In Real Estate the term "subject to" could be applied to many different contingencies when making an offer on a property. "Subject to inspection" "subject to approval" or subject to whatever the Buyer may need or want and the Seller may accept to make the transaction agreeable to both parties. The subject to we're going to discuss is "subject to the existing mortgage" In short, after the closing has taken place and title has transferred from the Seller to the Buyer, the existing mortgage will remain in place.
Subject to the existing mortgage (subject to) is the most common "subject to" in real estate investor circles. So much so that when you say "subject to" to an Investor, unless you've specified something else, he assumes you're referring to using the existing financing on the property.
What Are The Advantages To Both Buyer And Seller?
- Buyer - This Is A No Qualifying Loan
- Buyer - No Loan Expenses
- Buyer - No Limitations On The Number Of Loans Or Amount Of Loans You Can Have
- Seller - Ability To Sell a House Fast Even If It's Damaged and In Need Of Repair
- Seller - Damaged Payment History Can Be Repaired And Your FICO Score Raised
- Seller - Ability To Sell Low Or No Equity Properties that otherwise would not sell
- Buyer and Seller - Speedy Transaction Closings
Buyers Advantage - This Is A No Qualifying Loan
Buying a property "Subject To" simply allows for a Buyer to take over the Sellers position and begin making the monthly mortgage payments. We don't ask the lender for permission either to buy the property or formally assume the loan. There is no qualifying process just simple paperwork.
Buyers Advantage - No Loan Expenses
For Investors we must have multiple financing techniques at our disposal. We may put up our own cash at which point we are looking only at the rate of return on our investment but the number of investments is then limited to the amount of cash we have. We may go to a bank where we look at loan inception fees (closing costs) which run thousands of dollars, and terms (interest rate and number of years) and of course the bank looks at us as well. We can use private lenders who charge a premium on the current interest rates, or hard money lenders which have exceptionally high interest rates and points. An alternative to this is to buy the property "subject to". When buying subject to there are no loan expenses incurred. Just an agreement between the Seller and the Buyer, and little extra paperwork.
Buyer - No Limitations On The Number Of Loans Or Amount Of Loans You Can Have
These days Lenders don't want to give one loan to one Buyer let alone multiple loans to an Investor. The subject to tool in the Investors toolbox of home buying techniques may provide an opportunity for the Seller to sell and the Buyer to buy when the Seller is all out of options.
Seller - Ability To Sell a House Fast Even If It's Damaged and In Need Of Repair
Frequently Professional Real Estate Buyers are called in as a last resort to buy a property that is so beat down and nasty nobody else wants to buy it. The Investor may work the numbers and determine that although he would like the property and is willing to take on the rehab it makes no sense financially to make an outright cash purchase of the property and then incur all the rehab expenses. An alternative is for the Seller to leave the existing financing in place and allow the Buyer to take over the mortgage payments until the property is rehabbed and sold providing a win win situation for both Seller and Buyer.
Seller - Damaged Payment History Can Be Repaired And Your FICO Score Raised
Quite often the "Subject To" clause is used when you have a Seller with poor payment history or who is currently behind on payments. When this occurs the Seller (the Mortgagor) may benefit greatly by Selling the property "Subject to the existing mortgage of record remaining in place". What happens if the house is sold when the mortgage is delinquent? The loan is paid off and closed and forever the last 3, 4 or 9 mortgage payments are displayed on the Sellers Credit Report as big bold red letters that say DELINQUENT !! So it may be a substantial benefit for the Seller to allow for all the back payments to be made and timely mortgage payments to be made for a couple years. This way the missed payments show as a bump in the road vs the Mortgagors legacy of the loan forever displayed negatively on their credit report.
Seller - Ability To Sell Low Or No Equity Properties that otherwise would not sell
I regularly come across Sellers who cannot sell because they have low or no equity in their property. If you have zero equity in a $150,000 home and you list your property on the MLS, pay a Realtor 6% commission and add an additional 3% for traditional Seller contributed closing costs plus Buyers contingencies of "fix this" "paint that" and "give us a credit for…" and then we'll buy it. That same Seller would have to go to the closing table with a check for $13,500 just to be able to hand the Buyer the keys. If you can find a Buyer willing to just take over your payments and buy your house "Subject To" doesn't that make far better sense?
Buyer and Seller - Speedy Transaction Closings
Both Buyer and Seller will benefit from a speedy transaction and closing. When both parties are in agreement a subject to real estate deal can be done in hours as opposed to 30, 60, or 90 days which has now become the norm in this challenged real estate market.
Subject To deals can be a win win for both the Seller and the Buyer. Of course there is some risk involved for a Seller who agrees to sell "Subject To". If the Buyer fails to make the payments it's the Seller whose credit will be damaged. But for many Sellers the "Subject To" clause is quite often their only way out of a distressed situation and the rewards greatly outweigh the risk. It really can be a win win for both Seller and Buyer.
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