Is Subject to fraud?

[Johnathan Cummings]

I have a subject to deal that I can pursue, but my broker tells me that subject to is mortgage fraud. Basically if the current owners die, go into bankruptcy, or something else, I would lose the property and it’s not worth the risk. Curious what the BP community thinks.

[Scott Trench]

Fraud? No. But, many investors who don't have material financial resources and backing may create be on the wrong side of an ethical dilemma. 

Subject to is perfectly legitimate for a multimillionaire real estate investor, doing it in select circumstances, with the easy ability to pay off a note that is called due by a lender, in the unlikely event that this happens. 

This is an ethical approach to subject to, where a seller and buyer both likely win, and the seller can be confident that the buyer is well-capitalized. 

Here's an unethical subject-to, in my opinion: Buyer has $100K income, $50K in savings, good credit, a personal residence that they barely qualified for two years ago, and is looking to score a property at today's prices with a 2021 mortgage. Buyer would not have qualified for the mortgage on their own with a broker. Buyer purchases property with subject-to financing, and would be totally screwed if the note was called. And, this is a responsible financial position for millions of Americans. Anyone with a WORSE financial position is even deeper on the wrong side of creating risk for sellers, in my opinion.

This puts unreasonable risk on the seller. 

Illegal? No. But, in my opinion, bad business practice that puts risk on the industry of real estate investing. Sure many will disagree. 

IMO, subject to is appropriate for experienced, wealthy investors who will defend their reputation with other sources of wealth. Not folks buying one of their first properties.