transaction or deal is where a homeowner gives you their property, but unlike what some would call a "traditional" real estate scenario, the property is not free of liens or a lien or a mortgage. Instead, it's still "subject to" the existing lien or mortgage, in this case the mortgage that remains.
A "subject to"
transaction or deal is basically but not exactly
the same thing as the old "assumable" loans, (remember those?) with the difference being thatwithassumable loans, the bank has given its blessing to the transaction and the liability for the loan will eventually pass to the new owner.
transaction or deal on the other hand, is typically done withoutthe specific approval from the lender or mortgage company because it is a private transaction and agreement between the former owner and the new owner or investor.The liability for the loan remains with the previous owner until the loan is paid offwith or without a specific time frame.
The traditional or common way
that property is purchased when their is an existing mortgage is the following:
let's say the typical person who went out and bought a property the traditional way located at 123 Scottsdale Rd, and they get a mortgage loan from a lender or bank, then two things have taken place:
The old owner of the property deeded the property to them, so they are now the owner of the property.
Since they didn't have the money to pay cash for the property, they borrowed the money from a lender or bank. But of course the lender or bank wanted some collateral, so they gave them a mortgage against the property to secure the debt. When the closing of this deal is complete, they are still the owner of the property, and the lender or bank owns a mortgage against the property in their name.
Ok now that's the traditional or common way to acquire real estate.
Now let's say something happens in a homeowner or sellers life - maybe a job transfer that they've got to react to very quickly, perhaps loss of income, divorce, or any number of things that change their ability or willingness to pay the mortgage and maintain a house.
Enter you, a smart real estate investor approaching the seller to purchase their home. You explain to them that they the homeowner have the ability to just deed their house to you, (there is a proper way to do this)
and that you'll take over the payments on their mortgage.
You could explain to them that it's a lot like a lease, because you'll be paying a mortgage that's in their name. But it's different from a lease because you the investor will be the owner of the property, and therefore required to maintain the property (taxes, insurance, maintenance, repairs).
When the transaction is complete, you'll hold the deed to the property in your name or entity,
but your deed is still"subject to" the loan
the seller got from the lender or bank because the loan wasn't completely paid off at closing.
In this transaction (Subject To) no credit was required from you the investor and you have a loan or mortgage that came with the deed.
"Subject to" transactions or dealsare an incredible way to buy property,and these types of transactionstruly require none of your own credit. Creative Real Estate.
So the simple fact is that if having ABSOLUTE, UNDENIABLE ownership of a property is your goal,
real estate investing via "subject to"is one of the best ways in creative real estate to achieve that goal.
Subject To is a type of seller or owner financing
and it is the strongest type of ownership
when it comes to “Seller financing”. What I mean by that is you have the deed,
that is why "sub2" or "subject to existing financing" means "get the deed".
"Seller financing" means "any way a home seller can assist a buyer or a tenant to buy their home". Anytime you can get the seller to help fund the purchase of a property it is usually a good thing because unlike most banks the seller can be more flexible with terms.
Subject To deals have always been one of our favorite techniques when acquiring properties. If a seller let's you takeover his payments all you have to do is negotiate any remaining equity (if any) the seller has. A win-win for both seller and buyer.
Most of the times if a seller is upside down they usually aren't concerned about pulling any cash out. You can takeover the existing payment and whatever equity is leftover is yours. We always ask the seller if he is willing to walk away from the property for what is left owed on it and almost all who are looking to walk away from a house and mortgage will.
Who would do that you say? Sellers who may economically default
(involuntary foreclosure) and sellers who seek to strategically default(voluntary foreclosure aka walkaways). Both huge markets now.
Is This Legal?
"Subject To?"Simply buying property subject to the existing mortgage or financing.
The seller deeds the property to the buyer and the sellers financing remains in place.
I've seen this: "some states and brokers do not "encourage" these types of transactions...check with your state or managing broker before doing these."
