The Complete Guide to Subject-To Real Estate Investing

What is Subject-To Real Estate Investing?

Subject-to real estate investing (often called “subject-to” or “sub2”) is a creative financing strategy where an investor purchases a property by taking over the existing mortgage payments while leaving the original mortgage in the seller’s name. The property is purchased “subject to” the existing mortgage, meaning the original loan stays in place.

How Subject-To Deals Work

1. The seller deeds the property to you while their existing mortgage remains in place
2. You make the mortgage payments directly to the lender on the seller’s behalf
3. You own the property and can rent it out or resell it
4. The original mortgage stays in the seller’s name and on their credit report

Key Benefits

For Investors

• Little to no money down required
• No loan qualification needed
• Below market interest rates (especially valuable in high-rate environments)
• Faster closing process
• Lower closing costs
• Potential for immediate equity

For Sellers

• Quick sale of property
• Relief from mortgage payments
• Solution for distressed property situations
• No damage to credit from foreclosure
• Potential to recover equity if property appreciates

Important Risks and Considerations

Due-on-Sale Clause

Most mortgages contain a due-on-sale clause giving the lender the right to demand full payment if the property is transferred. While rarely exercised when payments are current, investors should:

• Understand this risk exists
• Maintain adequate reserves
• Have backup exit strategies
• Consider insurance products that protect against this

Ethical Considerations

• Full disclosure to sellers is essential
• Sellers must understand they remain legally responsible for the loan
• Clear documentation of all agreements is crucial
• Professional legal counsel is recommended

Liability Management

• Maintain adequate insurance coverage
• Use proper legal entities for protection
• Keep detailed payment records
• Monitor the original mortgage

Finding Subject-To Opportunities

Best Candidate Properties

• Motivated sellers facing financial hardship
• Properties with significant equity
• Newer loans with favorable terms
• Sellers relocating quickly
• Inherited properties with existing mortgages

Marketing Strategies

• Direct mail to distressed homeowners
• Social media targeting
• Networking with real estate agents
• Bandit signs in appropriate areas
• Online marketing focusing on motivated sellers

Documentation Requirements

Essential Paperwork

• Purchase agreement
• Subject-to addendum
• Warranty deed
• Disclosure statements
• Payment agreement
• Insurance documentation
• Authorization to release information

Exit Strategies

Common Exit Options

1. Refinance into conventional loan
2. Sell to end buyer
3. Lease-option to tenant-buyer
4. Keep as long-term rental
5. Wholesale to another investor

Best Practices

1. Due Diligence
   • Verify current mortgage status
   • Check for liens and encumbrances
   • Review insurance requirements
   • Assess property condition
   • Calculate equity position
2. Risk Management
   • Maintain reserves for payments
   • Keep detailed documentation
   • Monitor credit reports
   • Maintain professional relationships
3. Professional Team
   • Real estate attorney
   • Title company
   • Insurance agent
   • Property manager
   • Accountant

Common Pitfalls to Avoid

1. Inadequate seller disclosure
2. Poor documentation
3. Insufficient reserves
4. Neglecting due diligence
5. Mismanaging insurance
6. Improper entity structure
7. Poor communication with sellers

Getting Started

1. Education First
   • Study local real estate laws
   • Join investor networks
   • Attend relevant seminars
   • Read case studies
2. Build Your Team
   • Find experienced attorneys
   • Connect with title companies
   • Network with other investors
   • Establish banking relationships
3. Create Systems
   • Document management
   • Payment processing
   • Property maintenance
   • Tenant screening
   • Communication protocols

Conclusion

Subject-to real estate investing can be a powerful strategy when executed properly. Success requires:

• Thorough understanding of the mechanics
• Strong ethical foundation
• Proper risk management
• Professional guidance
• Systematic approach
• Clear communication

Remember that while subject-to investing can offer significant advantages, it’s crucial to approach it with proper preparation, professional guidance, and a clear understanding of both the opportunities and risks involved.