In today’s rapidly evolving real estate landscape, many realtors and homeowners alike are being presented creative offers as investors look to adapt. Some sellers find themselves at a crossroads, contemplating the implications of a conventional sale versus the unconventional approach of selling a home subject to the existing mortgage. In the current interest rate environment, where market prices and property values can experience rapid shifts, this article aims to simplify the nuanced considerations that sellers must weigh when navigating these two options.

Conventional Sale:

In simple terms, a conventional sale in real estate is the traditional way of selling a house. In this process, a homeowner hires a realtor to find a buyer who will purchase the property using their own funds or by getting a mortgage from a bank. The buyer takes ownership of the house, and the seller receives the agreed-upon sale price in cash, of course having to pay the remaining mortgage balance and other associated costs of the sale. The buyer secures a new loan to purchase the home, and the seller typically moves on with the proceeds from the sale.

Pros:

1. Cash Payment: In a conventional sale, you typically receive the full sale amount in cash at the closing, providing immediate liquidity once the mortgage balance, commissions and other costs have been paid.
2. Quick Closing: Conventional sales often have a faster closing process compared to subject-to transactions, which might involve more paperwork.
3. Market Price: Depending on market conditions, sellers may have more control over pricing and negotiations in a conventional sale, potentially fetching a market-driven price.

Cons:

1. Market Conditions: The property market can be unpredictable, and you might have to wait longer for a buyer in a slow market.
2. Repairs and Inspections: Buyers may request repairs or concessions based on home inspections, adding potential costs and delays.
3. Closing Costs: Sellers are typically responsible for covering closing costs, which can be a significant amount.
4. Buyer Finance Contingencies: Often times, buyers in conventional transactions must find a property before being fully approved for the funds, creating a risk to the home seller that the transaction could not close after being off-market for the contract period.

Subject-To Transaction:

In layman’s terms, a “subject-to” sale in real estate refers to a unique transaction where a buyer purchases a property, but instead of securing a new mortgage, they agree to take over the existing mortgage that the seller already has on the home. Essentially, the buyer assumes responsibility for making the mortgage payments, and the loan remains in the seller’s name. This type of sale can be appealing because it allows the buyer to acquire the property without the need for new financing, however it also comes with considerations like the existing mortgage terms and the seller’s ongoing connection to the loan.

Pros:

1. No Need for New Financing: Buyers take over the existing mortgage, which can be beneficial in a low-interest rate environment, and sellers avoid the hassle of finding a new buyer with financing.
2. Flexible Terms: Subject-to transactions may allow for more flexible terms in negotiations, such as a lease-option or delayed closing.
3. Potential for Higher Sales Price: As the buyer is taking over an existing mortgage, the property may be more attractive, potentially allowing for a higher sales price. Subject To investors are occasionally able to pay the seller more cash at close than they would have received in a conventional sale.

Cons:

1. Lack of Control: After close, sellers no longer have control over the property and mortgage, as it’s dependent on the new owner to manage everything related to the property.
2. Due-on-Sale Clause: The existing mortgage may have a due-on-sale clause, allowing the lender to demand full repayment if the property changes hands, though enforcement varies and experienced investors have solutions if one were to be called.
3. Legal and Ethical Considerations: Subject-to transactions involve legal and ethical considerations, all parties should ensure compliance with local laws and regulations.

The decision between a conventional sale and a subject-to transaction is undoubtedly multifaceted, each avenue presenting its own array of merits and risks. A conventional sale offers sellers the allure of immediate liquidity, market-driven pricing control, and a quicker closing process. On the flip side, subject-to transactions introduce a unique strategy, allowing buyers to assume existing mortgages and potentially fetch higher sale prices. For homeowners considering selling their home subject to it is important to have some understanding of what the buyer plans to do with the property after closing and some idea of their experience or current portfolio.