"Subject To" Deals: Ultimate Guide for Real Estate

Subject To Deals

Photo | Freedomz, Canva

You’ve probably started looking into real estate investing options and discovered “Subject To” deals. 

These deals offer discounted home prices, quicker transactions, and less hassle for investors (even first-timers). For real estate investing in California, understanding “Subject To” deals is essential. That’s the short version, but you probably want to know more.

What is a “Subject To” deal?

The difference between “Subject To” & mortgage assumption

What are the benefits and risks of “Subject To” deals? 

We’ll explain all of that right now. 

Row of Homes

You’ll be clear on “Subject To” concepts very soon - photo via Canva

What is “Subject To” in Real Estate?

When a real estate investor says “Subject To” deal, they are actually saying, "Subject To the Current Mortgage”. There are a few different kinds, which we’ll talk about soon.

In a “Subject To” deal, the mortgage is paid by the homebuyer, but the previous homeowner is listed as the financially responsible party. So, you make the payments on the mortgage, but it remains under the previous homeowner’s name. 

Usually, this is an agreement between the homeowner and the investor. For obvious reasons, lenders don’t always get informed about this. Still, if the investor holds up their end of the deal, the home is essentially theirs. It can be altered, renovated, rented, and made to fit any purpose the investor desires.

This can be a financial victory for the investor, as well as the homeowner.

People Handshaking

“Subject To” deals can benefit both parties - photo via Canva

Just know that a “Subject To” deal may happen without traditional oversight. Still, agreements, disclosures, and other contracts may be drawn up by the involved parties. 

What Realtors Think About “Subject To” Deals

We know you would probably like to hear from professionals since this is not a standard real estate situation. Here’s what Sandy Jamison, an acclaimed real estate personality in San Jose, CA, has to say about “Subject To” deals:

“Subject to” deals can be risky for both buyers and sellers.  Many sellers prefer a clean simple transaction that cashes them out completely and removes their financial obligations at the close of escrow. However, when a home is not selling many desperate sellers are looking for any creative way to exit the property and walk away. Many creative investors are looking for sellers willing to consider a subject to offer. It’s always best to work with a seasoned broker any time you have a creative transaction that requires more oversight and experience.”

The Four Kinds of “Subject To” Deals (With Examples)

There are four types of “Subject To” real estate deals that you should know.

Each one comes with different terms and processes, which we will briefly explain.

“Subject to” Inspection Deals

As the name eludes to, a “Subject to” Inspection deal means that the sale relies on an inspection.

To be more clear, in a “Subject to” inspection deal, there must be an offer made by the buyer to the seller. Next, the buyer can view the property, inspect it, and approve or decline based on the properties condition. To successfully close the deal, repairs, concessions, or discounts must be made post-inspection (if they are needed). If the home passes the inspection with flying colors, the sale can proceed through to the final stages.

This means that the buyer can commit to a property, but only proceed if the home’s condition meets their approval.

The seller also gets a commitment from the buyer, but must ensure the home meets a certain standard.

Cash-to-Loan “Subject To” Deals

This one is the most common kind of “Subject To” deal for real estate investors. Cash-to-loan deals work exactly as we described in the opening paragraph. 

Investors pay the difference between the current value and the remaining amount on the seller’s mortgage. 

A simple example of cash-to-loan “Subject To” real estate deals:

A home has a mortgage balance of $100,000 remaining. The current market value is $125,000.

In this case, the investor would pay $25,000, which is the difference between the two. They are now the Subject To homeowner if they continue to make payments toward the mortgage.

Seller Carryback “Subject To” Deals

Some Subject To homes for sale use the “Seller Carryback” deal. It’s less common in California, but some circumstances can make it work. 

In a Seller Carryback (also known as Owner Financing), the buyer doesn’t have to pay as much to acquire the property. Some of the purchase price is withheld, or at other times, the seller will finance the deal. 

This gives the seller a way to keep some control. On the other hand, the investor doesn’t need to come up with the full amount of cash. And so, again, this “Subject To” deal provides a win for both sides of the transaction.

Wrap-Around “Subject To” Deals

This style of “Subject To” deal is a rarer type of real estate agreement, but it's still worth talking about.

The Wrap-Around deal’s loan is calculated from the original mortgage loan, with a premium.

Naturally, a seller often pays interest on their mortgage. In this kind of “Subject To” real estate agreement, they’ll ask the buyer for an extra interest rate, within reason. This carryback only makes sense when interest rates are low because paying an extra on top of a high interest rate would dissuade investors.

How Does a “Subject To” Deal Benefit the Seller?

Why would a homeowner agree to a “Subject To” deal in the first place? 

