurring payments over a longer period.

Key items to note:

There’s often no “official” agreement between the buyer and seller The buyer (in some cases) has no legal obligation to make the mortgage payments However, the home could fall into foreclosure if the buyer fails to make payments At first glance, it appears that the seller takes on more risk since the buyer has no legal obligation to make the mortgage payments. But even though the buyer is not assuming the mortgage, the buyer is still taking the property title. If the buyer stops making payments, the house will fall into foreclosure, and the buyer will lose it. Usually, that’s plenty of motivation for a buyer to uphold their end of the bargain.

Types of Subject To Real Estate Deals

There are three types of subject to real estate deals: 1. Cash-to-loan subject to 2. Seller carry back subject to 3. Wrap-around subject to Let’s compare each one.

Cash-to-Loan Subject To

A cash-to-loan subject to is the most simple and common type of subject to. When you buy a home from a seller, you’ll pay the existing loan balance in cash. For example, if you’re buying a home for $300,000, and the existing mortgage balance is $250,000, then you’d pay the seller $50,000 in cash, in addition to the sales price. As you can see, the buyer isn’t assuming the mortgage. The buyer is just paying forward an extra sum so the seller can pay the remaining balance. When you hear people mention a subject to, they’re most often referring to a cash-to-loan transaction.

Seller Carryback Subject To

Seller carryback is also known as “seller financing” or “owner financing.” The transaction is similar to a second mortgage. A seller carryback may be a necessary option if a lender won’t offer the buyer the total amount of financing needed to buy the property. For example, let’s assume that a property is selling for $300,000. The buyer can only secure financing for $250,000, so they receive a “loan” from the seller for the remaining $50,000. The buyer makes payments to the lender on the $250,000 borrowed and makes payments to the seller for the $50,000 borrowed. The seller doesn’t actually give the buyer any money—they just allow the buyer to pay installments over a short period. In the example above, the buyer would be given a short amount of time to pay the seller carryback of $50,000. The down payment, interest rate, and terms can be negotiated between the buyer and seller. The buyer must often pay off the purchase price in 5 years or less and is typically required to make a down payment anywhere between 5% and 25% (the seller stipulates the percentage).

Wrap-Around Subject To

A wrap-around subject to is similar to a seller carryback, but the interest rate that the buyer pays is based on the interest rate for the original mortgage loan. Because the seller must pay interest on the original mortgage, they’ll require the buyer to pay a proportional interest rate that covers it. If a seller’s mortgage interest is 5%, they might require the buyer to pay 7% interest on the carryback. Ideally, the seller would make enough money to compensate for the interest on the original mortgage.

Summary

A subject to real estate deal is when you buy or sell a property with an existing mortgage. Under a subject to deal, the buyer takes over the property, but the seller retains the mortgage. The buyer makes mortgage payments for the seller, and the lender is not informed that the property has been transferred. It’s highly advised that you seek an experienced real estate attorney to help you draft a subject to agreement.