In buying and selling a house you may want to engage in a Subject-To contract.
What is a “Subject-To” Agreement?
The subject-to agreement is an agreement where the seller agrees to sell and the buyer agrees to buy, not in cash, but by taking over the mortgage payments.
The Subject-To sales agreement has become increasingly popular while interest rates have been at an historic low. Yes, it’s true that every trust deed document includes a clause saying that the loan may become due in the case of sale; but until the interest rates climb up the lender is more than happy to keep receiving payments; rather than to do a fire-sale on the house; call the note due and if not paid will foreclose.
In the Subject-To Agreement the buyer makes the payments to the mortgage servicer. It’s best to provide proof to the seller that the payments are being made.
In the Subject-to transaction, you the buyer, are taking the legal title form the seller while leaving their existing mortgage in place and the debt in their name. So you’re buying the property “subject to” the underlying mortgage in place.
You, the buyer, are not agreeing to pay off the loan, nor are you agreeing to assume the loan. You’re just taking over the payments.
Why would a Seller want to sell a house “Subject-To”?
Do you know of anybody who would just turn over the keys to their home for free; just for you to turn a profit?
Look at it from the seller’s point of view:
· The Seller may want to repair their credit.
· The Seller may be in financial distress.
· The home may be in physical distress (such as a leaking roof).
· The Seller may want to get out of Dodge!
A homeowner that is very diligent in making their monthly mortgage payments and is up-to-date is probably not your “Subject-To” Seller.
However, the homeowner that has just gone into a nice forbearance loan is. You can take over the payments and help repair their credit while they move on to sunshine and sandy beaches.
This strategy allows the buyer to move forward as if they own the property and can now rent it out, fix-and sell it, and even live in it.
In this newsletter I write about forbearance agreements. Predicting that thousands of mortgages will be amended with forbearance agreements, we will see some opportunities to buy houses with “Subject-To” agreements.