Imagine that you were in a tough financial position and could fall behind on mortgage payments. A homeowner in that situation could be foreclosed on, losing their equity and crippling their credit standing. Bankruptcy could be a far worse outcome than losing the ability to live in the home. The homeowner may be able to downsize and find accommodation that better suits their financial situation.

But with a “Subject To” deal, those mortgage payments are covered and the homeowner hangs on to their healthy credit score. The investors make the mortgage payments and usually give homeowners the difference between the payment and the current market value of the home. 

A Person Holding a House Key

“Subject To” deals can give sellers options - photo via Canva

How “Subject To” Deals are Different to Mortgage Assumption

The difference between a “Subject To” deal and a mortgage assumption is simple. 

In a “Subject To” deal, the investor doesn’t have liability from the mortgage. If the payments stop coming in from the investor, the homeowner is on the hook, as their name is on the mortgage. Of course, investors don’t want to lose their new property, so maintaining the payments is their priority. 

In a mortgage assumption, the mortgage liability is transferred to you. That means you make payments on the mortgage and also have full liability.

What Are the Benefits of “Subject To” Deals?

There must be benefits to “Subject To” deals or you probably wouldn’t have heard of them. Let’s look at “Subject To” benefits for buyers and sellers.

For buyers, a “Subject To” real estate agreement has several advantages.

  • The property could be discounted or lower-priced than comparables: “Subject To” deals don’t have all the fees that normal real estate transactions do, which affects the home’s sale price.
  • The interest rate may be lower: A new loan may have a much higher interest rate than the homeowner’s original one. With interest rates in California these days, those savings look even more attractive.
  • Pay very little or no money down: Forget down payments and new loans. In a “Subject To” deal, you can pay little or no money down to take possession of the home.
  • Closing a “Subject To” deal can be quick: Without as many details to iron out, no new lenders, and no title company, your deal can close even faster than traditional real estate transactions.

For sellers, selling a “Subject To” home has benefits too.

  • Stave off foreclosure and credit damage: A “Subject To” deal could be the only thing standing between missing mortgage payments and falling into bankruptcy or losing the home to lenders and banks.
  • Sell the property quickly to investors: Without home loans and other steps of normal real estate transactions, investors can move quickly. Sellers might have pressure to sell, so they’ll appreciate doing things sooner, rather than later.
  • Receive payment upfront: Sellers can get paid a lump sum in some of the types of “Subject To” deals, as long as the property value is higher than what they owe on the mortgage.
  • Renovations or repairs might not be needed: Normal real estate transactions come with open houses, staging, and a lot of fuss over appearances. In “Subject To” deals, the buyer often takes those tasks on themselves. 

The Risks of “Subject To” Deals for Buyers

We’ve gone over the benefits, but we’d be doing you a disservice if we left out the risks of “Subject To” real estate deals.

There’s something called a Due-On-Sale clause that can affect a “Subject To” deal. What this clause means is that lenders have the right to demand full repayment of the loan amount when the property is sold. This can pose a risk to investors and sellers. 

In theory, the homeowner’s lender could demand payment for the balance of the loan since the investor has technically acquired the property.

Be aware of the Due-On-Sale clause, but understand that enforcing it is fairly rare, as lenders will create a whole lot of hassle for everyone. If payments are coming in and the terms are being satisfied, you shouldn’t have to worry. Still, be aware.

The Risks of “Subject To” Deals for Sellers

As you’ve been reading, some potential risks for sellers may have occurred to you. 

All of these risks become realities if the buyer/investor stops making payments. 

Firstly, the homeowner could face foreclosure and lose their home if investors fall behind on payments. 

Secondly, if money stops coming in from the investor, the homeowner could seriously damage their credit score. 

Thirdly, the liability remains with the homeowner, meaning that late fees and other financial penalties will be due (even if the investor is technically the responsible party).

Invest in “Subject To” Deals the Right Way

Treading carefully and consulting with real estate professionals about “Subject To” deals is the best route to take.

That’s without a doubt. You’ll want everything in writing, whether you are the new homeowner or the one selling the home. “Subject To” deals rely on trust between the two parties. As an investor, you’ll have a commitment to uphold. Despite not having your name on the mortgage loan, operating as if you do is going to be your moral obligation. 

How would you like to talk more about this? Our team of realtors has guided plenty of investors and homeowners in “Subject To” deals, mortgage assumptions, and other non-standard real estate agreements. Contacting us will provide quick answers from professionals and likely make your transaction more advantageous. 

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If you have more questions about what to expect from the markets around the Bay Area, don’t be afraid to reach out to us today. Our experts are experienced in all property types and the entire San Francisco Bay Area, and we can help you to find what you need to know today.

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