Why Subject to's Work!

I write a lot about leasing with the option to purchase because it's at the top of my list for how to creatively acquire property for very little money. However, I also frequently acquire homes using subject to deals (aka get the deed). "Subject To" aka “Get the Deed” is when you purchase property subject to existing financing already in place, along with any other attached liens or encumbrances.

Anyone can use this financing method but few do because many retail buyers even think it's illegal. It's not. You do not formally assume the loan through the bank. The owner deeds the property to you and you take over making the payments to the lending institution. Regardless of the credit environment, every real estate investor should have "subject to" in their arsenal of financing methods.

Subject to Deals (aka Get the Deed) are a Type of Owner Financing

Subject to deals are a form of owner financing. The current owner already has financing in place. Instead of the investor going through the painstaking (and costly) task of applying and being approved for a new loan, the investor simply takes over the sellers existing loan. The seller can make a profit on the deal but that becomes a second mortgage owed to the seller.

Like most creative financing deals, there are several ways these deals can be put in place. The one thing that needs to happen is the terms of the original loan contract need to be adhered to. There are three common ways that subject to deals are put together:

1. The investor obtains the original loan account number, mailing address, and due date to make the monthly payments. As long as the payments keep coming, the lender isn't likely to call the "due on sale" clause (no matter whose name is on the check).
2. Another common scenario is for the investor to send the original loan amount plus the amount for the second mortgage directly to the seller. The risk here is that the seller simply pockets all of the cash without making the original loan payment. This is not a preferred way to write a subject to deal contract. Especially if the seller has a history of credit problems.
3. The third common method is using a third party to distribute the money. The investor sends the money to a third party (essentially an escrow company) and that company sends one check to the original lender and another check to the seller for the second mortgage. This is the most secure but has the added cost of the third party.

Why You Would Invest in

One main reason you want to invest this way is because you take ownership of the property without putting up much (if any) of your own money. The other is that you don't have to take out a new mortgage. Taking out a new mortgage takes time and money - if you can qualify. You'll be filling out long application forms when you don't know if you'll even qualify. If you do qualify, at closing, you'll be paying all kinds of loan fees, setting up escrow accounts, and who knows what other costs will be slipped into the loan. It makes a lot more sense to take over an existing loan where all these costs and troubles have already been taken care of. You simply take possession of the house and start making the existing mortgage payments.

There are many reasons why a lender won't call the loan due as long as it stays current. Beyond the legal costs, the government keeps count of nonperforming loans and accesses punishment to irresponsible lenders that have to take a property back. Something else to keep in mind is that the investor is taking almost no risk. Even if something goes wrong with the loan and the house is foreclosed on, it's the seller's name that is still on the loan. In subject to deals, it's the seller that takes the hit on his or her credit report rather than the investor.

Why Sellers Accept Subject to Deals

Several years ago, before I knew him, an acquaintance was forced to sell a house because of a divorce. He and his wife had a successful medical equipment business that went out of business because of the divorce.

As a result, a relatively newly built nice home had to be sold quickly. When it didn't sell in the first month and the mortgage came due, he ordered the realtor to drop the price like a rock. At that point, the house did sell quickly but he took an almost $25,000 loss. What he didn't know at the time is he almost certainly could have prevented that loss if he had known about subject to deals aka get the deed.

Had he sold the house using a wraparound mortgage or one of the many other seller financing methods, he likely would have made money on the deal instead of taking a bath.

Finding an owner who will sell "subject to" is not as hard as it seems. These are some of the same distressed owners that you find in other motivated seller deals. Most cannot keep making the payments and welcome the relief. Reasons vary: some need to move, some desire to rent, own two homes, divorce, foreclosure, poor health, etc.

You use the same criteria and numbers in determining a good deal as with any other financing. Just because it’s a "subject to" deal does not mean you want to buy a bad deal. One thing you want to look at closely is whether the deed has any liens against it. This shouldn’t surprise you if the seller is having financial problems. You want to be sure to fully understand the total numbers and that you will profit from the deal.