A subject-to real estate deal is defined as an investor taking over ownership of a property with an existing mortgage already in place. This method is a great tool to acquire a home without traditional efforts. Every serious investor should know and understand this method of property acquisition. In order to build a growing portfolio, knowing what is subject-to real estate is essential for success.
What is Involved in a Subject-To Deal
No deal can be made unless two important variables exist. These two things are a buyer and a seller. The actual owner of a home must be the one to take part in the exclusive contract that a buyer requires in order to initiate and complete a subject-to arrangement.
The agreement that is created is one option that can be used to get the actual deed to the home. Without involving a bank or financial institution directly, an investor can legally take control of any home using this type of real estate tool. Payments are still made to a mortgage company or service company under the existing mortgage.
Subject-To: How to Make Money
One reason why people choose to seek out this type of tool is the ease of use. In a traditional housing transaction, financing would have to be in place prior to going to a closing. For a new investor with limited financial resources, it can be difficult to purchase higher-end properties.
Under a subject-to arrangement, no traditional 20% down payment is required. Because no direct interaction with a bank or finance company is required, the buyer and seller agree on what terms are beneficial to both parties.
Once the deed is in the hand of the buyer, the property is his or hers to profit from. It can be rented, in more than one way, in order to provide instant cash flow.
Any equity that remains in the house at the time of title transfer can be used in different ways. Acquisition of the home for a less than market value price can add to the total profit that is made on the deal.
Sellers appreciate this arrangement because nothing needs to be done. A homeowner can leave the house, condo or apartment immediately without having to make repairs or do other things first.
The home can be taken off of the market quickly, and this can help avoid Realtor fees and other charges normally incurred with a standard sale.
A person does have options to earn money using this housing method. The most important thing is how to find subject-to properties in a specific geographic area. Online forums, Bulletin Boards, MLS and social media platforms provide a range of ways to locate available properties by homeowners.
Risks Using Subject-To Deals
As with any real estate investment, there are risks involved. In particular, when trying to complete a subject-to arrangement, it can be a good thing to hire an attorney. Things like title insurance, and mortgage documentation can be difficult to understand. Having a qualified attorney to review the documents will ensure that the deal is in fact valid, and will hold up if any issues come up.
Liens on a home are common, and are only found once a complete title search is conducted. It is quite common for an investor to run into issues at closing due to someone claiming a lien on a piece of real estate.
A bankruptcy filed by the original owner can cause problems once a deal is structured and accepted. The company, person or entity that holds the right to the assets can make a claim. A new or experienced investor can have bankruptcy liens that are hard to track down due to the nature of personal and corporate credit.
Homeowners who are tied to the property by their signature can enter into foreclosure due to non-payment of the mortgage. If a person misses a payment or two, it could invoke a foreclosure clause in the mortgage contract.
Lastly, a service company, mortgage owner or bank could require payment in full for the entire loan. This is called a due on sale clause. It allows the owner of the property to call the loan due immediately. This issue can happen when titles are transferred to more than one party.
Alternatives to Subject-To Real Estate
The purchase of a single-family, duplex, multi-family or condo can be completed without any type of subject-to deal. If an investor is able to obtain hard money or has cash, a sale can most always be completed. For most first-time people, buying houses with no money down is the easiest method, but it poses the most risks.
Things like turnkey properties, REITs and tax lien investing are other alternatives to subject-to real estate in the North American housing market.