Audio

Intro

Explains the process of buying a property “subject to” existing financing, meaning the buyer takes title without assuming the loan.

Details the motivations of sellers willing to do this, often those facing foreclosure, and addresses common concerns like due-on-sale clauses.

Outlines the legal and practical steps involved, including using land trusts and various agreements, and discusses strategies for finding and working with buyers using seller financing.

Compares “subject to” purchases with lease options.

FAQ

Subject-To Real Estate Investing FAQ

1. What does buying a property “Subject To” mean?

Buying a property “Subject To” the existing mortgage means taking ownership of the property without officially assuming the existing loan in your name. The loan remains in the seller’s name and on their credit report, but you make the payments. It’s often referred to as “Getting the Deed.”

2. Why would a seller agree to a “Subject To” transaction?

Sellers typically agree to “Subject To” deals when they’re facing foreclosure or are highly motivated to sell quickly. They may be behind on payments, have damaged credit, or simply need to get rid of the property for personal reasons. A “Subject To” sale can provide them with debt relief and avoid foreclosure damaging their credit further.

3. Won’t the bank call the loan due because of the due-on-sale clause?

Most mortgages have a due-on-sale clause that allows the lender to demand full payment of the loan if the property is sold without their consent. However, while banks have the right to call the loan due, they often choose not to if the mortgage payments are being made on time. Foreclosing is expensive and time-consuming for lenders, and they prefer to have performing loans on their books.

4. Do I need to qualify for a loan to buy a property “Subject To”?

No, you don’t need to qualify for a loan to purchase a property “Subject To.” This is a significant advantage for investors with limited credit or funds.

5. Is buying a property “Subject To” unethical or illegal?

No, it’s not unethical or illegal as long as both the buyer and seller are aware of the due-on-sale clause and its potential consequences. All parties should sign a clear agreement outlining the terms of the transaction and acknowledging the risks.

6. What are the advantages of buying “Subject To”?

No Loan Qualification: You don’t need to qualify for a mortgage.
Low Down Payment: You can acquire a property with little to no down payment.
Faster Closing: The closing process is generally quicker and less expensive than traditional financing.
Multiple Exit Strategies: You can hold the property as a rental, resell it with seller financing, or fix it up and sell it on the retail market.

7. What are the disadvantages of buying “Subject To”?

Due-on-Sale Clause Risk: Although the risk is typically low, the lender could enforce the due-on-sale clause and demand full loan repayment.
Resale Challenges: Some buyers may be hesitant to purchase a property with an underlying “Subject To” loan due to the potential for the loan to be called due.
Potential Liability: If the original borrower defaults on the loan, the lender could foreclose on the property.

8. What legal documents are essential for a “Subject To” transaction?

Purchase and Sale Agreement: This outlines the terms of the sale, including the “Subject To” financing arrangement.
Seller’s Due-On-Sale Acknowledgment: This document confirms the seller’s awareness of the due-on-sale clause and the potential consequences of the transaction.
Quitclaim Deed to Trustee: The seller deeds the property into a land trust, providing an added layer of protection for the buyer.
Authorization to Release Mortgage Information: This allows the buyer to obtain information about the existing mortgage from the lender.
Limited Power of Attorney: This grants the buyer limited authority to handle matters related to the property on behalf of the seller.
Insurance and Escrow Documentation: These documents ensure that the buyer is covered by the insurance policy and can control the escrow account.

Understanding Subject-To Real Estate Investing

Source: Excerpts from “Sub ject to the Existing Financing..txt”

I. Introduction to Subject-To Transactions

Buying a Property “Subject To”: Defines “Subject To” as taking ownership without assuming the loan, highlighting its common reference as “Getting the Deed.”
Sellers Who Will Walk Away: Explores the motivations of sellers willing to deed properties with existing loans, often driven by foreclosure, credit concerns, or a desire for debt relief.

II. Legal and Practical Considerations

Due-On-Sale Clauses: Explains the clause’s implications, emphasizing that banks have the right, but not the obligation, to call the loan due upon transfer. Dispels the misconception that loan payoff is mandatory for title transfer.
Banks Must Choose to Even Care: Analyzes banks’ motivations, highlighting their preference for performing assets and aversion to foreclosure expenses.
You Don’t Have to Qualify to Assume Loans: Clarifies that assumption doesn’t require qualification and that the process for new loans and assumptions is identical.
Is this unethical or illegal?: Addresses the ethical and legal concerns, asserting its legality and emphasizing transparency with the seller. Discusses the practicalities of making payments and the limited likelihood of banks actively monitoring title transfers.

III. Property Types and Advantages/Disadvantages

Types of Property to Invest In: States that all property types are viable for “Subject To” transactions, emphasizing the importance of aligning investments with financial goals.
Advantages of Buying “Subject To”: Outlines the advantages, particularly for beginners or those with limited funds/credit, highlighting minimal down payments, no loan qualification, low closing costs, and flexible exit strategies.
Disadvantages of Buying “Subject To”: Acknowledges the due-on-sale clause as a potential disadvantage, suggesting lease options as an alternative if uncomfortable with the risk.

