5d ago in General discussion
Subject to breakdown
1. Finding a Motivated Seller
Scenario:
A homeowner, let’s call her Sarah, is struggling with payments on her property due to financial hardship, divorce, or other personal reasons. Sarah needs to sell the house quickly but does not have the equity to sell it traditionally. She’s open to a Subject-To offer because it allows her to walk away from the property without worrying about paying off the remaining mortgage balance.
Key Point:
The seller is motivated to sell and wants to avoid foreclosure or keep their credit intact. This creates an opportunity for the buyer.
2. Analyzing the Property and the Existing Mortgage
Scenario:
Sarah’s home is valued at $200,000, and she still owes $180,000 on her mortgage. The interest rate on her mortgage is 4%, and there are 20 years remaining on the loan.
Key Point:
The buyer needs to determine the current market value of the property, the remaining mortgage balance, and the mortgage terms. In a Subject-To deal, the buyer takes over the existing loan payments without assuming the loan personally. This means the original loan remains in Sarah’s name, but the buyer will be making the mortgage payments directly.
3. Structuring the Offer
The buyer makes an offer to Sarah:
• Offer Price: $200,000 (the market value of the home)
• Mortgage Balance: $180,000 (the current amount owed)
• Monthly Payments: The buyer agrees to take over Sarah’s monthly mortgage payments of $1,200 (including principal, interest, taxes, and insurance).
Key Point:
The offer is structured in a way that the buyer does not need to get new financing. Instead, they continue to make payments on Sarah’s existing mortgage. The buyer takes ownership of the property “subject to” the existing financing.
4. Signing the Agreement
The buyer and Sarah sign a Subject-To Agreement, which typically includes:
• Deed Transfer: Sarah transfers the deed of the property to the buyer, making them the legal owner.
• Mortgage Continuity: Sarah’s mortgage remains in her name, and the buyer agrees to make the payments on her behalf.
• Seller’s Protection: The agreement should specify that the seller (Sarah) is protected from any potential future liability and that the buyer is responsible for the payments.
Key Point:
The buyer now owns the property and has the right to control it, but the mortgage is still in Sarah’s name.
5. Closing the Transaction
At closing, the buyer and Sarah finalize the deal, which might be handled by a title company or an attorney. Sarah signs over the property deed to the buyer, and the buyer begins making the mortgage payments going forward.
Key Point:
There is no need for a new loan or a traditional bank mortgage, which makes Subject-To a great way for buyers to acquire property without needing a large down payment or good credit.
6. Post-Closing and Payment Management
Once the deal closes:
• The buyer assumes responsibility for the monthly mortgage payments, which are made directly to the lender by the buyer, but the mortgage stays in Sarah’s name.
• The buyer may choose to rent out the property, sell it for a profit, or refinance it in the future (if they choose to pay off the original loan).
Key Point:
The buyer profits from the deal by either renting the property for cash flow or selling it for a profit. The key to making a Subject-To deal work is ensuring the property has enough positive cash flow from rent or appreciation potential to cover the mortgage and other expenses.
7. Potential Risks and Rewards
• Risks:
• The original lender may invoke the due-on-sale clause (though this is rare, and most lenders don’t act on it if payments continue).
• The buyer is not legally assuming the loan, so if payments are missed, Sarah’s credit could be affected.
• Rewards:
• The buyer acquires property with little to no money down.
• The buyer can often take advantage of favorable loan terms (low interest rates) that are already in place.
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