Minnesota Real Estate Investors Association, Inc.

How to Buy Subject-To Properties

By: Loreal Loftus

Buying Subject-To properties is a strategy used in real estate investing where the investor acquires a property without assuming the seller's mortgage or paying off the existing debt. Instead, the investor takes control of the property, but the mortgage remains in the seller's name. This method is particularly useful when the seller is in a distressed situation, such as facing foreclosure or struggling with high mortgage payments.

Here’s a step-by-step guide on how to buy Subject-To properties:

1. Understand the Concept

• Subject-To refers to buying a property where the existing financing (mortgage) stays in the seller’s name, but the buyer (investor) takes over the property’s control, including payments and maintenance.
• The buyer does not assume responsibility for the loan, but they are typically given access to the title and can manage the property as if they owned it.
• The lender is not directly involved in the transaction, and the seller remains legally responsible for the debt unless the lender agrees to a formal assumption.

2. Find Motivated Sellers

• To make a Subject-To deal work, you need to find sellers who are in distress or motivated to sell, such as:
• Sellers facing foreclosure.
• Homeowners who can't afford their mortgage payments.
• Sellers with a property that has significant equity but they are unable to sell via traditional methods.
• You can find these leads through direct mail, online marketing, networking with real estate agents, or using foreclosure lists.

3. Negotiate with the Seller

• Explain the Subject-To method to the seller, focusing on how it can help them avoid foreclosure or relieve them of a financially burdensome property.
• Some key points to cover with the seller:
• You will take over the mortgage payments, which allows them to avoid foreclosure.
• The loan will remain in their name, but they will be relieved of the financial responsibility for the property.
• The seller may be able to leave the property without any further obligations, depending on the agreement.
• Be transparent and make sure the seller understands the arrangement fully.

4. Verify the Loan Status

• Research the property and the mortgage.
• Check the outstanding mortgage balance, monthly payments, and terms of the loan.
• Verify whether there are any late payments or the risk of foreclosure.
• Confirm whether the mortgage has a due-on-sale clause (most loans do, which means the lender can demand full payment if the property is sold or transferred).
• If the loan has a due-on-sale clause, you may still be able to proceed, but you will need to address how to mitigate the risk of the lender calling the loan.
• In some cases, lenders don’t enforce the due-on-sale clause immediately.
• Some investors have successfully negotiated with lenders to avoid triggering the due-on-sale clause.

5. Create a Purchase Agreement

• Draft a purchase agreement that includes the Subject-To terms. The agreement should clearly state:
• The price of the property.
• The seller's loan amount (what you're taking over).
• Any other terms of the agreement, such as the timeline for the transfer of the property and responsibilities for repairs, maintenance, and taxes.
• The agreement should also address how you’ll take over the mortgage payments and the seller’s responsibilities, including any escrow fees or closing costs.

6. Obtain the Title and Deed

• To take control of the property, the deed needs to be transferred to you. This is typically done via a Quitclaim Deed or a Warranty Deed, depending on the situation.
• Ensure that the deed is transferred correctly, and that the title is free of liens or issues that might complicate your ownership.

7. Have the Seller Sign the Necessary Documents

• Along with the deed transfer, the seller will need to sign any documents required to transfer ownership and give you the legal right to manage the property.
• You should also have the seller sign an agreement stating that they will continue to make the mortgage payments (if that’s part of your agreement) until you take over the payments.

8. Make the Mortgage Payments

• Once you take control of the property, you will begin making the mortgage payments on behalf of the seller.
• Be sure to make the payments on time to avoid any issues with the lender or the property’s status.
• Keep a record of the payments you make and monitor the loan balance.

9. Address the Existing Mortgage

• After acquiring the property Subject-To, you can either continue to hold the property, rent it out, or sell it.
• If you plan to sell the property, you might need to deal with the original mortgage or explore options like refinancing or selling the property with the existing loan in place.

10. Consider the Legal and Tax Implications

• Understand that the seller’s name will remain on the mortgage, so you may want to consult with a real estate attorney to ensure the transaction is structured correctly.
• Check if there are any tax or legal consequences for the seller, as they may still be liable for the mortgage even after the transaction.
• Additionally, you might want to consult with a tax advisor to understand how the Subject-To strategy impacts your finances.

11. Post-Transaction Considerations

• If you hold the property long-term, you may choose to either rent it or flip it depending on the market.
• If you sell the property, you may need to handle the remaining mortgage balance during the sale process.

Important Notes:

• The due-on-sale clause is a potential issue to consider. Some lenders might enforce it once the property is transferred, but many lenders don’t typically enforce it immediately. If the clause is a major concern, you might need to consult with a real estate attorney for guidance on how to proceed without triggering it.
• The Subject-To strategy is legal, but make sure all the necessary legal steps are followed to avoid future complications with the property or the mortgage.

Buying Subject-To properties can be a great way to acquire real estate with minimal capital, but it's important to be well-informed and to handle the transaction with due diligence.