Subject To Real Estate: The (ULTIMATE) Guide

Subject to real estate is a type of real estate transaction. It can be mutually beneficial for both the buyer and the seller. 

While subject to real estate may seem intimidating or confusing at first, it is, in many ways, simpler and more accessible than the more traditional ways of buying or selling a property. 

• What Is Subject To Real Estate?
• Types Of Subject To Real Estate
• How To Find Subject To Properties For Sale
• Subject To Real Estate Benefits
• Subject To Real Estate Cons
• How To Do A Subject To Real Estate Transaction Step By Step
• Why Would A Seller Agree To Subject To?
• Subject To Real Estate Contract
• Subject To Real Estate Checklist
• Final Thoughts

What Is Subject To Real Estate? 

"Subject to" real estate refers to the transaction of a property while maintaining the integrity of the existing loan on the parcel. 

In subject to real estate, the investor purchases the property and agrees to make payments on the existing loan of the house. The seller gives the title to the investor. 

This loan stays in the seller's name, but the buyer makes the mortgage payments on behalf of the seller, and the lender does not know about the property's transaction.

The Types Of Subject To Real Estate

There are three primary kinds of subject to real estate transactions. 

Cash To Loan Subject To

A cash to loan subject to is the most common form of subject to. 

For this type of sale, the investor pays the seller the difference between the sales price and the mortgage balance in cash, while taking over the mortgage payments.

For example, if both parties agree that the property is worth $325,000, but the mortgage remaining is only $275,000, the investor will pay the seller $50,000 in cash and cover the remaining mortgage. 

Usually, though not always, properties sold under these circumstances are in (or are about to be in) foreclosure. 

Seller Carryback Subject To

A seller carryback subject to is the second most common form of a subject to. You're likely to have already heard of this type, just in different terms. This type of transaction is often called "owner financing" or "seller financing." 

This works as an additional form of financing to be used if the investor's lender won't allow them the total funding that is needed for the purchase of the property. 

The investor will get a mortgage for as much of the property's value as possible and then make payments to the lender in the form of a traditional mortgage, as well as payments to the seller in the form of a seller carryback subject to. 

The seller never gives the investor the difference in cash. Rather, they are not paid in full for their house and instead slowly receive the difference in payments directly from the investor. 

The seller is in control of the terms of this transaction. They generally control the interest rate, downpayment, and loan length. Usually, the original homeowner wants the investor to put down a downpayment of five to twenty-five percent and pay off this portion in five years or less. 

The official mortgage with the lender can take much longer to pay off and will likely be on different terms with different stipulations, down payments, etc. 

Wrap Around Subject To

A wrap-around subject to is the least common type and for a good reason. The loan's interest rate is based on the original mortgage loan but with additional interest on top of that. 

Since the seller has to pay interest on their original mortgage from their lender, they ask the investor to pay an additional, proportional interest rate to cover that. 

If the original homeowner's mortgage is 4%, the seller will likely ask the investor to pay 6% on the carryback. At low-interest rates, this isn't much of an issue. If, however, the seller had a higher interest rate, to begin with, then this is not an ideal situation for the investor. 

How To Find Subject To Properties For Sale

You will likely find subject to deals wherever you can find distressed properties or motivated sellers. 

Connect with a real estate agent for assistance, look up soon-to-be foreclosed, auctioned, or short-sale properties through public records or online, and speak directly to the distressed homeowners. 

Here are a few websites to help you get started: 

• The Multiple Listing Service ("The MLS")
• PropStream (use our link for a free 7-day trial!)
• Foreclosure.com (here is our review of Foreclosure.com)
• Zillow.com (filter the results to only show pre-foreclosures) 
• Redfin.com
• Mashvisor.com
• RedX.com
• Your local newspaper. Your local newspaper is required to publish the addresses of houses that are in the foreclosure process. 
• Real Estate Wholesalers. Real estate wholesalers will have access to pre-foreclosure listings and can get you in touch with distressed property owners. 
• Real Estate Attorneys. Your local attorney will also have access to a list of pre-foreclosure and foreclosure properties. 
• Driving for Dollars. You can also drive around neighborhoods and speak to homeowners; you never know who may be interested in selling their home in a subject to transaction. 

