The "Subject To" Strategy

[Nathan Claire]

The famous “subject to.” Investors far and wide have pondered what this mysterious term refers to and how it can be utilized in putting a quality deal together. A subject to deal refers to purchasing a property “subject to” the existing mortgage. This means that the property currently has a mortgage on it from a lender. The mortgage consists of the term or years left on the note, the interest rate, and the remaining principal balance. When taking on an existing mortgage from the seller, the loan stays in their name while the deed to the property transfers to you. The payments are now your responsibility. However, if for some reason you do default and no longer make the payments, you are not liable or at risk, the seller is. Their credit will take the hit and you’ll be relieved of your obligations.

So what makes this “subject to” thing so appealing for investors? First off, taking over payments on an existing mortgage allows you to save time by already having financing in place. You won’t have to go through underwriting with banks and deal with appraisals. You also won’t have to qualify for the loan, so your credit isn’t pulled or taken into consideration for you to obtain financing. Next, you may be able to take advantage of a low monthly payment and interest rate depending on the structure of the loan. This low monthly payment allows you to move into the property and live there for an affordable price or rent out the property and generate cashflow.

Another benefit of a “subject to” deal is possibly being able to acquire property for a low downpayment. Most sellers who are willing to let someone take over their mortgage payments are facing foreclosure and would rather walk away with something than lose their house entirely, in addition to taking a credit hit. The majority of these sellers are behind 1-3 months in payments and added fees and this amount typically isn't anything over 10-15k. They may want to walk away with some cash, and this can vary from seller to seller. I’ve seen deals where sellers only ask for 2-5k and others where they want 50k or more. This usually depends on the equity they have built in the property. If the seller is only asking for their past due payments to be covered and for a small amount of cash on top, this can be an easy deal to wholesale to a first time home buyer. This buyer may have 15-25k saved but cannot get the financing in place to purchase a property due to credit or past eviction issues. The good news for them is that you now have a property where they won’t need to secure financing in order to move into the home. They can pay the downpayment and have a place to live. Depending on the scope of repairs, you could also wholesale these deals to a flipper/rehabber.

As you can see, the “subject to” strategy has many ways in which it can be utilized and used for your own benefit. However, there are also some risks you do have to look into before assuming a mortgage. The length of the term is important, and if the loan term is set to expire in a few years, there may be a balloon payment attached to this. A balloon payment is when the bank demands for the remainder of the loan balance to be paid in full at the end of the term. Similar to this, is the due on sale clause. This clause is triggered when the mortgagee goes to sell the property. Once sold, the new buyer is required to pay the remainder of the loan balance. When looking at doing a subject to deal, make sure to understand all aspects of the loan agreement so you don’t get caught up in something you don’t want to take on. Besides this, subject to can be an awesome way to acquire property for a low up front cost and or low monthly payment, allowing you to wholesale to a first time home buyer/flipper or rent the property out for some solid cashflow.