Sub2 Real Estate: What Is SubTo In Real Estate? 

Sub2 Real Estate: What Is SubTo In Real Estate? 

A subject 2 real estate deal can be beneficial to both real estate investors and sellers. When done right, this strategy can help a seller avoid foreclosure while the real estate investor gets a property at a discounted price. 

There are three main types of a SubTo real estate deal in real estate and if you want to add them to your toolbox, you better stick around! Here we cover everything you need to know about sub 2 real estate deals including its types, benefits and risks, finding subject to properties, and more!

What Is SubTo in Real Estate?

SubTo in real estate means you buy a property that is still "subject to" its existing mortgage. You take over the monthly mortgage payments of the property legally but the former owner is still named as the borrower by the lender. 

Most commonly, homeowners and investors enter this deal to avoid foreclosure or short sales. The lender is not informed of this deal but the real estate investor serves as the legal owner of the property as long as he is paying the mortgage.

The real estate investor has all the rights to the property so he can fix it up, flip it, or rent it out.

As for the seller, not only can they avoid foreclosure, but they'll also be paid the difference between the current market value of the property and the exact mortgage payment they owe. 

Note that depending on negotiations, the buyer or real estate investor may need to settle the mortgage payments within a short period or a longer period. 

Many subject to real estate deals do not have an official agreement. However, if the buyer failed to pay the mortgage for a few years, the house would be foreclosed and he would also suffer losses just like the seller. 

Subject To vs. Loan Assumption or Existing Mortgage Assumption

In a subject to deal, the seller is still named as the financially responsible party by the lender. Meanwhile, in a mortgage loan assumption, the seller is already out of the equation. The mortgage loan is named after the buyer or real estate investor.

For sub2 deals, the lender can still go after the home seller once the buyer or real estate investor defaults on payment. This is not possible for mortgage loan assumption since the financial responsibility solely falls on the buyer. 

The buyer goes through the same loan qualifications, pays the closing costs, and keeps the original interest rate when he assumes a mortgage. 

Most sellers enter sub 2 deals even though it is more risky because they are already underwater and under distress. In other words, they owe the bank more than the current market value of their property. Through entering a subject 2 deal, they don't have to pay the difference between the property's worth and what they owe in cash. 

Also, mortgage assumption is only allowed for governtment loans such as the FHA. However, for conventional loans, mortgage assumption is not an option leading many sellers to enter a subject to deal.

How Does a SubTo Work for a Real Estate Investor

There are three major types of subject to loans that home sellers and real estate investors can enter. They are the following:

Cash to Loan Subject To Sale

In this type of real estate subject to deal, the subject to real estate investor pays the home seller the difference between the current market value of the property and their mortgage balance. This is the most common subject to deal. 

Here's an illustration of how it works:

Joseph is facing foreclosure so he wants to sell his property as a subject to deal. The current market value of his property is $250,000 and his existing loan balance is $200,000. The experienced investor would pay the seller with the difference which is $50,000 and continue paying the $200,000 balance. The property would be under the real estate investor's ownership so long as they settle the monthly payment. The buyer owns the property through a deed.

Straight Subject To with Seller Carryback

Another type of subject to deals is the seller carryback, owner financing, or seller financing. In this strategy, the seller finances the deal for the real estate investor or buyer or carries back a certain part of the purchase price. Think of it as a second mortgage. 

Often, this strategy is used when the buyer cannot pay for the full price of the property or the seller just wants to eliminate some risks. 

For example, Joseph is selling his property for $250,000 but the buyer was only able to borrow $200,000 to make the payment. In this case, Joseph will lend the $50,000 difference to the buyer which will be called the seller carryback so the buyer can make full payment. The buyer would be given a short period to pay for this. 

In this deal, the seller doesn't really give the buyer hard cash but only allows the buyer to pay the existing loan balance in installments. 

