Are Subject-To Deals Safe for Real Estate Investors?

Are subject-to deals safe for real estate investors?

Sub2Empire creative finance experts, Jeff Coffman and Ken Rossics, explore the potential risks and rewards of using subject-to financing when buying properties in this podcast episode. If you’ve ever considered taking over an existing mortgage with a subject-to deal, this episode is a must-watch! Jeff and Ken break down the essential considerations that every investor should be aware of before diving into this strategy.

What is a Subject-To Deal?

A subject-to deal allows an investor to purchase a property while leaving the existing mortgage in place. The buyer takes control of the property and makes payments on the seller’s existing mortgage, without formally assuming the loan. This can be an attractive strategy for investors looking to acquire properties with little upfront capital or to avoid traditional financing hurdles. However, it’s not without its risks.

Key Risks of Subject-To Deals:

Due-on-Sale Clause: The biggest risk with subject-to deals is the due-on-sale clause. Most mortgages contain this clause, which gives the lender the right to demand full repayment of the loan if the property ownership changes. If the lender becomes aware of the transfer, they could call the loan due, which can put the investor in a challenging position.

Trusting the Seller: Since the mortgage stays in the seller’s name, it’s crucial that the seller remains cooperative throughout the process. If the seller has financial issues or enters bankruptcy, it could affect the property, even though the investor is now making payments.

Insurance Complications: Changing the insurance on a subject-to property can be complex. Investors need to ensure that the property remains properly insured while still listing the seller’s name on the existing policy. A failure to do so could lead to coverage gaps, leaving the property exposed to potential risks.

Impact on Seller’s Credit: If an investor fails to make timely payments, it can negatively impact the seller’s credit score, potentially leading to disputes and legal challenges. Investors must ensure they have a plan for consistent, timely payments.

Limited Exit Strategies: Investors using subject-to financing must carefully plan their exit strategy. Selling the property or refinancing the loan without involving the original lender can be tricky, making it crucial to have a clear plan from the outset.

Jeff and Ken discuss these risks in detail and provide practical advice on how to mitigate them, making subject-to deals a viable option for investors who understand the potential challenges. They also share real-life examples and tips to help you decide if subject-to financing aligns with your investment strategy.

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