How to Do a Subject-To Real Estate Deal

A “subject to” real estate deal involves acquiring a property where the buyer takes over payments on the existing mortgage, but the loan itself remains in the seller’s name. This approach differs from a traditional sale where the seller typically pays off the mortgage, or a mortgage assumption where the buyer formally takes on the loan liability. This method can offer an alternative for sellers needing to dispose of a property quickly, especially if facing financial distress or foreclosure, and for buyers seeking to acquire property with potentially reduced upfront costs or without traditional financing hurdles.

Core Principles of Subject-To Deals

The buyer agrees to make the monthly payments on the existing mortgage loan, effectively stepping into the payment responsibility without formally assuming the debt from the lender.

Despite the mortgage remaining with the seller, the property deed, or title, is legally transferred to the buyer. This transfer of ownership means the buyer holds the legal rights to the property, even though the underlying loan remains tied to the seller. The buyer then becomes directly responsible for the ongoing costs associated with property ownership, including the monthly mortgage payments, property taxes, and insurance premiums.

When there is existing equity in the property, how it is handled becomes a component of the deal structure. Buyers might provide a cash payment to the seller at closing to cover this equity, or the seller might provide financing for their equity, often documented through a promissory note from the buyer to the seller. This promissory note outlines the terms of repayment for the seller’s equity, establishing a direct financial relationship between the buyer and seller beyond the original mortgage. The arrangement creates a unique relationship where the buyer, seller, and the original lender all have roles, with the buyer making payments on a loan that is still formally the seller’s obligation to the lender.

Preparing for Your Subject-To Acquisition

Identifying suitable properties and motivated sellers is a first step in a subject-to acquisition. Properties with existing low-interest mortgages can be attractive, as current interest rates may be higher, making the existing loan more appealing. Sellers facing financial difficulties, such as impending foreclosure, divorce, or job loss, often represent motivated candidates for subject-to deals, as they may prioritize debt relief or a swift exit over maximizing traditional sale proceeds.

An assessment of the existing mortgage is important before proceeding. Buyers must gather details about the loan, including the current balance, the interest rate, the monthly payment amount, and the original lender’s information. It is also important to determine the loan type, whether fixed or adjustable, and to identify the presence of a “due-on-sale” clause, which is common in most mortgage agreements. Obtaining this information involves requesting loan statements from the seller or, with authorization, directly contacting the lender.

Property due diligence is necessary to understand the asset being acquired. This includes conducting physical inspections to identify any needed repairs and estimating their costs, which can vary significantly depending on the property’s condition. Buyers should also research property taxes, check for any existing liens or encumbrances against the property, and perform a comparative market analysis to determine the property’s current value in relation to the outstanding mortgage and any additional payments.

Beyond the property itself, buyers must assess their own financial readiness to manage the ongoing responsibilities. This involves confirming the capacity to cover the existing mortgage payments, property taxes, insurance premiums, and any anticipated repair or maintenance costs. Having sufficient reserves is important to mitigate unexpected expenses that may arise during ownership.

Before formally entering into any agreements, seeking professional advice is an important step. Consulting with a real estate attorney is advisable to ensure all legal aspects are addressed and to draft or review necessary documents. Engaging a title company is also important to conduct a title search and manage the escrow process, while a tax advisor can provide guidance on the potential tax implications for the buyer.

Structuring and Closing Your Subject-To Deal

Negotiating the terms of a subject-to deal involves defining the purchase price and how any existing seller equity will be addressed. This might include a cash down payment from the buyer at closing or seller financing for the equity, often structured through a separate promissory note. Responsibilities for closing costs, such as title insurance premiums, escrow fees, and recording charges, are also negotiated between the parties.

Drafting and reviewing the necessary legal agreements is a process. The purchase agreement should state the “subject to” nature of the sale, outlining that the buyer is taking over the existing mortgage payments without formally assuming the loan. The deed transfers the property title to the buyer, noting the existing mortgage as an encumbrance on the property.

Ancillary agreements may include:
A promissory note if the seller is financing any portion of their equity
A limited power of attorney if the buyer will make payments directly through the seller’s account
A hold harmless agreement to protect the seller
An occupancy agreement if the seller will remain in the property for a period after closing

These documents incorporate the specific loan balance, interest rate, and property address gathered during the preparation phase.

The title and escrow process ensures a secure transfer of ownership. A title company or real estate attorney conducts a title search to verify clear ownership and identify any liens, judgments, or encumbrances on the property. Title insurance is obtained to protect both the buyer and, if applicable, the original lender against future title defects. The escrow agent manages all funds and documents, ensuring all conditions of the purchase agreement are met before the transaction is finalized.

Handling the existing mortgage at closing involves steps to ensure payments continue without interruption. This may include setting up direct payment methods, such as online bill pay to the lender, or establishing a system for the buyer to provide funds to the seller for payment. While most mortgages contain a “due-on-sale” clause, allowing the lender to demand full repayment upon property transfer, it is common practice in subject-to deals not to notify the lender of the transfer. Lenders generally enforce this clause infrequently as long as payments are consistently made.

On closing day, both the buyer and seller sign legal documents, including the deed, promissory note, and various disclosures. Funds are transferred, including any down payment or equity payment to the seller, and the deed is recorded with the local county recorder’s office to transfer ownership to the buyer. This formal event marks the culmination of the transaction, transitioning the property’s possession and payment responsibility to the buyer.

Post-Closing Management

After a subject-to deal has closed, the buyer’s ongoing responsibility involves making the existing mortgage payments. This can be accomplished through methods such as direct deposit to the seller, online bill payment directly to the lender, or utilizing a third-party servicing company to handle the payments. Maintaining records of all payments, including dates and amounts, is important for financial tracking and future reference.

Property management becomes a task for the new owner. This includes routine maintenance, addressing repairs, and, if the property is income-generating, managing tenants. Tenant management responsibilities can involve drafting clear lease agreements, ensuring timely rent collection, and addressing tenant issues or concerns as they arise.

Maintaining insurance coverage is another post-closing responsibility. It is important to secure a homeowner’s or landlord’s insurance policy in the buyer’s name, especially since the deed has transferred. While the original lender’s interests are still protected by the seller’s existing policy, the buyer needs their own coverage to protect their insurable interest in the property. Many subject-to properties may end up with two insurance policies: one in the seller’s name to satisfy the lender and a new one in the buyer’s name.

Property taxes must also be paid to avoid penalties and liens. Depending on the original mortgage terms, these taxes might be handled through an existing escrow account managed by the original lender, or the buyer may be responsible for paying them directly. Buyers should confirm the payment mechanism and ensure that tax obligations are met.

Maintaining clear communication with the seller can be beneficial, particularly if there is ongoing seller financing for equity or if the seller continues to receive loan statements from the original lender. This communication helps ensure a flow of information regarding the mortgage, addresses any issues, and reinforces the terms of their agreement.