Wrap Around Subject To

Among the three real estate subject to deals listed here, the wrap around subject to strategy is the least common. In this type of deal, the interest rate of the new mortgage loan is calculated using the existing mortgage plus extra premium.

The homeseller is the one responsible for paying the interest rate to the lender so they put a top up to the interest they ask from the buyer. 

Why Do Real Estate Investors and Sellers Want a Subject To

Subject to deals are becoming more and more common because it offers lots of benefits. Here's why many investors and sellers prefer a subject to deal:

Buyers

• Discounted Property. Entering a sub 2 deal means the buyer doesn't have to worry about several fees. A few examples would be down payment, property taxes, appraisal, origination, or even closing which can cost thousands of dollars when getting a new mortgage. Many homeowners also want to sell fast so they sell below market value so long as the mortgage is still paid.
• Low Interest Rate. If the property was purchased a few years back, chances are, its mortgage interest rate is lower compared to the interest rates of a new loan. 
• Little to No Money Down. Since you aren't getting a new loan, you won't need any money for down payment or closing costs. It can be recalled that in traditional sales, you need to at least pay 20% of the property's sales price. For a subject to deal, all you have to pay for is the difference between the market value or purchase price of the property and the existing loan balance. This often accounts for only a small amount so you still have a great cash flow even if interest rates rise.
• Fast Closing. Since there would be no lender or title company involved in the sale or property subject to, you'll be able to close fast and assume ownership of the property.

Sellers

• Sell the Property Fast. As mentioned, subject to deals have fast closing since there are no mortgage lenders or title companies involved. The whole buying process is also reduced. This is super ideal if the seller wants to close fast because they are relocating for a job or they want to get rid of a property that has damages but still has a remaining balance. 
• Avoid Foreclosure. In most cases, sellers who enter subject to deals would avoid defaulting on their mortgage, undergoing foreclosure, or bankruptcy. When a buyer pays in cash to cover the beneficial interest of both parties, all problems are solved.
• No Repairs or Renovations Required. Since the seller is selling sub2, they are not expected to make any repairs or renovations which are oftentimes required when listing a property in the MLS. The buyer, in this case, would be responsible for any repairs.
• LumpSum Payment. If a property is worth more than a seller owes, they would still get a significant amount of money that will be paid upfront by the buyer. This is a big help for sellers who are in need of fast cash or experiencing financial distress.

Risks of a Subject 2 Deal in Real Estate

Not many investors and sellers are excited to enter the subject to game. For them, the benefits of this strategy do not outweigh its risks. That said, here are the risks associated with sub2 deals for the buyer and seller.

Buyers

• Enforcement of Due-on-Sale Clause. Many mortgage contracts have a due-on-sale clause which means the lender can demand that the remaining existing mortgage balance be paid in lieu of a sale. Technically, a sub2 deal means the property gets sold so the lender can enact this clause. This would put the seller's credit at financial risk as well as the buyer's property title. 
• Chapter 7 Bankruptcy. If a seller files for chapter 7 bankruptcy, the property might be seized by the existing financing company as collateral for the outstanding mortgage. In this case, the buyer would lose all his equity. Someone's loan is a huge responsibility and when a buyer makes the seller agree to a subject to setup, he should also practice due diligence.
• Loan Acceleration. A mortgage loan acceleration can be triggered by a change in policy insurance. This means the seller's mortgage company can require immediate payment before the expiration of standard seller's loan terms. 

Sellers

• Loss of a Home. The seller can lose the property should the subject to real estate investor stop making mortgage payments or if the seller's lender enacts the due on sale clause. 
• Liability. Since the seller is still named in the mortgage and has the legal obligation, they would have to continue the monthly loan payments or penalties if the subject to real estate investor fails to do so.  This is why many are confused as to why would a seller agree to enter this type of deal.
• Low Credit Score. Again, when the buyer does not settle the monthly payments for the mortgage agreement, the credit score of the seller would be affected since they are the one named on the loan.

