Subject To for Primary Residence?

Question

Hello there,

I'm a fairly new investor and have questions about using subject-to financing for a primary residence. I currently live in a two-story home in North Dallas and recently saw a sign come up in my neighborhood for a one-story home that we originally wanted. The home originally sold for 1.3M (during the peak of 2022) but is currently listed at 1.1M. When speaking to the listing agent, she could not tell me any information on his financing situation and only stated that the seller knew he would be selling his home at a loss. At current interest rates, the new mortgage would be more than our current home to move into this smaller house. If the numbers make sense, we would like to keep our current home as a LTR/MTR. When bringing up subject-to as an option, the agent kept stating that his loan was un-assumable and that there was nothing more outside of traditional financing that could be done. I felt like I wasn't making any progress with the agent so I wanted to speak with the seller directly. I was able to find out his contact information pretty easily with a simple google search.

So my questions are:

1. Am I doing anything illegal/violating anything by speaking to the seller directly? I'm not a real estate agent.

2. Can someone provide me with some resources (i.e lawyers, title companies, etc) on how to do sub-to deals in Texas?

3. Anything else I may need to consider/that I overlooked?

Bruce Lynn · Answer

FORGET this. There is a 99% chance this is not going to work for 100 different reasons.

#1 you probably need to check and see if it even has financing on it.   I can do that for you if you give me the address.   Plenty of cash sales over the past several years.

#2 Keeping your current home as a rental in $1million neighborhood probably makes no sense even if you have super low interest rate.  Sell that bad boy and either put the cash in the new house or buy some other investment properties that make sense.  You loose your capital gains exemption if you turn it into a rental (some exceptions).  Wild guess, but let's say you are in the 20% bracket and have a $500,000 gain, you'd quickly lose $100,000. Even if you cash flow $1000/month and now I'm throwing out wild number that's a 10 year payback just at break even.   Don't do that to yourself.  The rental market at $10,000/month is super thin in DFW and you may sit for months vacant and vacancy kills any returns and you likely don't really have any anyway.  If you wouldn't buy it as a rental today, then it is likely not a good rental.  Chances are that it is not a good MTR either.  Relo company or insurance companies aren't going to pay that much and they'll just force the customer in a hotel or apartment.

#3.  If there is financing, chances are the seller will need that credit to go buy their next home and is savvy enough not to want to tie up that financing with an unknown 3rd party for the next 28 years.  There is so much risk for the seller in most cases it makes absolutely no sense in this market for them to take that on.

#4.  Sub2 is really for markets like we had back in 2008-2011 timeframe where there were whole neighborhoods of houses and foreclosures for sale, no one had equity and maybe even negative equity.  If they were divorced or forced to move, they often really didn't have any option other than Sub2 and could be talked into it not fully understanding the consequences.   It was worth a roll of the dice.  Maybe it would work out.  Often it didn't and they still got screwed over.  The Sub2 buyer would just pocket rent for a year or two, never pay the mortgage, house would get foreclosed on and original owner payed the price.

#5.  The other trick we see today with people thinking they can assume the mortgage is how does the equity get paid.  Tough if not impossible to find a lender for the difference as a 2nd loan on a Sub2 deal.  So that leaves you paying cash for whatever equity the seller wants/needs.  Maybe in this case there is now equity, or they're willing to give it up, or company is taking care of it.

#6.  How much do you know about insurance?  It's an issue.  So if you think you can fly under the radar by not transferring the deed, then how do you get insurance in your name?  Have a big wind and hail storm and the owner decides just to pocket insurance proceeds?  Their house, their insurance.  It's in their name.   OK so you want to resolve this by transferring the deed.  Now the lender gets notified.  DOS is not a myth.  Probably doesn't happen often, but crazy things happen.  Think there will be any banks that go out of business in next 5 years, think any are going to have real estate issues, think any will merge or have a takeover?   What happens when OZK goes thru a merge and whoever takes them decides they don't want the low rate residential mortgages.  So then they need to sell them, they start doing audits.  Bingo DOS.

#7 How about homestead exemption for taxes?  Leave deed in seller name, but they don't live there, no homestead exemption, so your taxes probably go up 30%.  Dallas and Tarrant were doing homestead audits this year if you think that doesn't happen.   Transfer the deed and claim your homestead and lender then gets your tax bill to pay from escrow, bingo you've notified them of the sale.