Subject To Real Estate Benefits

There are three primary benefits for investors to utilize subject to, and two significant benefits for sellers. Here they are: 

Subject To Pros For Investors

• No Credit Checks. If you're young, don't have credit, or don't have a favorable credit score, this is a great way to get your foot in the door as a new real estate investor. You don't have to have your credit checked at all for subject to real estate. And because you are using someone else's existing mortgage, you may get a better interest rate, even if you did have a decent credit score. 
• It's Cheaper. Usually subject to sales have low or no closing costs. You can also benefit from fewer up-front costs, no bank fees, no realtor commissions, title companies, or loan officers involved. 
• It's a Quick Way to Build Equity and Grow Your Income. Subject to properties gain equity faster than other real estate investing strategies because some of the mortgages is already paid off. It's also a quick process to close on a subject to property because there's little red tape involved. If you like to flip houses, you can get started much quicker with this method. 

Subject To Pros For The Selling Homeowner 

• It's a Quick Sale. Selling their place using subject to allows them to dispose of a property quickly so they can move onto something else. 
• It may save their financial life. If the homeowner is facing foreclosure or needs cash in a hurry, subject to is a great solution. Foreclosure can be avoided because the investor takes over the foreclosure payments and keeps that off the seller's record. They can also get some cash pretty quickly from the investor, especially if the investor does a cash to loan subject to.

Subject To Real Estate Cons

No type of sales transaction is perfect, and that includes subject to real estate.

Untrustworthy Sellers

If the homeowner (seller) doesn't take the money that the investor pays them to their lender or mortgage company, the investment property could still be foreclosed. Yes, this means that the investor could be doing everything right and paying the monthly payment, and the house could still be foreclosed on. 

The investor is trusting that the seller will continue to pay down the mortgage balance. 

Untrustworthy Investors

Likewise, the seller has to trust that the investor will continue making payments on the subject to real estate. If the new buyer stops paying, the seller will have to continue making payments to the lender. The seller will also have to pursue legal action in order to regain their title to the property. 

Due On Sale Clauses

Due on sale clauses would require the seller to pay back the bank the full amount of the mortgage loan once the subject to agreement is made. 

High-Interest Rates

If the original homeowner had bad credit when they bought the property, the interest rates could be high. If the seller's credit is bad, then the investor will have to pay high-interest rates during the subject to transaction. 

How To Do A Subject To Real Estate Investing Transaction (Step By Step)

Step 1 - Find A Distressed Property Owner Willing To Do A Subject To Sale

Again, here are some great places to start looking: 

• Mashvisor.com
• Zillow.com (filter the results to only show pre-foreclosures) 
• Foreclosure.com
• RedX.com
• Your local newspaper
• Real Estate Wholesalers
• Real Estate Attorneys
• Driving for Dollars
• The MLS

Step 2 - Approach the Homeowner And Get As Much Information As You Can

Be kind and respectful. This may be a challenging time for the homeowner, so be on your best behavior, be thoughtful, respectful, and kind. 

Figure out why the homeowner may be in distress and how motivated they are to sell. 

Ask who their lender is, the current loan balance, the mortgage payment amount, and how many payments they're behind. It would be best to ask about tax liens and mechanic liens. 

Get the seller to sign an "Authorization to Release Information" form. This will allow you to double-check all of the above information they gave you with their mortgage lender.  You're not doing this to test the homeowners, but rather to make sure you can offer the very best, most fair offer on their home. 

Step 3 - Run The Numbers

Now you need to calculate the "After Repair Value," figure out how much it will cost to rehab the property, and also plan out your exit strategy. 

Compare other properties in the neighborhood to the property subject to the sale. 

You should also run a thorough sales comparison analysis and adjust the comps to reflect the property's features, square footage, and the number of bedrooms and bathrooms in the house. 

What's your exit strategy? Do you want to sell the house for more cash flow, turn it into a rental property, or offer a lease option? If selling it, compare to other local sales. If renting it, compare it to other rentals in the area. If leasing it, compare it to nearby leases. 

Step 4 - Visit The Property

Get permission from the homeowners and then visit the house. This will fill in the blanks on repairs you'll need to make, the condition of the property, and how long it will take you to fully rehab the home. Take pictures if you've been given permission, and don't forget to bring your checklist. We'll provide you with that checklist down below. 

If you can get a home inspector to tag along with you, that's even better. 

After your visit through the property, you may need to revisit step three and adjust your estimates. 

Step 5 - Do Your Due Diligence 

The experienced investor knows to never, ever skip this step. This isn't exactly a fun part of real estate deals, but it is crucial to protect yourself and ensure a smooth, profitable sale. 

Authorization to Release Information

If you haven't already, get the seller to sign an "Authorization to Release Information" form. Once this form is signed, call their lender and fax or email this form to them. Once they see you have the authorization, the lender will give you lots of really important information regarding your potential new property. 

