A How To on Subject To's
A case study on how I acquired a property "subject to" the existing mortgage.
Subject To vs Assumptions
Subject To (otherwise known as a Subto) is a way to purchase properties and leave the existing loan in place. In a majority of cases, when someone purchases a property subject to, they mean purchasing it subject to the first lien (mortgage). You can also purchase properties subject to the second, third, or fourth lien.
This means you acquire the property in your name, the deed actually transfers from the seller to you. The existing lien/mortgage stays in the seller’s name and is still attached to the property. This is critical to understand. The buyer of the property will be making payments on the lien/mortgage on behalf the seller. The seller is essentially trusting the new owner to keep the loan current.
This is different than a Assumption. When assuming the loan, the buyer will notify the mortgage holder that they want to take over the property and loan associated with the property. The bank/lien holder will underwrite the new buyer to make sure they are qualified before allowing an assumption. Once that is approved, the seller will deed the property over and the bank will move the loan into the buyer’s name.
Subject to’s are a riskier form of ownership. Every mortgage out there has a specific clause in the loan documents called a “Due On Sale Clause”. This allows the mortgage holder to call the full balance of the loan due whenever there is a transfer of ownership. There are a number of ways to mitigate this risk and I can write a small book about it. From my conversations with title companies and other investors, as long as payments are made on time, the banks don’t have a reason to dive deeper into the file. Just know they absolutely have the right to call it due with written notice.
Acquiring the Deal
This property was acquired from a cold calling campaign from my virtual assistant. The deal was a mobile home with land over in the Canyon Lake area. The sellers were motivated to sell as they wanted to travel in their RV and their kids didn’t want to take over their place. I spoke to them and asked how much cash they needed to move out. The amount was actually pretty small, with that in mind, I offered that I could give them more money in their pocket if I instead took over their loan. It’s a win-win because I don’t have to pay for lender fees and higher interest, I can pass the savings onto the seller.
I requested a copy of their loan information and worked the number backwards on the net amount they needed to walk at closing. All in all purchase price was 119k with taking sub2 of 92.5k first and a 4k HUD lien. Payments (PITI) came out to $860 a month, with 21 years left on a 30 year loan at 4.5%. I could easily rent this out at $1600 for great cash flow. Instead I opted to rehab and flip this. Closing statement on acquisition below.
Payments, Insurance and Rehab
Since the loan stays in the previous owner’s name, I had to make sure I could always find the sellers if something came up with the bank. I wasn’t as worried about the due on sale but more so the insurance. One of the biggest tips where a bank might look into a sub2 is when the insurance information changes. If this place were to burn down, the beneficiary of the policy is still technically the previous owners. It’s these minor details that could cost me a fortune. I had the sellers sign an agreement stating any overage on a potential insurance payout would go to me.
On top of that, I grabbed their personal information and login information for the loan servicing company. These deals require a lot of trust of be had between the seller and buyer.
Rehab was all done myself, it was mostly cosmetic consisting of new flooring, inside and outside paint, mud/texture, cabinet refinish paint, yard clean up, toilet replacement and removal of countertops.
Rental and Resale
As you can tell from the pictures above, I was on the tail end of the rehab. What was left was mostly touch ups and countertops. I happened to find a buyer during this time. He walked it knowing it wasn’t completed. He was willing to take the property as-is if I cut him a deal. In the end we agreed to a 195k resale price (no agent commissions since it was off market), and he wanted to lease the place while he worked up the money for a down payment. The rest of his financially profile was solid, I wasn’t worried about him not qualifying for a mortgage.
I structured a lease with option to purchase with the buyer. $1800 a month till he closed the loan. About $950 in monthly cash flow with a estimated net profit of 55k.
125k Purchase (and closing costs) with 15k Renovations and 195k Resale leaves about 55k in Profit. The rental income for the next few months will off set the resale closing costs on the deal, call that a wash.
Future Projects
I’ve got a great write up on a deal I am working a “wrap” on. I purchased a place with seller financing at 0% interest. I am then reselling that property to a buyer at 5% interest. This deal should be closing mid March. I initially put $800 down to close it and with interest payments over time, it’ll net me shy of $250,000 over the life of the mortgage.
Thanks to this newsletter, I’ve partnered with a private money partner via joint venture to acquire a property over in the Seguin area. It’s a small development deal that’ll be posted here and I may do some video on that one if there is interest.
Lastly, I’m closing on a fix and flip in the Canyon lake area this upcoming week. If anyone is looking to put some capital to work, please reach out. This property is coming with the lot next door and I’m looking to raise some money to install utilities on it. First lien position!