To Subject-to or Not To Subject-to

[David Cohen]

I have a seller that has offered to sell his house to me for what he owes on the mortgage. Still a little low but not that much lower than houses on the street are worth.  But then I thought as a subject-to it might be worth it, so I wouldn't have the downpayment. Then I could put my capital into the fixes and not the loan. He owes $150,000 and pays $1000 a month.  What do you think?  

[Jeff G.]

@David Cohen subject-to can be a good way to build your portfolio quickly. But be careful. Most of the people I know who do Subject-To transactions do so with a few added steps:

The Process

• They provide the seller with a Subject-To hazards disclosure form. Find one that is valid for your state, have a qualified attorney review it, and use it.
• They put the house in a trust and make the current owner the executor or the trust. A bank account gets setup for the trust with several months worth of reserves, etc. and the title gets transferred to the trust. All this juggling takes a bit of time The due on sale clause is not triggered, yet.
• A good loan servicing company is hired to make sure everybody gets paid on time. This is critical to keeping everyone happy.
• Once all of that infrastructure is put in place then the you're elected the executor of the trust by the end-end buyer. The Due on Sale clause is now violated. Which leads me to my next point....
• Everyone I know who has Subject-To in their portfolio and stays in the business acquires the property at price low enough that they could sell the property retail within 90's or less. This is used as a stop-loss measure of last resort should the lender exercise their right under the clause. Adjust that timeline accordingly if you're in a judicial foreclosure state vs. a non-judicial one.

Things You Should Know

• The Guru's will tell you that the bank is highly unlikely to foreclose. This is technically correct at present, but there is a vast difference between a statistically unlikely event and a statistically impossible event. Banks do occasionally foreclose on Subject-To deals. Typically, this happens when something goes wrong with payment processing and they have a reason to start looking at what's going on.
• Also, as the economy changes note that should the Federal Reserve ever raise interest rates significantly during the lifetime of the subject-to agreement the lenders will have a vested financial interest in foreclosing because they can re-issue the loan at a higher rate of return.

I haven't personally done a Subject-To deal. I want to get more Wholesaling deals under my belt first. But, that's personal preference on my part. If you feel comfortable proceeding come back and tell us how it went!

Some Resources

• HOW TO INVEST ‘SUBJECT TO’ AND OVERCOME THE “DUE ON SALE” CLAUSE | EREI 28
• BP Radio Podcast 002: Starting Out with Karen Rittenhouse – Subject To, Direct Mail, and Investing from a Woman’s Perspective
• BP Podcast Show 70 buy subject-to, with wrapped mortgage, selling owner financed