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Unlocking the Power of Subject-To Deals in Real Estate

Hey everyone! This is Grant Kemp from CreativeCashFlow.com, and today we’re diving into one of my favorite real estate strategies: Subject-To deals. Partnering with Propelio, we’re presenting powerful tactics to make money in real estate. Let’s get started with understanding the Subject-To model and how it can work wonders for you.

What is a Subject-To Deal?

Definition of Subject-To

Subject-To is short for buying a house subject to the existing mortgage. In simpler terms, you acquire the property and take over the seller’s mortgage payments, but the mortgage remains in their name. This method is not the same as a mortgage assumption, where you would actually have the seller’s name removed from the mortgage and yours added. With Subject-To, the mortgage stays untouched, you just continue making payments on behalf of the seller.

Advantages of Subject-To

Subject-To deals come with a host of benefits:

  • Lower Capital Risk: Since you’re not paying off the entire mortgage upfront, your initial cash outlay is significantly lower.
  • Higher Loan-to-Value (LTV): You can work with properties that have higher LTV ratios because your risk is mitigated with minimal cash upfront.
  • Unlimited Non-Traditional Lending: There’s no limit to the number of Subject-To deals you can undertake.
  • Fast and Cheap Acquisitions: You can close these deals quickly, often within a few days, without needing a new mortgage.
  • Homestead Opportunities: You can even find your own residence this way, stepping into significant equity right away.

Traditional Bank Financing vs. Subject-To

Understanding Traditional Bank Financing

In a typical bank-financed deal, the seller has an existing lien with their bank. The buyer secures a loan from their bank, receives a warranty deed transferring ownership, and then the buyer takes on the new mortgage. The mortgage documents, namely the note and deed of trust, represent the debt obligation.

How Subject-To Works

Under a Subject-To scenario, the seller keeps their original mortgage. You, the buyer, get a warranty deed, gaining ownership immediately. You provide the seller with a deed of trust for security, ensuring they can foreclose if you default on payments. You essentially take over the seller’s mortgage payments without disturbing the original debt terms.

Navigating the Due-On-Sale Clause

One potential risk in Subject-To deals is the due-on-sale clause. This clause allows the lender to demand full repayment if the property is sold without their consent. However, in my experience managing over ten thousand deals, it’s rarely invoked. Still, it’s crucial to understand this clause thoroughly. I have a dedicated video explaining the due-on-sale clause and strategies to mitigate its risks, so be sure to check that out.

What Does a Typical Subject-To Deal Look Like?

Ideal Property and Financials

A typical Subject-To deal involves properties valued between $80,000 and $150,000. Sellers are usually 6-8 months behind on payments, with existing mortgages at 75-85% of the property value. The properties often need $12,000 to $15,000 in rehab.

Keys to Success

To thrive in Subject-To deals, you need:

  • Reserves: Even though entry costs are low, you must have reserves to cover payments if needed.
  • Proper Contracts: Use ironclad contracts like those from Horne & Associates.
  • Honesty: Be upfront with sellers about what you can and cannot do.
  • Proper Disclosures: Make sure sellers are fully aware of the terms and their implications.

Helping Sellers Move On

Seller’s Future Mortgage Opportunities

Sellers often worry about their ability to buy another home. Historically, underwriters are flexible if you can demonstrate that you’re making the mortgage payments. They usually do not count the Subject-To mortgage against the seller’s debt-to-income ratio.

Disposing of the Property

Once you acquire a property using the Subject-To method, you have several options:

  • **Renting: ** You can lease out the property and generate rental income.
  • Flipping: You can rehab and sell the property for a profit.
  • Owner Financing: You can sell the property with owner financing, creating a wraparound mortgage. This method can yield significant profits. For example, a $100,000 home with an $80,000 mortgage could net you $142,000 in profits (check out our wraparound video for more details).

Finding Subject-To Leads

You can find Subject-To deals using the same marketing strategies as other real estate opportunities:

  • Foreclosures: People facing foreclosure are prime candidates.
  • Low/No Equity Situations: These sellers need a quick exit.
  • Divorce: While challenging, both parties may want to offload the property fast.
  • Vacant Homes: Properties just sitting there costing money are ripe for Subject-To deals.

Rules of Thumb

Knowing When to Break Them

While it’s helpful to have basic rules of thumb, it’s equally important to know when to break them. Watch our rule of thumb video to learn more about evaluating properties.

Wrap-Up

Subject-To deals present a unique and powerful strategy for acquiring real estate with minimal upfront costs and significant flexibility. By taking over existing mortgage payments without the need to secure new financing, investors can quickly and efficiently expand their property portfolios. 

However, success in this niche requires a deep understanding of the process, clear and honest communication with sellers, and the ability to navigate potential risks like the due-on-sale clause. Whether you aim to rent, flip, or finance your acquisitions, mastering Subject-To deals can unlock tremendous opportunities in the real estate market. For more insights and detailed strategies, explore our videos and resources on CreativeCashFlow.com.

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