The biggest controversy for a subject to is the violation of the ‘due on sale’.   The due on sale clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full.   This means that when the sellers deed the home to you, the lender could say, “Seller, we want you to pay off that mortgage in full – NOW!”   If you or the seller don’t pay it off, the bank could foreclosure on the property.    Most lenders will never know the seller transferred their title to you if the payments are paid on time.   Most lenders are really concerned with getting their payments on the loan, in full and on time.  Some lenders, for whatever reason, can and do choose to foreclose on a property transferred subject to, instead of continuing to receive payments from an investor.  Such events are rare, but do occur.  You should disclose this risk to a seller, or better yet, be prepared to refinance the existing mortgage in the unlikely event a lender calls the seller’s loan due.  There is some speculation in the industry that many due on sale clauses have not been called because interest rates are currently low, but if they go up, then lenders will have a reason to call loans due.  They will want to get the higher rates.  Right now the lenders have little incentive to call loans due, but that may change in the future.

In my personal opinion, the best and most ethical way to handle a subject to deal is to be totally honest.  Let the lender know you did it.  Send the lender a certified letter informing them of the ownership change.   Keep proof of the letter and return receipt in your files.  If they don’t respond (most won’t), then the law may hold that they have accepted the change by ignoring your letter.   If they actually try to foreclose, then you may need to pay off the existing mortgage and refinance the property into your own name.  If the property doesn’t have enough equity to justify refinancing into your own name, then it probably was not a worthwhile deal to begin with.

To learn about other risks when dealing with Subjects Tos and how to avoid them you can read my Investing in Real Estate with Lease Options and Subject-to Deals book.

A Subject To is getting the deed to a property without getting a new mortgage.  Instead, the seller signs over the deed to his home ‘subject to’ the existing mortgage. The buyer makes the mortgage payments on the seller’s existing loan, but does not take out a new mortgage to acquire the home.

Knowing when to use one is very important.  Many times, investors try to fit one technique into every situation.  That can be a very dangerous approach.   You must know which technique – Lease Option or Subject To – to use with each seller, to protect not only yourself, but your tenant/buyer as well.  Knowing which technique to use for your seller and their situation can save you tens of thousands of dollars in profit. There are many advantages of Subject Tos (some are the same as an option)

1.    Minimum or zero down.  Usually you only need to pay the seller a small amount to sign the deed over to you.  If they owe more than you are willing to pay, then there are times that they will pay you to take the deed from them.

2.    No financing required. When you do a subject to you don’t need to get a mortgage because you are taking over the seller’s mortgage payments.  Technically, you are not assuming the seller’s mortgage.  You are just making the payments on their existing mortgage.

3.    Ownership. The day the seller deeds the property to you it is yours.   You are the true owner of the home.

1. No income or credit checks.  Not once has a seller ever asked to look at my income or check my credit.  They are more worried about their situation and how to get help from you.
2. The Seller will love you!   You will be making a positive difference in someone’s life.

Look out for my next blog.  We will be discussing Subject Tos-The Risks and How to Avoid Them.  To learn more about Subject Tos and the advantages you can read my Investing in Real Estate with Lease Options and Subject-to Deals book.