Subject To – Owner Financing Made Easy
One of the best things about real estate investing is the versatility. You don’t have to already have wealth to start investing in real estate. Many investment strategies offer unique solutions to find and fund real estate investments. Subject-to financing is one of the unique real estate strategies that works for both seasoned and new investors.
What Does “Subject To” Mean?
Real estate investing, like other industries, uses jargon and industry terms. Subject To is a shortened version of the phrase, “subject to the existing financing.” For a subject to deal, the current owner finances the deal by staying listed as the borrower on the loan. The buyer receives the rights to the property with an agreement to pay the seller’s mortgage payments.
The financing agreement doesn’t shift from the seller to the investor like with a loan assumption. In fact, the lender is not involved in the deal. The Subject To agreement stays between the buyer and the seller. The buyer has rights to the property if the buyer pays the loan payment. This means the buyer has the right to rent, sell, renovate or take other action with the property.
Advantages of a Subject To Deal
Subject to deals offer a workaround from the buyer securing their own financing. This means the deal isn’t dependent on the buyer qualifying for a loan. In addition, the monthly payment and interest rate stays in place.
The amount of a monthly mortgage payment depends greatly on the interest rate. If the buyer doesn’t qualify for a low interest rate, they may not have the cashflow to pay the higher monthly payment amount. A Subject To deal removes this problem.
If the seller is open to a Subject To deal, it offers several advantages. First, the seller has a bigger pool of buyers. Even buyers without a strong credit history have the option to purchase the property under a Subject To agreement. Also, if the buyer stops making payments, the seller regains the rights to the property per the contract.
For sellers in financial hardship, a Subject To deal may help avoid foreclosure or the need to sell at a lower price. The seller catches up on payments and receives the true value of the property instead of a reduced amount. For the buyer and seller, Subject To deals create the opportunity to transfer the property without the difficulty of new financing.
Risks of a Subject To Deal
Subject To deals also include risks. For the seller, their credit score may suffer if the buyer fails to make payments and the loan goes past due. For the buyer, if they can’t pay the loan, they lose rights to the property. Subject To deals only work well for both parties if the investor pays the loan as agreed to.
The lender’s “due on sale” clause presents the biggest risk with Subject To deals. The “due on sale” clause impacts most mortgages. It states that if the borrower sells the property, the lender has the right to require full payment of the loan. Because the deed transfers to the buyer with a Subject To deal, the lender could cancel the loan by requiring a full repayment.
However, most lenders don’t realize the deed transferred, or don’t act if they receive monthly payments on time. Again, Subject To deals work best when the buyer pays the agreed to loan amount by the due date.
A Step-Up Deal Option
For sellers reluctant to a Subject To deal, consider a step-up deal option. This reduces the seller’s risk by starting with a lease option where the buyer must make the payments according to the agreement for six months before the deed transfers. This allows the seller to evaluate the trustworthiness of the buyer before they sign over the deed.
Use a third party as an intermediary to pay the loan. This provides peace of mind to the buyer and seller that the monthly loan payment occurs based on the agreement. If the buyer fails to make the payment, the third party informs the seller instead of the lender sending out a past due notice.
To build a strong reputation as a real estate investor, honesty and integrity matter. Don’t enter deals that you can’t keep. When you make solid investments that work out well for the seller, you’ll create a reputation that leads to more investment opportunities.
Is Subject To Right for You
Subject To works well for motivated sellers and investors with limited credit. But, this real estate strategy works well even for buyers with great credit. Subject To deals move quicker than with traditional financing. You don’t have to wait on the lenders timeframe for approval and closing.
Instead, you work with the seller to determine when the deal goes into effect. Because the timeframe to close the deal moves more quickly, you start to earn money more quickly. This makes Subject To investments effective for many different types of real estate investors.
Explore different investment strategies to deepen your investment portfolio and to take on more properties without the hassle of lender requirements. Basically, it offers another way to invest and close a deal quickly.
Subject To deals offer a powerful technique for real estate investments. With it, the investors can make money in days instead of months because the deal isn’t bound to the lender’s timeframe.
However, with any real estate investment strategy, education is key to success. Sign up for Laura Alamery’s Lease Options and Subject To Deals package to learn the keys to success with these real estate strategies. You’ll receive a step-by-step action plan, downloadable contracts and forms, and more.
Avoid mistakes by learning from proven and effective steps to integrate this investment strategy into your portfolio.