Subject-to Deals

The economy has been subject to change over the past couple of years. Banks and other private lenders are not as easily accessible as they once were. It is much more difficult to qualify for and/or receive a loan today than it has been in the past. Because of this, investors have turned to more creative ways of financing their investments.

Subject to existing financing is one such method. This non-traditional type of financing offers a unique opportunity to the potential investor. Purchasing property that is referred to as “subject to” is a concept that has become recently more popular due to today's changing real estate market. This type of deal offers the buyer a unique opportunity to buy property without the need for loan acquisition or a stellar credit rating. For these reasons, making this type of deal has become more popular among investors in the current market.

Financing using this method generally means that the investor purchases real estate that is subject to the existing financing that is currently in place. This includes any liens or encumbrances already attached to the property. This type of deal does not feature a formal assumption of the loan on the part of the investor. He/she simply starts making payments to the lender. An investor receives the deed, but the loan assumption remains in the name of the original homeowner.

There are several advantages to making this kind of investment. For one thing, banks are not even needed for this type of transaction. Communication and arrangements are typically between only the buyer and the seller. Also, overall closing costs are lower and closing times are much faster. In addition, an investor can use the owner's interest rate which has been previously established and is usually lower and the buyer can then own the property with the long term financing that is already in place. Another positive element of this type of sale is that the buyer does not necessarily need to have great credit in order to proceed.

Making this type of deal may sound almost too easy, but it is not without its drawbacks. As with any deal, there is the possibility of simply making a bad deal. Purchasing real estate is always subject to risk. In regards to rental properties, there may be problems between the tenant and the buyer that can arise. Tenants may not pay rent or trash the property. Another situation that may not have been previously anticipated is the interference from the seller after the deal has been made.

Yet another risk that may be involved is between the buyer and the lender. Some lenders include a “due on sale” clause in their collateral agreements. In this case, the lien holder may, but does not have to, require full payment of the loan if and when the original homeowner sells or transfers any interest in the property to someone else.

There are also some common myths and misconceptions in regard to making these “subject-to” deals. As it seems like a relatively easy process, people often wonder if it may not be allowed or even legal. Buying property with existing financing is definitely within the limitations of the law. It simply requires a transfer of commitment to the individual who will assume the payment requirements.

Some may believe that since they do not assume the actual loan, they are not personally responsible for the loan. This is not true. An investor that opts to take over the payments is also responsible for the existing loan. Other myths include, not needing any money to make such a deal and a fear that the bank will foreclose on the property if they find out about the transaction, which again are not true.

If an investor decides to make a subject-to investment, he/she should consider the variety of means to go about the actual purchase. It is important to know that the most motivated sellers are those who are either behind in their payments, in foreclosure, or just have no equity in the home. As a potential investor, there are several advantages one can offer to the seller. For example, taking over the payments and making them on time is beneficial to the seller as it actually helps his/her credit.

The seller can also open a new savings and loan account with the bank that is carrying the account. The investor can then proceed to make payments to that account and eventually set up automatic payment. Doing so allows the seller to check the account to see that the payment was made and paid out to the lender. A loan servicing company or trust company can also be incorporated into the deal between the buyer and the seller. Having an intermediate to collect and disburse payments offers a sense of security and protection to the seller.

Upon making a subject-to investment, a buyer should be well aware of the stipulations required in regards to insurance on the property. A homeowner's policy is only relevant for thirty days. An investor can ask to be added onto the existing policy, but should remember to follow up after a couple of weeks and actually change the existing policy to a “renters” policy which is in both the buyer and the seller's name. Getting a new policy in both the buyer and the seller's name is also an option. A buyer can also opt to leave the original insurance policy in place and just get a second policy.

A land trust can also be used. This trust holds the title to the real property. The homeowner is the beneficiary and the buyer is the trustee. As the trustee, he/she carries out orders and controls the property. The buyer writes a letter to the lender explaining the change and also requests that the trustee is to receive any and all future correspondence. Then, beneficial interest is assigned to the trustee after the policy is changed.

With the real estate market and the overall economy being as unstable as it is today, buyers and sellers are taking matters into their own hands. The subject-to existing financing deal is becoming increasingly more attractive to investors. It offers investors the potential for profit without the demands of traditional financing.