What is Subject to Real Estate Mean? An Investor’s Guide
Real estate investing offers numerous strategies for wealth-building, but one that is often misunderstood yet highly effective is the “Subject To” strategy. This method involves acquiring a property by taking over the seller’s existing mortgage payments without formally assuming the loan. In this guide, we’ll break down everything you need to know about “Subject To” real estate, from what it means to how to apply it in your investment strategy. If you’re considering this method, understanding its pros, cons, risks, and how to find deals will be key to your success.
What Does Subject To Mean in Real Estate?
In real estate investing, “Subject To” refers to a type of transaction where an investor acquires a property, but the seller’s original mortgage remains in place. This means the buyer doesn’t need to secure new financing or assume the loan—rather, they “take over” the mortgage payments. The seller stays on the hook for the mortgage, but the investor takes control of the property.
This strategy can be particularly advantageous when the seller is in a distressed situation or needs to move quickly. It’s a creative way to acquire property with little to no upfront costs, leveraging the seller’s financing to your benefit. The investor gains ownership of the property while the existing loan remains intact, typically without the lender’s direct approval. However, this strategy does have potential risks and nuances that investors must understand before diving in.
Pros and Cons of ‘Subject to’ Real Estate Investing
Pros
Low Upfront Costs: One of the main attractions of “Subject To” deals is that they allow investors to acquire property with little to no money down. Since the existing mortgage remains in place, the buyer doesn’t need to secure traditional financing or make a large down payment.
No Loan Qualification: Investors don’t need to go through the typical qualification process for a new mortgage. This makes “Subject To” deals an attractive option for those who may not have the credit or financial history to qualify for conventional loans.
Faster Acquisition: The process of acquiring a property “Subject To” is often faster than traditional methods because you aren’t dealing with securing new financing. This can be particularly advantageous when time is of the essence.
Opportunity for Equity: If the seller has built up equity in the property, the investor can inherit that equity and potentially benefit from appreciation over time.
Creative Financing: For investors who are familiar with creative financing techniques, “Subject To” offers a flexible way to structure deals and acquire properties without going through traditional channels.
Cons
Due-On-Sale Clause Risk: Most traditional mortgages have a “due-on-sale” clause, meaning the lender can demand the full payment of the remaining loan balance if the property is sold. While this risk is often mitigated, it’s still a potential issue that must be considered.
Seller’s Liability: Since the seller’s name remains on the loan, they may still be liable for the mortgage if the investor fails to make payments. This can lead to strained relationships and potential legal complications.
Limited Control Over Financing Terms: The investor doesn’t have control over the terms of the existing mortgage, which may include unfavorable interest rates or other conditions that might not align with their investment strategy.
Lender Scrutiny: Even though the transaction may not require lender approval, some lenders may become aware of the transfer of control, which could lead to complications. It’s important to understand how lenders may react to “Subject To” deals.
Types of Subject To Real Estate Deals
There are several variations of “Subject To” real estate deals, each with its own characteristics and benefits:
1. Standard Subject To Deals:
In this type of deal, the investor takes control of the property and assumes the seller’s existing mortgage payments, but the loan remains in the seller’s name.
2. Subject To with Seller Financing:
In this case, the investor might take over the mortgage and work out a secondary financing agreement with the seller. This may involve the seller providing additional terms for the buyer to pay off the loan or equity over time.
3. Lease Option with Subject To:
A lease option allows the investor to control the property by leasing it with an option to buy later. In this variation, the investor may take over the existing mortgage while agreeing to lease the property to potential buyers or renters.
4. Seller Financing Plus Subject To:
This hybrid deal involves both the seller financing part of the deal (a portion of the purchase price) while the investor takes control of the mortgage payments for the rest of the price.
Financing Strategies for ‘Subject to’ Investments
Financing “Subject To” deals can be quite different from traditional real estate investments. Here are a few common strategies used in these transactions:
Private Lending
Investors can work with private lenders to raise capital for repairs, renovations, or other costs associated with the deal. Private money lenders are often more flexible than banks, making them a viable option for “Subject To” deals.
Seller Financing
As mentioned earlier, seller financing allows the buyer to work out a payment plan with the seller for the remaining purchase price. This strategy can be used in conjunction with the “Subject To” method to make the deal more appealing to the seller.
Hard Money Loans
These are short-term loans often used for renovation and flipping. Hard money lenders may be more open to creative financing strategies like “Subject To” since they are focused on the value of the property.
Equity Partnerships
Some investors partner with others who bring in capital for repairs or improvements in exchange for a share of the profits. This can help investors who lack sufficient cash for the deal.
Risk Management in ‘Subject to’ Investing
Managing risks is crucial in “Subject To” real estate investing. To mitigate the potential risks, consider these strategies:
Do Your Due Diligence: Before acquiring a property, thoroughly inspect the property and research the mortgage terms. This will give you a clear understanding of the seller’s loan, including the interest rate, monthly payments, and any potential liabilities.
Create a Contingency Plan: It’s essential to have a backup plan in case the lender enforces the due-on-sale clause or the seller’s loan goes into default.
Ensure Seller Disclosure: The seller should provide full disclosure of any liens, judgments, or financial issues tied to the property. This can help you avoid unforeseen financial headaches after closing.
Legal Protection: Consider working with a real estate attorney to ensure the deal is structured in a way that minimizes your risk. Having the right legal protections in place can protect both you and the seller.
How To Find Subject To Real Estate Deals
Finding “Subject To” deals can be challenging, but the right approach can help you uncover profitable opportunities:
Direct Mail Campaigns:
Sending letters or postcards to homeowners who may be in financial distress is one way to find “Subject To” deals. Target properties with significant equity, as sellers may be more motivated to consider creative financing.
Foreclosure Auctions:
Some properties in foreclosure may be great candidates for “Subject To” deals. Investors can approach distressed homeowners and offer a solution that avoids foreclosure.
Networking:
Build relationships with other real estate investors, wholesalers, and agents who may have access to properties with “Subject To” potential.
Online Listings and Auctions:
Keep an eye on online real estate platforms, foreclosure websites, and auction sites for potential “Subject To” deals.
Conclusion
In summary, “Subject To” real estate investing can be a powerful strategy for acquiring properties with minimal upfront costs, but it requires a solid understanding of the risks involved and how to structure deals effectively. As with any investment, thorough research, planning, and risk management are key to success.
If you’re ready to take your real estate investing to the next level, Dwan, the founder of Dwanderful, offers great resources to help you master creative real estate strategies. Download the free book Real Estate Lingo and explore the paid book Five Pillars of Real Estate Investing to enhance your knowledge. Don’t forget to take the fun and insightful quiz to discover how you could potentially generate six figures in the next six months, whether you’re buying your first property or your next! Contact us now!
Frequently Asked Questions:
1. What is a subject to offer in real estate?
A subject to offer is an offer made by an investor to purchase a property while leaving the existing mortgage in place. The investor takes control of the property and continues making the mortgage payments, but the original seller remains liable for the loan.
2. What is a subject to real estate contract?
A subject to real estate contract is a legal agreement in which an investor agrees to purchase a property “subject to” the existing mortgage. The contract outlines the terms of the deal and specifies the investor’s obligations for the mortgage payments.
3.Can a lender call the loan due in a subject to deal?
Yes, many mortgages include a “due-on-sale” clause, which allows the lender to call the full loan balance due if the property is transferred. However, this doesn’t always happen, and many investors have successfully executed “Subject To” deals without the lender enforcing the clause. It’s important to consult a real estate attorney to understand the potential risks and how to mitigate them.
