Subject to strategy basic questions

Madison, WI · Member since 2021 · 75 posts · 19 votes

Doing a subject to may help a homeowner that faces foreclosure.

I may have the stupidest question of the day, but I do not want to assume anything. When doing a subject to strategy, I understand the mortgage stays in the homeowners name, buyer gets the title and makes the mortgage payments. Once the property is sold does the homeowner get any of the equity or is that something that is negotiated?

For example: Mortgage is $200,000 ,Home value is $275,000, homeowner has paid down their mortgage by $100,000.

If I were to lease option the home and once the option to purchase is exercised and the home is sold, if no equity terms have been negotiated then all of the profit goes to me since I hold the title?

Since the homeowner has the mortgage is there a chance they would not want to close unless they get a portion of the profits?

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Chris Davidson

Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes

@Wendy Busa if you buy it subject to you own it not them, and thus they have no say on when it is sold. They would not have any right to equity from the second sale as they wouldn't be involved, and would just have the debt removed from their credit report.

Work on separating out the debt and ownership mentally as they are two different aspects. While often linked they are not the same.

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Ethan Sofinowski
Member since 2019 · 2 posts · 0 votes
3y
If the Seller wants more of his equity that would be negotiated up front. They would then have a 2nd position lien to be payed right after the mortgage is knocked out.
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Chris Davidson
Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes
3y
@Wendy Busa if you buy it subject to you own it not them, and thus they have no say on when it is sold. They would not have any right to equity from the second sale as they wouldn't be involved, and would just have the debt removed from their credit report.
Work on separating out the debt and ownership mentally as they are two different aspects. While often linked they are not the same.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3y
Quote from @Wendy Busa:

Doing a subject to may help a homeowner that faces foreclosure.
I may have the stupidest question of the day, but I do not want to assume anything. When doing a subject to strategy, I understand the mortgage stays in the homeowners name, buyer gets the title and makes the mortgage payments. Once the property is sold does the homeowner get any of the equity or is that something that is negotiated?
For example: Mortgage is $200,000 ,Home value is $275,000, homeowner has paid down their mortgage by $100,000.
If I were to lease option the home and once the option to purchase is exercised and the home is sold, if no equity terms have been negotiated then all of the profit goes to me since I hold the title?
Since the homeowner has the mortgage is there a chance they would not want to close unless they get a portion of the profits?

A mortgage loan is a loan secured by real property, it is not a personal loan. In most situations, and almost all residential situations, the note is guaranteed by the borrower.
Even if title to the property is passed, the note is still in existence unless paid in full, as well as the mortgage or deed of trust securing the note to the subject property.
When a real property is purchased “subject to” the existing note, title is transferred but the note is not paid off. If the seller of the property had personally guaranteed the note then that guarantee remains in effect despite the fact that he no longer own he property. The buyer now owns the property, but has no personal liability for the note. However the subject property is still encumbered by the existing note and related mortgage or deed of trust.
Almost all mortgages have due on sale clauses, meaning that if a property title transfers and the note is not paid off then there has been a violation of the terms of the mortgage. A remedy for that is that the lender can “accelerate” the note, i.e., call the note due and if by a specific period of time the note is not paid off then the lender can foreclose. With interest rates generally falling over the last 40 years lenders had no financial incentive to do so, and there was no efficient way for the lender to access information about title transfer. Now with many notes bearing interest rates well below market rate, and with the technology to easily and inexpensively ferret out title transfers, we may see lenders take a more aggressive stance on this issue.
The two biggest problems with a subject to property purchase is that the seller is liable for a loan secured by a property he no longer owns and the buyer now holds title to a property with a note where the corresponding mortgage has an act of default. To lessen the potential negative impact of this “problem” specific agreements and actions between the buyer and seller have been created. If you do a search for subject to on BP you’ll have access to the latest thoughts and processes for limiting potential problems.

Private Mortgage Financing Partners, LLC
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
The equity is yours.
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Charley Gates
Investor · Meadville, PA · Member since 2021 · 75 posts · 45 votes
3y
When you acquire a property "subject to" the existing mortgage, you are now the owner of the property. You hold title. Thus, any equity created through a future sales belongs wholly to you since you hold the title.
I would add that a seller with equity usually would not sell their home 'subject to' since they do not want to lose the equity that they have built up over time. Most subject to deals are in low or no equity situations.
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