OfflineBuying Real Estate Subject To The Existing Mortgage Part 1 Of 3
By: Donna R.
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
“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.”
Colin L. Powell
This one definately works for me. I am currently renting and may be I will apply this method to own this property.
Thanks Sistreat,
Never regret any time reading the posts on this site. Always something I can learn or suppport I can use. Thanks!
It is new to me. One question: would you have to get approval from the bank lending the money to the seller first in order to make the deal legal? Is it OK in California to do that without bank's knowledge?
Winny
I have never done a sub 2 so someone more qualified can better answer your question. What I thnk is that if the bank (guarantor) who holds the mortgage knew about the sub 2 deal that they would "call the loan" meaning tell you that it is due in full. That is the reason for leaving the mortgage in the original persons(guarantee) name and just let the new person make the payments for them.
It just looks like the original guarantee it making payments.
Sissy
“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.”
Colin L. Powell
It seems to myself that this way of financing "subject-to sellers existing mortgage" is not made for today's current market. Or is it? Am I not thinking differently enough.
Its not a great time for it in a lot of circumstances, yea.. If the property is over-encumbered or the loan is one of those toxic loans then you DONT want to take it over.
Its not a great time for it in a lot of circumstances, yea.. If the property is over-encumbered or the loan is one of those toxic loans then you DONT want to take it over.
Thanks Mark for clearing my thoughts. I knew I wasn't crazy. But its good to understand "subject-to" a bit more and the different types.
Great article, easy reading. Well done.
Sandra
"You can never get to the top, if you are not willing to climb. Do not look at the difficulty of the climb, only anticipate the view from the top."
"Can't even walk without you holding my hand." (Song)
"Is anything too hard for the Lord ..." Genesis 19:14
"In all things, wait on the Lord."
"Think not of your own deliverance, but trust in God who will give in abundance."
"When you are down to nothing, God is up to something." Unknown
This is great. I will save this information. You just happen to catch the owner at the right time, how fortunate for you.
Cant wait for part 2.
Well, I just used the same technique above to make an offer to my landlord and I got a very positive respond.
Thanks To You All!!!
If you are the seller do a wrap around mortgage at a higher interest rate than the first. Have the buyer pay you. You pay the mortgage just like you always have. That way you know when the payments are made on time. If the buyer stops paying you can foreclose and sell the property again. You can make dinner change on the 1% intrest.
Be the banks, bank. Some lenders frown on wrap around mortgages, but I would guess they enough propertis in foreclosures & REO's today they won't say or do a thing but take the money.
Dewey