#8.  Plenty of people will tell you lenders never exercise DOS.  They probably didn't as much when rates were falling, but when they're going up, may be a completely different situation.  They might have been less interested in exchanging their 8% home mortgage to a new one at 4%, but these days they may be much more interested in exchanging the 3% or sub 3% to one that is 7% and maybe earning another origination and underwriting fee.

Sean Jastillano · Answer

Hey Peter, I live in Dallas too. I’ll send you a DM. Assumable mortgages and Sub-To are totally different though. I was wondering the same thing cause I’m working with an agent to birddog deals for me and I’m a wholesaler. Most Agents aren’t versed with the nuances of Subject To unless they’re a Unicorn agent/commercial agent or they don’t know how to explain it to their sellers. but being underwater is a perfect subject-to situation!

Diego A. · Answer

All comments are valid, but a few things to consider here:

First of all, I am not an attorney, so this is not a legal advice, only options based on my experience.

-  Subject-to is not being accepted by any lender at the current rates. Texas is good in the sense that there are possible options to do this anyways without notifying the lender, so here it comes the second consideration, in which the seller has to have assurance that you have the funds.

When a seller is in a transaction, the idea is to dispose the property, in a subject-to, he is still at risk and that responsibility on working with you is on him, which makes it a bit discouraging for the seller depending on the situation.

I have only seen this happening when the seller was not going out of the city and they were investors.

- Contacting to the seller directly is un-ethical, this is not because you are by-passing the agent but because the seller is not a real estate professional, and he might disclouse things that affects him on the deal that will make the negotiation tougher for the seller, in which case it will be a lose-lose situation for him.

- You should look at talking with a real estate attorney if you want to know more. Title companies generally won't discuss this matter with general public, but they will speak with an agent because the agent is who brings them business.

- You should consider working with an agent that is experienced, so that you don't work alone. At the end this is a business transaction and for such as much support as possible is better. They will be able to discuss with a few attorneys and give you possible advise in the situation and direct you to an real estate attorney that will be able to answer your questions. An agent has access to multiple mortgage brokers as well. Currently the loan market due to the interest rates have come with many different programs that can help you as well. Don't stick with one but try a few.

Jonathan Greene · Answer

Everything that Account Closed said plus you are already being a nuisance to the seller in my mind. They have listed the house on the market. They have an agent and will be paying that agent to be the buffer between buyers and them. They don't want to deal with you direct. And they definitely don't want someone new to subject-to trying to explain it to them and how it would work that the mortgage would stay in their name and the due on sale clause. This is usually about reading too much about creative finance. If I had an agent, had my property listed, and someone kept trying to contact me directly I would probably get a restraining order against them.

Andrew Syrios · Answer

It is not illegal to reach out to the seller directly but it's considered very bad form to go around the agent and they will probably just tell you talk to their agent. You could ask to speak to both the seller and agent to explain what you're looking to do. We've done this before although it's only been on what are clearly investment properties (apartments or portfolios of houses).

Furthermore, as an agent, unless the seller was desperate to sell and had no other options I would never recommend to them to take a subject to deal. You're just leaving your credit in someone else's hands and recommending that could potentially have liability for the agent if they endorse it.

Guy Gimenez · Answer

@Peter Shin

Getting an agent/broker to understand sub-to or a wrap will be very difficult. They will generally talk the seller out of it regardless of whether the seller has other viable options. Anything an agent/broker doesn't understand will be considered illegal, immoral or unethical in their minds.

The agent is generally not authorized to provide a buyer with any confidential information on the seller or seller's financing. All you can do is submit the sub-to offer in writing to the agent and send a copy to the seller as well. Once you send the offer, you can follow up directly with the seller if you wish. There is nothing illegal about direct communication between buyers and sellers.

You will need a real estate specific Texas licensed attorney to draft the sub-to offer...unless you just want to broach the subject with the seller via a Letter of Intent.

In addition to the offer terms, a savvy seller will want you to prove your have ample ability to pay both notes (your existing home and the seller's note(s)). But a good real estate attorney will help you understand how to do that as well.

Preston Dean · Answer

1. No but don't expect much of an answer

2. Yes I can help walk you though it if you'd like. I'll send you a message

3. I would like to see the Sellers Disclosure and look more into the property

@Peter Shin

Subject To for Primary Residence?

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