In the recent years, subject to has quickly become one of the most talked about topics in the real estate industry. Anyone currently in real estate should at the very least understand how it works and its use case.

The Basics

Existing Mortgage Remains: The most defining feature of a “Subject To” transaction is that the property is purchased subject to the existing mortgage. This means the mortgage remains in the seller’s name, but the deed transfers to the buyer.

The Mortgage does not need to be assumable: For subject to sales, the underlying mortgage does NOT need to be assumable. Subject to is not an assumption and therefore does not involve or require any communication or approval from the lender.

Transfer of Deed: Despite the mortgage remaining in the seller’s name, the deed to the property is legally transferred to the buyer. This means the buyer gains ownership of the property, even though they are not the named debtor on the mortgage.

Buyer’s Payment Responsibility: The buyer agrees to make mortgage payments on behalf of the seller. Experienced subject to buyers will have protections for the sellers in place in case a payment is ever missed.

Buyer’s Additional Responsibilities: After closing, the buyer is entirely responsible for the home. This includes but is not limited to the mortgage, insurance, taxes, maintenance, etc.

Benefits of “Subject To” Transactions for Sellers and Buyers

Sellers:

Quick Sale Process: “Subject To” transactions can often be completed much faster than traditional sales, especially since there’s no need for the buyer to secure new financing. This can be particularly beneficial for sellers needing to sell quickly due to relocation, financial distress, or other urgent reasons.

Ease of Transaction: For sellers who have struggled to sell their property through traditional means—possibly due to market conditions, property condition, or their own financial situation—a “Subject To” sale can offer a less stressful and more straightforward alternative.

No Need for Repairs: Buyers in “Subject To” transactions are often investors that may be willing to buy the property as-is. This can save the seller the time and expense of making repairs that might be required in a conventional sale.

Flexibility in Negotiation: Since the sale can be structured in a way that is mutually beneficial without the strict requirements of traditional lenders, sellers might find more flexibility in negotiating terms that suit their needs, such as sale price, closing date, and other conditions.

Relief from Burdensome Payments: If maintaining the mortgage payments is financially burdensome, transferring the obligation to a buyer can provide immediate financial relief. This can be particularly attractive if the seller has moved out and is carrying the cost of a new residence along with the old one.

Potential to Salvage Credit: By ensuring that mortgage payments continue to be made, a “Subject To” sale can help a seller avoid late payments or foreclosure, both of which can severely damage credit scores. The ongoing payments made by the buyer can actually help improve or maintain the seller’s credit standing over time.

Buyers:

Favorable Loan Terms: Buyers inherit the existing mortgage terms, which can be advantageous if the interest rate on the existing mortgage is lower than current market rates. Additionally, they step into an amortization schedule that’s already underway, potentially saving years of interest payments.

Immediate Cash Flow: For real estate investors, purchasing a property “Subject To” can allow for immediate rental income and cash flow, especially if the property is already tenanted. This can be an attractive prospect for building an investment portfolio quickly.

Lower Initial Costs: “Subject To” purchases can significantly reduce the initial cash outlay required to acquire a property. Buyers may avoid or minimize down payments, closing costs, and loan origination fees that are typical in traditional mortgage processes.

Rapid Acquisition: The process can be much faster than traditional buying methods since it eliminates the time needed for loan approval. This speed can be crucial for investors looking to capitalize on timely market opportunities.

Potential for Creative Financing Solutions: “Subject To” transactions open the door to creative financing solutions that can be tailored to the buyer’s and seller’s needs, offering a level of flexibility seldom found in traditional real estate transactions.

The Realtor’s Role in “Subject To” Transactions

Educate the client: A realtor’s primary responsibility is to explain the benefits and risks associated with this type of transaction to their client. Understanding how they work as well as knowing what protections should be in place for both parties is crucial.

Facilitate negotiations: Similar to a traditional transaction, the realtor acts as a mediator between the buyer and seller, facilitating negotiations to reach a mutually beneficial agreement. This includes terms of sale, handling of future risks, and potentially navigating conversations around the existing mortgage.

Identifying potential “subject to” opportunities: Whether representing buyers or sellers, the realtor should know how to identify situations where a subject to transaction may be favorable to the party they are representing.

Scenarios where “subject to” is particularly advantageous

Difficulty Selling: If the property is difficult to sell due to market conditions, its condition, or other factors, a “Subject To” arrangement can attract investors or buyers who are looking for creative financing options.

Quick Sale Requirement: Sellers needing to sell quickly, perhaps due to a job relocation, PCS relocation, divorce, or financial distress, might find “Subject To” transactions appealing because they can be completed faster than traditional sales.

Underwater Mortgages: For sellers who owe more on their mortgage than the property is worth, a “Subject To” sale might offer a way out without going through a short sale process.

Facing Foreclosure: Sellers at risk of foreclosure can benefit from a “Subject To” sale as it allows them to avoid the foreclosure process and its negative impact on their credit score. The buyer taking over the mortgage payments can provide immediate financial relief.

Additional Considerations:

IRS Acknowledgement of “subject to”: “Subject-to” appears on lines 203 and 503 of the HUD statement, indicating the acquisition of the property under the conditions of the current mortgage. This is further supported by its inclusion on the HUD statement and detailed in IRS Publication 537, available here.

Closing process: Experienced subject to buyers will follow a traditional closing process through either a title company or an attorney, depending on the state.

Credit Risk for Seller: Since the mortgage remains in the seller’s name, the seller’s credit is at risk if the buyer fails to make payments. The sellers credit can also benefit if they have missed any payments. It’s crucial for sellers to have safeguards in place, such as the ability to reclaim the property if the buyer defaults on their payment obligations. Experienced subject to buyers will have such protections in place as standard practice.

Do not be misled by unscrupulous Subject To investors that state or present a simple performance clause or similar document to be added to the contract for the seller’s protection. These clauses are NOT enforceable and any investor presenting this likely has little to no experience. Experienced investors will provide a legitimate and enforceable form of protection and should outline this prior to getting into contract.

The seller’s VA entitlement: If the property has a VA loan, assuming that is the only VA loan the seller has, they should have remaining entitlement left for their next purchase. The exact value of their remaining entitlement is dependent on the first loan’s balance and the county the seller plans to purchase their next home in.

Limited Lender Interaction: The buyer typically does not assume the loan formally with the lender; therefore, they may have limited interaction with the lender. It is common for limited powers of attorney to be implemented to allow the buyer to manage this as well.