I receive daily phone calls regarding ‘Subject to’ offers on two of my listings. However, both of my sellers adamantly refuse to participate in these transactions. So what exactly are “Subject to” offers?
“Subject to” offers involve investors targeting specific sellers with interest rates below 5% who are trying to sell their property but lack significant equity. Investors take over the payments on the mortgage, but the previous owner remains listed with the lender as the financially responsible party.
The most common way this works is that the investor agrees to make all of the mortgage payments going forward (the lender is not informed of this transfer). So long as you continue to do so, you are the owner of the property for all intents and purposes. This means you can fix it up, rent it out, and even fix and flip it.
What does the Seller Get?
Avoid foreclosure or bankruptcy
In cases where the seller faces the risk of mortgage default, a “Subject To” arrangement offers a lifeline, helping them avoid foreclosure or bankruptcy.
Get paid upfront
In addition to covering their mortgage payments, the investor often pays the seller for the difference between the property’s current market value and their mortgage payment.
Buyer Benefits
Get a property at a steep discount
Since you’re not acquiring a new loan, there are no origination fees, appraisal fees, or other closing costs related to obtaining a new mortgage. This can result in substantial savings on a single transaction.
The seller’s mortgage often carries a lower interest rate than what you might secure with a new loan. This especially applies if the buyer purchased the property several years ago when interest rates were lower.
Low-to-none money down
In a conventional real estate transaction, you’d typically require a down payment (usually 20% of the purchase price) or pay for the property outright in cash. However, in a “Subject To” arrangement, you can acquire the property with minimal or no down payment, as you’re not obtaining a new loan.
Risks for Sellers
Loss of Home
The biggest risk of “Subject to” transactions for sellers is the potential loss of their homes if the buyer fails to make mortgage payments.
Liability
In the end, the seller remains responsible for the mortgage payments. Thus, if the buyer defaults, the seller faces late fees and penalties. Further, your credit score could suffer considerably. Merely signing an agreement isn’t sufficient; you must secure a buyer you can trust to make the agreed mortgage payments.
This approach offers a potential solution to assist sellers in freeing themselves from property burdens. By presenting a full-price offer, investors provide a way for sellers to transition out of their property ownership effectively.
Done right, this is a win-win: the seller gets to avoid foreclosure or bankruptcy and you get a property at a steep discount (not to mention, faster, and with a favorable interest rate).
Sellers may benefit from ‘subject to’ offers, particularly for quick property disposal amid debt relief needs or foreclosure concerns. However, both buyers and sellers face significant foreclosure risks in such deals, making it a high-risk investment. It’s strongly recommended to engage an experienced real estate attorney to draft a ‘subject to’ agreement.
Hence, take the time to discuss this option with your trusty realtor before deciding. If you want to learn more about real estate tips and tricks, follow Stacey Glenn on all social media platforms for more.