What is a Subject To Real Estate Deal?

If you’re just starting out in real estate and feel like it’s impossible to become a real estate investor, I’m here to give you hope. If you do not know what is a subject to real estate deal is, I’ll teach you. With subject to real estate deals, you do not need 20% downpayment, you don’t need to verify your income, and you don’t need stellar credit. In fact, all you need is the right knowledge. 

Subject To Real Estate Deal Defined

Subject-to is short for subject to the existing financing. You may also see it abbreviated as sub-to or sub2. Essentially, when you buy someone’s property, you are taking over the existing loan payments. Instead of paying off the current loan with financing or cash.

Once you take over the payments the seller is able to move on. You will be paying for the loan payments, insurance, taxes and any/all other associated costs of ownership.

This might sound too good to be true, but it isn’t that clean cut. Since the owner isn’t paying off the existing loan first, before selling the house, the loan will remain in their name. The bank will not transfer the loan into your name.

Subject To Real Estate Deal Caveats

With that being said, the seller of the home has some risks if you, the investor, stop making the payments. The bank will hold the seller of the home responsible, as the loan is in their name.

At this point, you might be asking how does the investor, you, take ownership of the house?

Most investors will create a contract that transfers the deed to them but not the liabilities. This allows the investor to do whatever they’d like to the property. Whether that’s renting it or selling it for profit. Once the investor sells the property, the original loan must be paid off.

One consideration to make is that when transferring the deed, this will trigger a clause in the loan called “due on sale.” This is where the lender could potentially call the loan due. However, the reality is the lender has no way of knowing that you and the owner did a subject-to deal. For the most part, as long as the lender is getting their monthly payments, the lender will not be demanding the home be paid in full.

Who Benefits from Subject To Real Estate Deals?

If you’re wondering who can benefit from subject to real estate deals, then you’re thinking about it the right way. When you understand who benefits from this type of deal, you will know who your target audience is.

Someone who has good equity in their home, who isn’t motivated to sell, will unlikely benefit from this deal. In fact, anyone who isn’t motivated to sell at all is unlikely to benefit from this deal. So who does? Inversely, it would be motivated sellers.

Who are Motivated Sellers?

Motivated sellers can be anyone who needs to move because of a job, a couple who might be getting divorced, someone who inherited a home they are unable to maintain or live in, or someone who has fallen behind on their payments and are close to foreclosure.

Thinking through it, these individuals are more likely to benefit from a subject to real estate deal because they are probably looking to sell quickly, which is not the case with a traditional sale that can take more than a month long. A subject to deal can be done in as quickly as seven days.

Learning how to close a subject-to-deal is something you must master if you want to build financial freedom. If you are just starting out on your real estate investor journey, I invite you to download my investor kit.