What is “Subject To” in Real Estate Investing?

How to Subject To

This term has confused me for a while now. I had some questions and think I finally found the answers.

The following is from Sean Terry’s Week 4 section of the “Quit Your Job in 19 Weeks or Less” free ebook; it explains it perfectly.

Subject To Secrets, How to Make Huge Money With No Equity [Case Study]

This is a great strategy when you have a lead that has little to no equity. At the time of writing this book, tons of homes fit in that mold, so the deal are plentiful. Knowing this one strategy can make you a small fortune in the current market.

Basic Concept

We’re looking for motivated sellers that have little to no equity, which we can purchase for little to no money down. This method is called buying the property “subject to” the existing mortgage. This means you’re buying the property and the existing loan stays in the seller’s name for an agreed upon period of time.

The Risk

Before 1988 and 1989 there were loans, FHA–VA, that were fully assumable without qualifying; no credit check required. Today, almost all loans include a Due on Sale (DOS) clause whereby the lender can call the note due and payable upon transfer of the property to someone else.

However, it is my belief that if the loan is kept current, then no ‘flag’ is thrown to trigger this clause. I have personally never had a loan called on my properties. It is not illegal to take over or, I should say, become responsible for someone else’s loan. There are risks in all forms of real estate investing if not done properly. ‘Subject to’ is no different.

The Potential

With thousands of homeowners with little to no equity, this method becomes extremely profitable and deals are ripe for the picking. The structure is more advanced though, and I recommend consulting an attorney prior to executing this type of deal.

TIP: When we set up the closing, we’re going to have a Servicing Company collect the monthly payments from our buyer and pay the seller’s mortgage company directly.  We structured the deal so the buyer will pay the servicing company, the seller will get monthly reports of the money being paid to his mortgage, and if in default, the servicing company will handle all the legal issues.

Thanks, Sean Terry!

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