Subject to? Pros? Cons? Helpful resources on learning more info

[Ciria Y Hinojosa]

Looking to hear others opinions on the matter of subject to deals. Also wanting advice about the pros and cons others have experienced if possible.

[Jason B.]

I consider subject to deals as an advanced strategy for RE investing. Of course that doesn't apply to everyone but there are a lot of moving parts and some of those parts can put you in a very bad situation if you don’t structure the deal correctly. Assuming you’ve got the basic concepts of selling, buying, closing, valuation, etc., you must also understand the position you’re in as the middle person orchestrating the transaction. Our deal structure requires that the seller deeds the property to our company which is a huge responsibility considering the seller’s mortgage stays in place. They remain liable for those payments although they no longer own the property. Developing that trust with a seller is the key to getting the deal to work.

You should also have a few months of reserve funds in case you have trouble finding a tenant or lease option tenant/buyer. Our purchase contract gives us 60-90 days to rehab the property, market it, and find a tenant/buyer. The seller pays those 2-3 mortgage payments before we take over the payments. We have multiple disclosures to the seller and also the tenant/buyer who is fully aware that the lender may call the loan due (due on sale clause). We operate with full disclosure to everyone. All of our documents are prepared by a local attorney who is willing to defend them in court. This is a key element to successful sub to deals.

The pros to sub to investing is the ability to take ownership of a property with minimal funds. We generally spend at least a few thousand per property to prepare it for marketing but we specifically look for move in ready or near move in ready properties so that our costs are minimal. Another pro is that we sell to a tenant buyer who pays us a non-refundable option fee, enters into a standard but separate lease agreement (which is key in our area as we don’t want the lease to be tied to the option) providing a monthly positive cash flow, and finally completing the purchase which gives us the balance of our profit.

The cons start with the spooky “due on sale clause” that has been debated for decades. My opinion may differ from many, but we cover ourselves with disclosures to all parties except to the lender. Sellers acknowledge the risk as part of the contract. We use an insurance company that prepares certificates that show the lender and seller are still covered. We’ve yet to be challenged by a lender so far. Do your own homework on this issue. There are plenty of sub to experts that have much more experience that I do and I encourage you to research it yourself.

Another con is simply not being able to put all the pieces together. Another is the amount of responsibility to all parties.

All that said, it’s one of my favorite ways to put a deal together. When it’s done properly, every party involved is thrilled to be a part of it. The seller offloads a property they don’t want. The buyer becomes a home owner in a creative way with time to get their finances in order. And we benefit monetarily for orchestrating it all.