Notice they said "do not encourage",not that the transactions are illegal.
Buyers getting houses "subject to" is mentioned
in virtually all real estate training manuals in every state.
Notice I said mentioned? They just don't teach how to do it! Why?
Here's an excerpt from “Modern Real Estate Practice” one of many real estate training manuals that is used throughout the U.S. and is used by virtually all states as a guideline for real estate training manuals specific for their state.
QUOTE FROM “MODERN REAL ESTATE PRACTICE” – (Dearborn Press)
“When a person purchases real estate that has an outstanding mortgage or deed of trust, the buyer may take the property in one of two ways.The property may be purchasedsubject to the mortgageor deed of trust, or the buyer may assume the mortgage or deed of trust and agree to pay the debt.
The technical distinction becomes important if the buyer defaults and the mortgage or deed of trust is foreclosed.
When the property is sold subject to the mortgage, the buyer is not personally obligated to pay the debt in full. The buyer takes title
to the real estate knowing that he or she must make payments on the existing loan.
Now in the event of a default, the lender forecloses and the property is sold by court order to pay the debt. If the sale does not pay off the entire debt, the purchaser is not liable for the difference. In some circumstances, however, the original seller might continue to be liable.
For example: Robert owns an investment rental property that carries a mortgage. For health reasons, he wants to sell the property to Janet who has been managing the property and who also wants to use the rental property as an investment.
Robert sells the property to Janet "subject to the mortgage".
In the sale, Janet takes title and assumes responsibility for the loan, but lets say after two months something happens and she can no longer make payments on the loan.
There is a foreclosure sale and because Robert sold the propertysubject to the mortgage, Robert (notJanet) is personally liableif proceeds from the foreclosed sale do not meet the obligations.
a buyer who purchases the property and assumes the seller's debt (which is a mortgage assumption not "Subject To") becomes personally obligated for the payment of the entire debt. If the debt is foreclosed and the court sale does not bring enough money to pay the debt in full, a deficiency judgement against the assumer and the original borrower may be obtained for the unpaid balance of the note. If the original borrower has been released by the assumer, only the assumer is liable.
[b] The existence
of a lien (aka mortgage) does not prevent the transfer of property; however, when a mortgage is assumed (mortgage assumption), the mortgagee must approve the release of liability of the original mortgagor....”
in a "subject to"
transaction the buyer does not "assume" the mortgageaccording to the definition of "assuming the mortgage" by the mortgage company or lender. No approval or credit is needed for the transaction to take place. It is a Private transaction between seller and buyer.
Quote from “Arizona Real Estate Practice & Law”- (Dearborn Press)
Pg 132. “Cash To Loan Situations ” (Subject To)
Often a purchaser wants to “ buy out” a sellers equity position in a property and take title with the existing financing in place (aka Subject To).
Such transactions are often referred to as “cash to mortgage” transactions, although – with the predominant use of trust deeds in Arizona – a more accurate phrase would be “cash to loan”.
"Three situations can arise in a cash to loan transaction, based on the relative degrees of liability for the existing financing that the seller is willing to retain and the purchaser is willing to accept.
It is imperative that a licensee (real estate agent) involved in such a transaction correctly word the proposed financing arrangements in the purchase contract."
"The licensee is also obligated to inform and explain to all of the parties their rights, obligations and liabilities regarding the existing financing.
With the written permission of the original lender, a property may be sold “subject to” existing financing; and the seller remains totally liable for the payment of the loan balance even though the purchaser owns the property.
In this situation the purchaser does not have to qualify with the lender for the balance of the loan.
While this may appear financially risky for the seller, the risk depends on the amount of cash taken by the seller for his or her equity and the relationship of the balance of the loan to the market value of the property.
This should give you some basic understanding of what "subject to" is all about.
Ok. You ready? Contact us at (602) 753-8775 or Info@CreativeRealEstateInvestorsAcademy.com