Buying Real Estate "Subject To"

By Kathleen Couch

"Subject To" is when you purchase property subject to existing financing already in place, along with any other liens or encumbrances already attached. 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. Even in easy credit times every real estate investor should have "subject to" in their arsenal of financing methods. With the existing credit crunch, it is priceless.

Advantages of Buying Property by "Subject To"

  1. Banks are not needed.
  2. Low Closing Costs
  3. Fast Closing Time
  4. Credit not Needed
  5. Use the owner's interest rate (usually lower)
  6. Own the property with long term financing in place

Do Not Believe These Statements

  1. Buying "Subject To" is illegal
  2. You are not personally responsible for the loan
  3. You do not need any money for "subject to"
  4. The bank will foreclose if they find out

There is nothing illegal or unethical about buying a property "subject to". People who say this usually do not understand "subject to" fully. "Subject to" is on the HUD 1 statement on line 203. It says "existing loans taken subject to"

You are responsible for the timely payment of the loan you take over. The contract you make with the seller is enforceable in court. Even if it was not enforceable, you would not want to be unscrupulous in your dealings. Your first priority should be to the person you made the contract with concerning the loan, and any other parts of the contract.

Money is needed for a "subject to" deal. In some cases the homeowner has quite a bit of equity, and you agree to pay him some with cash. In the case of a pre foreclosure, you would need to catch up the loan first before taking it "subject to". Other times the home may need repairs before you market it. Or, sometimes you may only need money for holding costs.

About foreclosure, it is unlikely. As long as the payments are being made on time, the bank will most likely not foreclose. It is not fun, or profitable for a bank to foreclose. The average costs per property for a bank is $40,000. Plus, they have to hold in reserve, (not able to lend) 6 times the amount of the loan they foreclosed on. That is why lenders are short on mortgage money.

On the subject of worrying about if the bank finds out, I want to give you a personal example: I was making an automated payment on a loan, that I had taken the property "subject to". It was the policy of this lending institution that sometimes they come on the automated system with a live person. This happened this time. Along with some other general questions, I was asked, "Are you doing a "subject to" to buy this property"? I caught my breath, and said," Yes". The reply was, "Okay, just keep making the payments". What the bank is really interested in is getting paid.

Finding a owner who will sell by "subject to" is not as hard as it seems. They are some of the same distressed owners that you will find to be a motivated seller. Most cannot keep making the payments, and welcome the relief. Reasons vary, some need to move, some desire to rent, 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 is a "subject to" deal does not mean you can buy a bad deal. After you determine the numbers work, and the seller is interested...

1. Fill out with the seller the PURCHASE AND SALE AGREEMENT use the information the seller tells you. There should be a clause(s) for you to do due diligence.

2. Get an authorization to RELEASE INFORMATION TO A THIRD PARTY, use this authorization to talk to the sellers lender, to order the payoff amount, and to find out if there are delinquent payments.

3. Now investigate for tax liens or other liens, market value, title search, recheck figures, determine repairs, and the cost of repairs. If you are qualified, do this yourself, but bring in the experts if you need. Most of us need expert opinions in some areas. This is DUE DILIGENCE.

4. Determine if your research gives the same information as the seller. a. continue preparing the deal b. amend the agreement c. reach a new agreement d. void the agreement because of information you have found.

5. WARRANTY DEED TO TRUSTEE puts the property into a trust. The trust owns the property and the beneficiaries own the Trust.

6. TRUST AGREEMENT this offers the benefits stated in #5, and gives some protection for the "subject to" transaction.

7. LETTER OF AGREEMENT AND ADDENDUM: reiterates the understanding reached between the Sellers and you and becomes a part of the file for the property.

8. MORTGAGE CHANGE LETTER: advises the mortgage company the property has been put into a trust, and the name of the trustee, and that the checks will be coming from the trustee.

9. INSURANCE CHANGE LETTER: The same purpose as the mortgage change letter, but to the insurance carrier/agent.

10. LIMITED POWER OF ATTORNEY: The document allows you or your company to sign on behalf of the seller in matters of insurance payoff requests escrow account.

11. SELLER DISCLOSURE LETTER: Confirms there were no extenuating circumstances surrounding the agreement to sell the property.

12. GET COPIES OF: or originals in some cases, mortgage coupon book, (or info for online payments), copies of original Deed & Mortgage, current Insurance Policy, Survey, & Title Insurance Policy, Appraisal, Alarm Codes, and Garage Door Openers, Keys

When doing a "subject to" transaction, be genuine and explain the transaction thoroughly. You are solving their problem. Do not make any promises you can not keep. In doing "subject to" the biggest potential for risk is:

  • a) you make a bad deal
  • b) tenant/buyer problems (do not pay and/or trashes property)
  • c) interference from sellers after the fact: if the seller shows potential for this type of problem, do not do the deal
  • d) due on sale: the risk is there, but slight