Indianapolis Rehab Property

What is a “Subject To” real estate deal?
A “subject to” real estate deal involves a seller deeding the property to a buyer while keeping the existing mortgage in place. The buyer does not formally assume the loan, they just start making the payments while the loan is still in the seller’s name. There are many variations on “subject to” deals and as many ways to close a deal as there are investors doing it. We will cover all the steps needed right here.

Obtaining a property “Subject To” the existing loan isn’t really as hard as it may seem so long as you know what you’re doing. If you know the principles behind the deal and can clearly explain it and its benefits to the seller, you can buy more properties at a faster rate than a traditional investor would be able to by getting new loans on each purchase.

Here’s How to a “Subject To” deal works:
When a property is financed, the note says “I owe $$$ amount of money” and the Deed/Trust/Mortgage says something to the effect of “here is what the lender considers collateral to sell if the note is not paid back as agreed upon.” In most cases, the individual borrowing the money is the one that is personally liable on the loan. If the collateral that’s backing the note is sold and the amount received from the proceeds cannot cover the debt owed, the borrower must make up the difference out of their own pocket.

Traditionally, if you didn’t obtain a new loan when you purchased a property, you would take over ownership and “assume and agree to pay the orignal loan as agreed upon”. Recently lenders have started inserting a “due on sale” clause in collateral agreements; meaning that when the original homeowner sells or transfers interest in the property to another individual, the lien holder may require full payment of the loan immediately rather than continue to accept payments.

In the early years of the “due on sale” clause, the current interest rates were much higher than the rates on old loans, so lenders had a good reason to call the loans due where the “due on sale” had been violated. Now that interest rates have reached historic lows and interest rates are still low, lenders in general have not been filing “due on sale” cases at all. And, as a rule, unless something out of the ordinary happens, the lender never notices that a transfer has occurred. If you don’t make the payments, they will notice. If you cause them a lot of paper work, they will notice.

Buying a property “subject to” the in-place mortgage means that you will receive the deed, however you do not assume the full responsibility of the loan. The loan will stay in the name of the original homeowners, but you now own the property and continue to make the monthly mortgage payments. If you stop making the payments, it is possible that you could lose the property and the equity that you have in it. However, if the payments aren’t made and you end up losing the property, the personal liability for the mortgage will fall on the original homeowner.

Who is the ideal candidate for a “Subject To” deal?
Homeowners that are typically behind on payments, individuals that are going through foreclosure or may have little to no equity in the home are among the most frequent motivated sellers which you will be interacting with and perfect for buying “subject to”. Although it is common for highly motivated sellers to agree to practically anything, it’s still a good idea to take the time to explain what you’re doing, how the process of the deal works, and how it ultimately benefits them as well as you. They will ultimately benefit because you will be paying the mortgage in a timely manner which will help keep their credit intact and they could potentially stay in the house as you are making the payments. If the seler is concerned about the process and what you’re doing, it helps to explain to them that the potential risk of losing all of the equity in the house is enough of a motive to keep you from missing any mortgage payments.  You can also include a clause in the contract stating that you agree to pay off the sellers loans within a predetermined amount of time.

If the seller is still unsure, a good way to build their confidence is to have an independant third party collect and disburse the mortgage payments. The third party could be a company that deals with loan servicing or trusts that would be able to do this for you. Another method that works well is to have the seller open a seperate savings account at the bank that holds their original loan and add you on the account. You can then continue to make payments into their account and set up an automatic payment method to pay down the mortgage debt.  This allow them to actually see the money going into their account and then out to pay the mortgage.

What are some issues that may arise during or after the deal?
One of the largest problems that may arise deals with insurance. You must carry the proper insurance during the deal since the homeowner’s insurance policy is usually only valid for 30 days after the “subject to” transfer is complete. The first thing to do is to call the insurance company that is holding the existing homeowner’s policy and get them to add you onto the policy. Once this is done follow up with the mortgage company in a couple of weeks to modify the policy to a “renters” policy or you could get an entirely new homeowners policy which includes you and the seller.

An additional approach commonly used when dealing with insurance involves using a land trust. A land trust essentially holds the title to any real property and thus is often used by investors for estate planning or tax purposes. The beneficiary would be the homeowner and you would be listed as the trustee who’s responsibilities are to carry out orders and control the property. You would then speak with the lender and explain the change and ensure that all correspondences should be directed to the trustee (you) who can then make changes to the policy. To help protect your financial interest in the property, a beneficial interest would also need to be assigned over to your name.

It is a possibility that if interest rates start climbing in the near future that the lenders would be more interested in who’s actually making the payments. The best way to not catch their attention or raise any red flags is to miss payments. It is crucial that during a “subject to” deal you make sure that everything is done by the book so that both parties end up satisfied.

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