Subject-to Deals May Be The Ticket

Today, I spent the day working with a guy who wants to get into real estate investing. For almost twenty years, he’s worked for a big company.  Now he realizes that his efforts and ideas are making that company prosperous.  Meanwhile, his net worth is only creeping up a millimeter at a time.  He’s very concerned about his future financial well-being.

We knocked on the first seller’s door at 9:15.  We found the property while driving through a neighborhood that Kim and I regularly work.  The property owner had a For Sale sign in the yard.  After the seller told us her asking price and the reason she was selling, she invited us in.

After a bit, we learned that because of a divorce, she was being forced to move back home to Mississippi.   Problem was, she owed a lot more than what the house was worth.  We then discussed our buying the house subject to her mortgage.

This is known as a Subject-to Deal.  Basically, what happens is this:  You go to the closing and buy the seller’s property like normal.  Next, things get creative.  Instead of getting a new loan and paying off the seller’s existing mortgage, the seller agrees to leave his loan in place, and you agree to make the seller’s mortgage payment on the seller’s mortgage for the seller.  Think of it as a form of owner financing.

At first, you may be saying to yourself: Oh, Bill’s talking about a loan assumption.  But this isn’t a loan assumption.  With a loan assumption, the seller’s mortgage is transferred from the seller to you.  If you look at the mortgage after completing the loan assumption, your name is now on the mortgage, not the seller’s.

With a Subject-to Deal, the seller’s name stays on the mortgage.  The seller remains 100% responsible for his mortgage.  Again, all you’ve agreed to do is to buy the property and make the seller’s mortgage payments on the seller’s mortgage for the seller.  After closing, the property is now in your name and the mortgage remains in the seller’s name.

Couple of quick thoughts: You should NEVER try to do a Subject-to Deal unless you know exactly what you are doing.  As with any creative deal structure, there are some very slippery slopes that can cause a lot of trouble if you don’t do everything right.

For many, this creative deal structure leads to two questions: Are Subject-to Deals legal?  What seller would ever agree to do a Subject-to Deal?

Subject-to Deals are very much legal.  Look on any HUD-1 (this is a settlement statement used for most transfers of real estate) at line numbers 203 and 503.  It reads: Existing loan(s) taken subject to.  These two lines have been on the HUD-1 for many years.

As to what seller would ever agree to do a Subject-to Deal: Any seller who has to sell quickly.  If someone has a property that they must get rid of immediately, then a Sub-2 Deal may be their best ticket.

The best way to learn about Sub-2 Deals – and other creative deal structuring and financing techniques – is to hang out with experienced, local investors.  They can be a great source of real-world investing information.

Bill & Kim Cook are a husband and wife real estate investing team. They live in Adairsville, Georgia and have been investing in real estate since 1995. They specialize in buying single-family homes, mobile homes and mobile home parks. They also run North Georgia REIA and teach folks how to successfully invest in real estate.