Thoughts on “subject to” deal making

[Don Konipol]

There’s a lot of negativity out there concerning the risks (especially to the seller) of subject to deals.  To sum up the risks to the seller; the seller remains liable on a note which is secured by real estate they no longer own; the property sale has violated the due on sale clause of the mortgage or deed of trust and the note can be accelerated by the lender; the seller’s credit capacity is impaired because he has debt with no offsetting property equity.  The risk to the buyer can be summed up as : violation of sue on sale can lead to note being accelerated:; assuming buyer is an investor and seller a homeowner the buyer will probably be named in a lawsuit should either the note be called or default occur.  

Although there are safeguards that can, and should be set up, this merely modifies the risks, it doesn’t eliminate them.  So my thought on this is that I wouldn’t (personal preference) engage in a subject to transaction with anyone other than an experienced investor on the other side of the transaction.  I feel that if both parties understand the risks; if real estate investing is their business, if both parties are sophisticated and experienced investors, and both decide the risks are worth taking, then subject to can be a workable tactic.  The one exception would be a transaction where the seller IS a homeowner where the loan amount is small enough that I could cover a payoff should it become necessary out of my liquid assets. 

I’d like to hear how other investors feel about using “subject to” as the advantages of (1) no qualifying, (2) lower interest rates and (3) no financing costs seem like enough to turn a marginal deal into a worthwhile investment. 

[Francisco Hernandez]

Quote from @Don Konipol:

There’s a lot of negativity out there concerning the risks (especially to the seller) of subject to deals.  To sum up the risks to the seller; the seller remains liable on a note which is secured by real estate they no longer own; the property sale has violated the due on sale clause of the mortgage or deed of trust and the note can be accelerated by the lender; the seller’s credit capacity is impaired because he has debt with no offsetting property equity.  The risk to the buyer can be summed up as : violation of sue on sale can lead to note being accelerated:; assuming buyer is an investor and seller a homeowner the buyer will probably be named in a lawsuit should either the note be called or default occur.  

Although there are safeguards that can, and should be set up, this merely modifies the risks, it doesn’t eliminate them.  So my thought on this is that I wouldn’t (personal preference) engage in a subject to transaction with anyone other than an experienced investor on the other side of the transaction.  I feel that if both parties understand the risks; if real estate investing is their business, if both parties are sophisticated and experienced investors, and both decide the risks are worth taking, then subject to can be a workable tactic.  The one exception would be a transaction where the seller IS a homeowner where the loan amount is small enough that I could cover a payoff should it become necessary out of my liquid assets. 

I’d like to hear how other investors feel about using “subject to” as the advantages of (1) no qualifying, (2) lower interest rates and (3) no financing costs seem like enough to turn a marginal deal into a worthwhile investment. 

 It's simply a way to help a seller when nothing else works. It doesn't work for everyone and it's definitely NOT for everyone. Cash deals work best and that is always and should be always the first option. But let's be honest, how many times have we seen sellers stick to their price all the way to foreclosure? Subject-to is the only way they can have what they want if the numbers make sense.