What is a Subject-to Deal?

In previous columns, I’ve mentioned Subject-to Deals. This generated a lot of what-is-that phone calls and emails – from both real estate investors and realtors.

To help folks better understand this advanced creative deal-structuring technique, this month I’ll explain what it is. Next month, we’ll look at a Subject-to Deal we just did.

Normally, when you buy a house, the seller’s mortgage is paid off at closing. With a Subject-to Deal, the seller’s mortgage is NOT paid off at closing. Instead, when the property is deeded to the buyer, the seller’s mortgage remains in place and the buyer promises to pay the seller’s mortgage payments, on the seller’s mortgage, for the seller. In other words, the buyer is buying the property subject-to the seller’s mortgage. Think of it as a form of owner financing.

When first hearing about Subject-to Deals, most folks believe this type of transaction must be illegal – Kim and I hear this all the time. Fact is, Subject-to Deals have been around for decades. Look at lines 203 and 503 on any HUD-1. It reads: Existing loans taken subject to.

Many real estate professionals think lines 203 and 503 refer to a loan assumption. They don’t. A Subject-to Deal and a loan assumption are very different animals. With a loan assumption, the mortgage is transferred into the BUYER’S name. On the other hand, with a Subject-to Deal, the mortgage remains in the SELLER’S name!

Are there risks for both the buyer and seller when doing a Subject-to Deal? Absolutely…too many to list in this column. For example: Most mortgages have something called a Due on Sale clause. Basically, it says that if the borrower sells his property and doesn’t pay off his mortgage, the lender may – the key word here is MAY – call the mortgage due. Also, if the investor fails to make the seller’s mortgage payments as promised, the seller’s lender can foreclose on the property – and the foreclosure will be on the seller, not the buyer.

Before attempting to do a Subject-to Deal, make sure you get some good training – or partner with an experienced investor who has done a lot of Subject-to Deals. This will help you avoid the many pitfalls.

Do Subject-to Deals work? Kim and I have been doing them since 1998. Our personal residence, which we bought in 1999, was a Subject-to Deal. Have we ever had a seller’s mortgage called due? Never!

The three most important keys to doing a successful Subject-to Deal are: 1) Make all of the seller’s mortgage payments on time – as you promised. 2) Make sure the property taxes are paid on time. 3) Make sure you do your new homeowner’s insurance correctly – this is the biggest mistake we see investors make!

Next month, we’ll look at our most recent Subject-to Deal. We’ll also discuss why a seller would ever agree to this technique.