What is a Subject-to Deal and How Does It Work?

A subject-to-deal is a type of real estate transaction that allows buyers to purchase a property while undertaking the responsibility of paying the existing mortgage associated with that property. This type of real estate deal is often used when the seller is willing to transfer the ownership and responsibility of an existing mortgage to the buyer.

Subject-to deals are attractive to buyers because they don’t have to take out a new loan or put down any money upfront. Instead, they can use their existing funds to cover closing costs and other expenses associated with buying a home. The buyer also assumes all responsibility for payments on the existing mortgage, including any late payments that may occur.

This type of financing can benefit both buyers and sellers, as it allows buyers to purchase homes with ease while providing sellers with a faster way to sell their homes without going through the process of listing their property online and selling it in the market.

Pros and Cons of Investing in Subject-to Deals

Pros of investing in subject-to-deals include:

• Subject-to deals often allow entry into properties that would otherwise be out of reach for regular investors. 
• Subject-to deals can be more affordable than traditional financing for real estate investors.
• Investors and sellers can save time and close the deal quickly without getting a credit check.
• Subject-to deals are more flexible and could have higher return potential for the seller who is able to sell the property without requiring a new appraisal or costly renovation, etc.
• Real estate investing in this financing option can lead to significant tax savings if market timing turns out well or previous losses can be used to write off property taxes in future years.

Cons of investing in subject-to-deals include: 

• If the investor defaults on their loan payments or the seller files for bankruptcy, the property can go into foreclosure and the investor could lose the investment with due-on-sale acceleration.
• If non-payments happen, the buyer/investor may also face lawsuits from the seller.
• The seller may have credit liability due to the buyer’s non-payment.
• The seller may have limited financing options due to the existing mortgage. 

Who Should Consider Subject-to Deals?

Now we have discussed the pros and cons of investing in subject-in deals, you would probably know that subject-to deals are ideal for investors who:

• Are seeking creative financing for their next real estate investment
• Want to avoid getting a credit check nor had difficulty securing traditional financing
• Want a quick transaction and save time

Doing the necessary due diligence on both sides – the seller and the buyer – is essential in ensuring a successful subject-to transaction and investment.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.