Subject-to seems to be the new buzz-word circling through many of the real estate investor teaching arenas. That’s because in our current market, subject-to deals present a great opportunity. Before I get into that, let me explain what one is.
A subject-to deal is where you buy a house from someone with a mortgage in place. Instead of getting your own loan to pay off your seller’s loan, you agree to leave their mortgage in place after the sale and make payments on it until it’s paid off.
The way this deal structure gets its name is because you’re buying the house subject to the seller’s existing mortgage. This is very different than a loan assumption and carries with it lots of benefits for an investor.
For instance, since the seller’s mortgage is already in place, you get to use their long-term financing with no loan origination fees. And by buying the house subject-to, you’re not having to qualify for the loan like you would if you were assuming the mortgage or getting a new loan. So, instead of using your credit, you’re using the seller’s credit to buy their house.
Another perk to subject-to deals is that since the seller purchased the house as homeowner, their loan will have a way better interest rate than you could get as an investor.
We’ve bought many subject-to deals with very little down that had interest rates around 3 percent. To get that same mortgage as an investor, it would have cost us 20 percent down, and an interest rate of 5.5 percent or more.
An interest of 5.5 percent is not terrible, but coming up with 20 percent down on every rental could prove to be a limiting factor on how many houses you could buy. This factor makes buying subject-to more attractive.
Buying subject-to is great, but it takes some different thinking in order to do them right. I like to say they’re intricate, delicate and intimate. And you have to think in these terms when you set them up.
With that thought in mind, I want caution you on some things that I’ve seen people teaching in the past that I feel are not good practices.
First, because these deals are intricate and delicate, I would advise staying away from any “kitchen table” type closings. Instead, find an attorney who understands how a subject-to deal works. They’ll help you with the paperwork, get you title insurance issued and just make sure everything is done by the book.
Next, I want you to realize a subject-to deal is going to be a long-term relationship between you and the seller. Even though the property was deeded to you at closing, the mortgage is still in their name. This means that in the future, you could need their help with paperwork. That situation makes this deal more intimate than many other deal structures.
I’ve seen it taught that you should get a house under contract subject-to and then wholesale the deal to another investor for a profit. Now, if you are totally transparent with the seller, this could work. But I’m not comfortable with this situation.
When we buy a house subject-to, my seller is trusting me to make their mortgage payment. More importantly, they’re trusting me with their credit. When they put trust like that in us, I don’t take it lightly. And the reason they can put that trust in us is because they know we will do what we say we’ll do.
I can’t tell you how many times Ashley and I had to figure out how to pay for groceries after we made all of our mortgage payments… on time, mind you. Like I said, we don’t take that trust lightly.
So, if a seller puts their confidence in you and you wholesale the deal to another investor who doesn’t share that same commitment, their actions have the potential to hurt your seller’s credit and blemish your good name.
I’m not willing to risk either.
Subject-to deals are a great structure with lots of benefits for an investor. And when done correctly, with integrity, they create a win-win situation for all.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.