IV. Agreements and Documentation

Agreements for Sub2: Introduces the necessary agreements and documents for “Subject To” transactions.
Getting the Deed “Subject To”: Details the process of obtaining the deed, highlighting the simplicity and need for specific disclosures and paperwork.
The Purchase and Sale Agreement: Explains the agreement’s role, emphasizing the need for a specific addendum outlining the “Subject To” terms.
Seller’s Due-On-Sale Acknowledgment: Describes the addendum’s contents, emphasizing its importance in disclosing the due-on-sale clause and potential consequences to the seller. Highlights the seller’s acknowledgments regarding the loan, potential foreclosure, and non-assumption of the loan.
The Quit Claim Deed To Trustee Deed Into A Land Trust: Explains the use of a land trust for liability protection and avoidance of foreclosure complications. Addresses the naming convention for the trust and the importance of timely deed recording.
Get an Authorization to Release Mortgage Information: Emphasizes the necessity of obtaining authorization from the seller to access mortgage information.
Get a Limited Power of Attorney: Explains the need for a limited power of attorney to handle property-related documentation on the seller’s behalf.
Updating the Insurance Coverage: Details the process of adding the new owner as an insured party on the hazard insurance policy.
Controlling the Escrow Account: Explains the need for documentation ensuring any remaining escrow balance is applied to the loan balance upon payoff.
The Mortgage Company Calls The Loan Due: Provides a sample letter to address the unlikely event of the bank enforcing the due-on-sale clause. This letter asserts the legality of the trust arrangement under the Garn St. Germain Act.

V. Executing a Subject-To Deal

Executing A Seller Finance Section Deal: Discusses using seller financing as an exit strategy, advocating for lease options for maximum control.
Finding Seller Finance Buyers: Offers strategies for finding buyers, including leveraging a buyer’s list, running targeted newspaper ads, and collaborating with real estate agents and mortgage brokers.
Pre-Qualifying Seller Finance Buyers: Explains the importance of pre-qualifying potential buyers, focusing on down payment capabilities and comfort level with the due-on-sale clause.
Buyers Who Will Assume The Deal: Outlines the considerations for assigning seller financing to a new buyer, including down payment requirements and transparency regarding the due-on-sale clause.

Study Guide

Understanding Subject-To Real Estate Investing

Glossary of Key Terms

Subject-To: A real estate transaction where a buyer takes ownership of a property while the existing mortgage remains in the seller’s name. The buyer makes the mortgage payments, but the seller remains legally responsible for the loan.
Due-on-Sale Clause: A clause in most mortgages that allows the lender to demand full payment of the loan if the property is sold without their consent.
Quitclaim Deed: A legal document that transfers ownership of a property without any warranties or guarantees about the title.
Land Trust: A legal entity that holds title to real estate for the benefit of a beneficiary.
Beneficiary: The person or entity who benefits from the assets held in a trust.
Authorization to Release Mortgage Information: A document that authorizes a third party to obtain information about a mortgage from the lender.
Limited Power of Attorney: A legal document that gives someone the authority to act on behalf of another person in specific matters.
Garn-St. Germain Act: A federal law that provides certain exemptions to due-on-sale clauses, including the transfer of property into a trust for the benefit of the owner.
Lease Option: A contract that gives a tenant the right to purchase the property they are renting at a predetermined price within a specific timeframe.
Seller Financing: A financing arrangement where the seller of a property provides a loan to the buyer.

Quiz

Instructions: Answer the following questions in 2-3 sentences each.

What is the main difference between buying a property “subject to” the existing mortgage versus assuming the mortgage?
Why might a seller be willing to sell a property “subject to” the existing mortgage?
How does a due-on-sale clause affect a “subject to” transaction?
Why might banks choose not to enforce a due-on-sale clause in a “subject to” situation?
What is the benefit of using a land trust in a “subject to” transaction?
Why is it important to obtain an Authorization to Release Mortgage Information from the seller in a “subject to” deal?
How can a buyer protect themselves when taking over a property “subject to” an existing mortgage?
What are the advantages of buying a property “subject to”?
What are the disadvantages of buying a property “subject to”?
What are some exit strategies for an investor who has purchased a property “subject to”?

Answer Key

Subject to means the buyer takes title without being personally liable for the loan. The seller remains responsible for the debt. Assuming a mortgage involves the buyer qualifying for the loan and taking on personal liability for the debt.
A seller may be motivated to sell “subject to” if they are facing foreclosure, need quick debt relief, or have little equity in the property. It allows them to avoid a foreclosure on their credit report.
A due-on-sale clause gives the lender the right to demand full payment if the property is sold without their consent. While technically triggered in a “subject to” transaction, lenders often don’t enforce it if the mortgage payments are being made.
Banks generally prefer to avoid the costs and hassle of foreclosure. As long as the mortgage payments are current, they may choose not to enforce the due-on-sale clause.
A land trust provides a layer of asset protection and privacy. It can also potentially shield the transaction from triggering the due-on-sale clause, depending on the specific wording of the mortgage.
This authorization allows the buyer to obtain information about the loan balance, payment history, and other details from the lender.
The buyer should obtain clear legal documentation from the seller acknowledging the due-on-sale clause and agreeing to hold the buyer harmless if the lender enforces it. Using a land trust and other strategies can also mitigate risks.
Advantages include requiring little or no down payment, bypassing traditional loan qualification requirements, and providing multiple exit strategies.
Disadvantages include the potential for the lender to enforce the due-on-sale clause, difficulty in reselling the property without paying off the loan, and potential legal complications.
Exit strategies include refinancing the property once the buyer has sufficient equity, selling it with seller financing, or renting it out and collecting rental income.

Essay Questions

Explain the ethical considerations involved in “subject to” real estate transactions. Consider the perspectives of the buyer, the seller, and the lender.
Analyze the risks and benefits of using a land trust in a “subject to” real estate transaction.
Compare and contrast lease options with “subject to” transactions as investment strategies.
Describe the steps involved in finding and pre-qualifying suitable buyers for a property purchased “subject to.”
Discuss the legal implications of a lender choosing to enforce the due-on-sale clause in a “subject to” transaction. What options are available to the buyer in this scenario?