How to Mitigate the Risks of SubTo

There is no doubt that subto deals can be risky. Hence, you need to take proactive steps so you don't suffer a loss in the end whether you are an investor or seller. 

Buyer

• Research anything that could affect the deal. As is with any subject to real estate model, you have to research every aspect of the sale before signing everything including the property itself, the neighborhood, the market, the loan terms, other past balances, etc. Practice due diligence since this can make or break a subto financing.
• Get everything in writing. Any subject to real estate transaction related to the deal like purchase agreement, terms of the subject to deal, etc. should be written as it will serve as the protection of both parties if the deal goes south.
• Familiarize yourself with the state laws. Researching the state laws about subject to deals or current mortgage loans is also suggested before embarking in subject to real estate transactions. For example, some states are strict about the due-on-sale clause.
• Get insurance. While it's difficult to get insured for a subject to property, it isn't impossible.
• Analyze the investment property. If you are buying the house as an investment property, do a thorough analysis so you can identify whether it is really a great investment despite the risks. Run neighborhood comps, analysis or rental properties, or calculate the after repair value to see if you will really profit from it in the long run. 
• Hire an experienced real estate attorney. You would need an attorney to draft a legally binding contract for the subject to deal. This is to ensure that every aspect of the sale will go smoothly.

Seller

• Do a background check on the investor. Make sure that the real estate investor you will transact with has an impressive track record and subject to real estate portfolio. Don't work with investors who you find very sketchy since the beginning.
• Make sure everything is in writing. Similar to the buyer, make sure you get everything in writing when the buyer acquire property including repayment agreement, terms of the subject to deal, etc. for your own protection.

How to Find Subject To Properties

Now that you are already familiar with the sub2 model in buying properties, it's time to start your search for the perfect deal. Here are some strategies and motivated sellers you might want to consider. 

Seller in Foreclosure or Those Can't Make Mortgage Payments

As mentioned, homeowners facing foreclosure want to sell fast to avoid short sales. They're the best sellers to find because they are ready to sell even below market value or purchase price as long as the mortgage balance is covered by your payment. 

Sellers That Don't Want to Make Repairs

In some cases, the damage on a property is too expensive to repair making homeowners want to move out. Unfortunately, they can't because they run the risk of paying two mortgages when they purchase a new home. If you want to buy a distressed property and flip it, these homeowners should be on the top of your list.

Distressed Properties on the MLS

The MLS or multiple listing service is teeming with distressed properties that do not sell fast. You may want to work with a real estate agent to get access to the MLS and identify these properties as their owners would typically sell at a discounted price just so they can get rid of its burden. 

Drive for Dollars

If you have the time and patience, you can drive for dollars in your target neighborhood and identify vacant and distressed properties that you can get through a sub to. There are many driving for dollars app you can use to get the contact information of property owners. 

Real Estate Network

Many real estate investors get in touch with their network to find sub to deals. This may include fellow investors, real estate agents, family members, and friends. You may do so as well.

How to Present Subject To

When you finally found a seller who is willing to enter a sub to agreement, reach out to them with a proposal. Explain the advantages of this overall investment strategy compared to mortgage assumption. For example, its speed and cost-effectiveness.

Meanwhile, if you are a seller looking for a subject to sale, make sure you contact a reputable buyer or real estate investor. You are at an advantage here so don't let the investor solely set the terms.

Once both parties agreed to the buyer's purchase price and terms of the deal, they should contact a real estate attorney to make a contract. After which, the sale can close. 

Summary: What is SubTo Real Estate?

A subto deal isn't for everyone. It has its fair share of risks to both the seller and buyer if the sale did not go as planned. Nevertheless, if both the buyer and seller are motivated on their sale agenda, this model of real estate investing is very much profitable. 

If you have decided to embark on a sub to transaction but don't know where to find leads, check us out at Property Leads. We sell different types of motivated seller leads exclusively so you won't have many competitors.

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