By Donna Robinson
A look at the exit strategy angle, and what real estate investors need to do to protect themselves when buying real estate subject to the existing mortgage, as an investment strategy.
The author has permitted the reprinting and redistribution of this article.
A “subject-to” offer simply means that the buyer is willing to purchase a piece of property “subject-to” some specific circumstance. Usually that circumstance will be the sellers existing mortgage. It can also be a variety of other things.
One of the most common “subject-to” clauses in real estate contracts is “subject-to” buyers inspection. But for real estate investors, the most common use of the term “subject-to” is in relation to purchasing a property “subject-to” the sellers existing mortgage. This means that at closing, the property is titled in the buyers name, but the loan is still in the sellers name. Therefore, you are buying the property “subject-to” the sellers existing mortgage payments.
What are the advantages of “subject-to”?
The most common advantage is the can buy without the need to qualify for a new loan. When you purchase a property “subject-to” the existing mortgage, the seller is basically agreeing to allow a buyer to take possession of their property, and pay their existing mortgage payments. Since the buyer is not qualifying for a new loan, and the existing loan is in the sellers name, it is the sellers credit that is at risk. This means that a buyer does not need to worry about having good credit.
Why would a seller agree to allow you to take over a loan that is in their name?
There is definitely some risk involved for a seller who agrees to sell a property “subject-to” the existing mortgage. For one thing, if the buyer decides to walk away from the deal, or fails to make those mortgage payments, the seller is the one who will suffer. A sellers credit rating could be ruined by a buyer who fails to make the mortgage payments on time. So the buyer should consider the commitment being made, and do proper due diligence to insure that the deal makes sense.
This is also an excellent way for today’s credit challenged home buyers to buy a home to live in. With the housing meltdown and the resulting credit crunch, sellers must look at creative ways to sell that will allow for a win-win transaction. So subject-to transactions can be used to solve problems for both buyers and sellers.
I once did a “subject-to” deal with a seller who was getting married and moving out of state. She had been trying to sell her property for several months, with no takers. It was in a great area, in a nicer neighborhood, but the house needed some general updating of colors and carpet.
For the seller, time was running out. The wedding was only weeks away, and the she was planning to take up residence with her new husband in his house. Because of this she was motivated to sell the property any way she could.
She accepted an offer to buy her property subject-to the existing mortgage, for two years. That meant that we had two years to get new financing and pay her off. She understood the risk to her credit and was concerned, but we were able to produce references and other documentation that made her feel comfortable doing this deal with us.
Had she not been in the position she was in, she likely would never have agreed to accept a sale that would leave the mortgage in her name, so motivation was the primary factor in this deal. But, that being said, it was still a great way for the seller to solve her problem, and create a win-win for both parties.
We updated the house, and sold it a few months later to a buyer who was able to qualify for a new mortgage. The seller got her money about a year and a half earlier than expected.
The seller discounted the property about 20% from her asking price. While the buyer made good on the promise to renovate and resell the property. Compromise and Commitment were the two key components to this deal getting done right.
The “subject-to” arrangement allowed the seller to solve her immediate problem. It also allowed us to buy the property without having to qualify for a new loan. Everyone was happy.
In part 2, we’ll discuss the components that go into writing an offer to buy a property “Subject-To” the existing mortgage.
Donna Robinson is a licensed agent, real estate investor and real estate consultant, located in metro Atlanta, GA. She is a respected authority on the subject of real estate investing and property evaluation. Get Donna’s free newsletter for real estate investors at
http://www.biggerpockets.com/articles/
