Looking to purchase real estate but want to avoid the lengthy mortgage process? Subject to sales enable buyers to acquire properties without traditional bank loans.
In a subject to transaction, the buyer takes over mortgage payments while the seller retains ownership. Once the mortgage is fully paid off, the property transfers to the buyer. This unconventional strategy expedites the purchasing timeline and reduces closing costs.
Main Types of Subject To Sales
There are three primary kinds of subject to real estate deals to understand:
Cash to Loan
In a cash to loan subject to sale, the buyer pays the seller directly for their equity in the property. This relieves the seller of any remaining mortgage payments or financial risk. It functions similarly to an outright cash purchase for the seller but still enables the buyer to acquire the home without a mortgage loan.
Seller Carryback
With a seller carryback, the seller holds a second mortgage and collects subsequent payments from the buyer. This gives the seller ongoing monthly income while transferring most ownership responsibilities to the buyer. The seller is still vulnerable to foreclosure if the buyer misses too many payments.
Wraparound Mortgage
A wraparound mortgage subject to deal involves the existing mortgage remaining intact but getting wrapped into a new, larger mortgage held by the seller instead of a bank. The seller collects a monthly payment from the buyer that covers both the existing mortgage and additional down payment or fees.
Key Benefits of Subject To Deals
Subject to sales come with several potential rewards compared to traditional real estate transactions:
- Lower purchase prices since buyers do not need mortgage approvals
- Avoid extensive bank mortgage applications and income verification
- Faster timeline to take control of the property
- Reduced closing costs without loan fees or down payment requirements
For buyers struggling to get a traditional home loan, subject to deals provide an alternative path to home ownership quickly without debt barriers. Sellers also benefit from faster liquidation of their asset.
Risks To Understand
However, subject to sales come with notable risks that buyers and sellers must consider:
- The buyer must consistently make mortgage payments to prevent foreclosure. Missed payments risk the seller losing ownership of the home despite not holding the mortgage.
- There is often little recourse for the seller if the buyer stops making payments apart from repossessing the property which has a lengthy legal process.
- The condition and appreciation potential of the home and surrounding neighborhood requires thorough research beforehand to avoid overpaying.
While subject to deals provide flexibility, they require careful risk evaluation by both parties. Working with a knowledgeable real estate attorney is highly recommended.
Evaluating if a Subject To Sale is Right For You
Here are some key questions to ask when assessing if pursuing or accepting a subject to real estate transaction makes sense:
- Can you consult an attorney to review the purchase contract and necessary disclosures to understand the risks fully?
- If you’re the buyer, will you comfortably make mortgage payments long-term without overextending your income?
- As the buyer, will you thoroughly personally inspect the home first rather than just relying on a professional appraisal?
- As the seller, do you fully grasp the foreclosure risks if the buyer stops making monthly payments?
Carefully reflecting on these aspects means subject to deals may or may not align with your risk tolerance and financial situation.
Subject To Sale Process Step-By-Step
Successfully executing a subject to real estate transaction requires following this strategic sequence of steps:
- Make an offer contingent on verifying details related to the existing mortgage such as interest rate, monthly payments, outstanding term etc.
- Research title and confirm ownership, appraisal value, tax liens or other obligations attached to the property before finalizing an amount.
- Negotiate fair purchase price and favorable terms for both parties including future payment collection methods if seller financing.
- Draw up detailed purchase contract outlining specifics of the deal terms for buyer and seller protections.
- Record and transfer updated deed showing the buyer now responsible for making mortgage payments.
- Collect monthly payments per contract and track payments owed until mortgage balance reaches zero.
- File Request for Full Reconveyance form to transfer legal ownership fully once satisfied.
Without diligently following these steps, subject to transactions risk falling through or resulting in legal complications down the road.
Alternatives Worth Exploring
While subject to sales provide a unique route to home ownership, other alternatives to finance real estate include:
- Rent-To-Own Agreements: Making rent payments that partially contribute to a future home purchase.
- Owner Financing: Funding from the property seller instead of bank.
- Wholesaling: Quickly reselling a property for profit without needing financing.
- Auctions: Bidding for below-market properties but often with delayed closing.
These options can enable more flexibility or leverage than traditional financing methods in many cases.
Subject to real estate transactions allow both buyers and sellers unique benefits but require handling with care. While deals may close quicker and cost less upfront than normal sales, risks around foreclosure loom large if buyers fail to make monthly payments on time.
Weighing risks against rewards and working with an experienced real estate lawyer helps steer clear of pitfalls. For the organized, informed investor ready to move swiftly, subject to sales provide a legitimate shortcut to owning income-producing assets.
