May 13

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What You Need to Know About Subject-To Real Estate

By Jeff Coffman

May 13, 2020


Estimated reading time: 3 minutes

“Subject-To” is a way of purchasing¬†real estate¬†where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, “Subject-To” the existing financing. The investor now controls the property and makes the mortgage payments on the seller’s existing mortgage. Properties can be purchased using this method with little cash and no credit. “Subject-To” is a creative real estate financing technique that all serious investors should know and understand.

Typically homeowners who are behind on payments or are already in foreclosure are the most common types of motivated sellers and are good candidates for “Subject-To” purchases. You can approach the homeowners and explain to them that you are interested in purchasing the property “Subject-To” the existing financing. This can be a win-win scenario for both the seller and the buyer. Sellers can avoid foreclosure and the devastating impact that it has on their personal credit by allowing a buyer to take over their existing payments. In addition they will have monthly on-time payments recorded on their credit report while the buyer makes the payments on their mortgage. Buyers are able to purchase a house without obtaining traditional financing and avoid paying the associated fees and costs.

“Subject-To” is the easiest, fastest, cheapest, and least complicated way to acquire property. Although, contrary to what some will tell you, it is not without risk. One risk includes the possibility that the seller could file for bankruptcy. In this circumstance the investor owns the house and equity in the house, however, the original borrower still owns financial commitments to the loan taken “Subject-To.” The loan can be included in the bankruptcy and the property could be foreclosed on by the original lien holder.

Agreeing to make payments on someone’s loan is a huge responsibility; anyone utilizing this method of buying should approach the loan as if he had personally signed the mortgage. Or, for the security and “peace of mind” of both buyer and seller, have a qualified intermediary (such as a lawyer or title company) collect and send in the monthly payments.

Some techniques teach to hide the ownership of the property by placing the property in a trust and selling the beneficial interest of the trust. This is an attempt to avoid triggering the due-on-sale clause (which is found in most conventional mortgages). Because of the Garn-St. Germain Act, placing property into a trust is permissible and does not violate the due-on-sale clause. The due-on-sale clause is widely thought of as not being a threat to the investor because mortgage companies are not active in calling notes due for violating this clause in a mortgage. Some mortgage companies, however, could consider this practice fraudulent to a certain degree.

“Subject-To” is a great way to build a portfolio of income-producing real estate. There are no limits because the loans are not in your name and you never have to qualify so you can buy as many as you want. It is powerful stuff. Buying real estate “Subject-To” is a technique that can be a wonderful tool for the experienced investor as it is one of the best ways to build wealth at break-neck speed.

Jeff Coffman

About the author

Jeff Coffman is a real estate investor, creative finance expert, coach and mentor to aspiring real estate entrepreneurs across the United States. Jeff provides a dynamic mix of traditional investing advice and creative real estate acquisitions strategies like "Subject-To" and Lease-Options to help investors like you build and grow your brands and businesses.

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