Can a “Subject to” Transaction be done SAFELY?

[Don Konipol]

Can a “subject to” transaction be done safely? 

There’s been a LOT of “hostility” on BP toward subject to transactions.  Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer.  While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase.  They further point out that many sellers are unaware of the consequences of selling subject to. 

I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing.  Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.  

The possible negatives of subject to have been thoroughly discussed.  The positives are from the buyers prospective

1- the ability to buy a property with little down payment

2- the ability to obtain financing at below market rate

3 -not needing to qualify for convention/institutional financing

4- not having another debt on your PFS

5 - not needing to pay points and other fees to obtain a new mortgage 

The positives for the seller are 

1- can possibly sell a property in which they have negative equity without bringing cash to the closing table

2 -expand the pool of potential buyers 

3 -possibly obtain a higher price/ quicker sale 

4 - can utilize a wrap to potentially earn the “differential” on interest rate 

5 -May be able to save the Realtors commission

All this being established, here’s the BIG question:  Can a subject to transaction be done where both parties are reasonably protected?  Let us know what you think! 

[T. Alan Ceshker]

Quote from @Don Konipol:

Can a “subject to” transaction be done safely? 

There’s been a LOT of “hostility” on BP toward subject to transactions.  Some posters have gone so far as to call these transactions scams, questioning the legality, morality, and ethics of the buyer.  While imo this is unfair, extreme and just plain incorrect; the detractors do rightly point out that (1) the seller remains liable for a mortgage note secured by a property they no longer own and (2) as long as the note remains outstanding the seller’s credit capacity will be impacted negatively, often resulting in the inability to obtain a mortgage for a home purchase.  They further point out that many sellers are unaware of the consequences of selling subject to. 

I think it’s important to note that subject to became popular in 1980 - 1982 when it was virtually impossible to transact real estate using conventional financing.  Mortgage rates reached 18%, so transaction were all either owner finance, wrap, cash or subject to.  

The possible negatives of subject to have been thoroughly discussed.  The positives are from the buyers prospective

1- the ability to buy a property with little down payment

2- the ability to obtain financing at below market rate

3 -not needing to qualify for convention/institutional financing

4- not having another debt on your PFS

5 - not needing to pay points and other fees to obtain a new mortgage 

The positives for the seller are 

1- can possibly sell a property in which they have negative equity without bringing cash to the closing table

2 -expand the pool of potential buyers 

3 -possibly obtain a higher price/ quicker sale 

4 - can utilize a wrap to potentially earn the “differential” on interest rate 

5 -May be able to save the Realtors commission

All this being established, here’s the BIG question:  Can a subject to transaction be done where both parties are reasonably protected?  Let us know what you think! 

We have closed well over 10,000 wraps in our law and title office and have not had 1 go back to the bank because of a due on sale issue.  I have also closed dozens myself as the buyer and seller.  It is my primary method of investing.

If structured and closed correctly, they work.  You do have to be ready to deal with the due on sale clause issue - but this is doable.

As a seller, you need to be ready to deal with a buyer default -- which I have had to do.

Lastly, you cannot just close these anywhere with any contracting.  The key is to have the foundation of the transaction solid before embarking on this. 

Stay safe out there

Alan