Title Search

Have a title company run a preliminary search. This will tell you who the complete list of owners are, and if there are any liens or owed taxes on the property. During this search, you may find that tax liens, mechanics liens, HOA liens, code enforcement liens, or Federal IRS liens are owed against the property. 

Utility Bills and Property Taxes

You should also call all of the local utility companies to get information on the property. 

Here are utility companies you should be checking with to see if there are any past due bills: 

• Water Company
• Electric Company
• Sewer Company
• Trash Company
• Internet, Cable, Landline Company
• Alarm System Company

After checking on the utilities, check the property tax amount. This will let you know when and what to expect to pay in property taxes once the parcel is yours. It will also let you know if the current homeowner is behind on any of these taxes and how much money will be owed once you make the purchase. 

Step 6 - Estimate The Total Costs 

You will likely to need pay at least some amount of money in order to carry the property. 

You may need to pay: 

• the seller part of their equity, perhaps however much of the loan they've already paid off.
• arrears on the mortgage so that it is no longer behind. 
• closing costs, such as transfer fees, transfer taxes, escrow fees, closing attorney, title insurance. 

Step 7 - Make An Offer To The Homeowner

Using all of the above information that you've gathered, make a fair offer to the homeowner for their property. 

You may offer to take over payments for the homeowner without paying them any cash. 

You may offer to take over payments for the homeowner and pay them some lump sum of cash to cover their equity in the property. Usually, this is because they owe less than what the property is worth. 

You may also offer to take over payments for the homeowner and negotiate that they pay you to take this property off their hands. For instances like this, it's usually because the owners owe a lot more money on the mortgage than what the property is worth.  

It's always a good idea to have a mentor or real estate attorney help you draft an offer. They can accurately tell homebuyers if the existing loan balance is appropriate and what a fair purchase price should be. 

Step 8 - Organize And Ready Your Purchase Documents

For this step, you need a purchase document that is enforceable in your state. At the bare minimum, have your subject to agreement checked by a real estate attorney. Better yet, have your attorney write up the document for you. 

Your real estate attorney is already knowledgeable with loan terms, a fair sales price, and how to make a proper loan assumption. They are good people to have on your team. 

Step 9 - Close On The Property And Get Your Keys

Depending on the state, you can finalize the property transaction at home with the seller, at a title company, or with a closing attorney. While "kitchen table" closings are valid in some states, they are almost never a good idea. It's wise to stick to attorneys and title companies for the most financial safety. 

Most closing documents will need to be notarized, which is why kitchen table sales are such a bad idea. 

All owners will need to present to sign the documents, and that includes spouses. If an owner has died, a death certificate will likely be needed to make the transaction. 

At closing, you will receive your new investment property's keys. 

Step 10 - Take Care Of The Insurance

This is a two-part step. 

First, you will need to cancel the seller's insurance. Use your limited power of attorney to change the mailing address to your address, and then cancel their homeowner's insurance policy. 

Next, you'll need to obtain your own homeowner's insurance. You should always have your own policy on the house to ensure that you are never denied a claim. This can happen if the primary insured person is not the owner. 

When you create your new policy, make sure that you get a non-owner-occupied landlord policy. You need to be the first name listed on the insurance, and then the existing mortgage company as the mortgagee. Make the seller the additional insured on the policy. 

Why Would A Seller Agree To A Subject To?

A seller would agree to a subject to because they cannot afford their property, are about to be foreclosed on, they need quick cash, or they need a quick sale. 

A subject to can allow them to avoid foreclosure, which can really save their credit history and credit score. 

In some cases, the buyer pays the seller a lump sum of cash to cover their equity in the home. 

Each of these reasons, or a combination of them, are all good reasons for a seller to agree to a subject to sale. 

Subject To Real Estate Contract

You should contact your real estate attorney for a subject to contract or an agreement for the purchase and sale of a real estate subject to transaction. 

With that said, here is an example of a simple subject to agreement. Use this just to get an idea of what to expect. 

FREE Wholesale Real Estate Contracts [PDF Download]

Subject To Real Estate Checklist

Here is an example of a comprehensive subject to real estate checklist. Again, speak to your mentor, or better yet, a real estate attorney, for complete safety and coverage. Use a home inspector during step four if at all possible. 

Final Thoughts 

Subject to real estate can seem intimidating at first glance, but it's really not that difficult to break into. Subject to transactions can be mutually beneficial for the seller and the investor. For the seller, they get to avoid financial ruin, foreclosure, or hard hits on their credit. It also grants them the ability to walk away from a property relatively quickly, and sometimes with cash in hand. 

For the investor, subject to real estate transactions are attractive because they don't require credit checks, they need very little or no money down, and the sale closes quickly.