In real estate investing, contracts aren’t just paperwork—they’re the backbone of trust and clarity. For investors using subject-to strategies, the contract solidifies the agreement and sets the tone for a long-term relationship with the seller. If handled well, it builds confidence, addresses concerns, and ensures both sides are on the same page. Here’s how to approach the contracting process step by step to ensure a smooth and transparent transaction.
What Are Subject-To Deals?
Subject-to deals allow an investor to buy a property while leaving the seller’s existing mortgage in place. The investor takes over payments without obtaining bank approval, making it a straightforward way to acquire properties with little upfront capital. The seller benefits by offloading the property and its financial burden, while the investor gains control without needing to qualify for a new loan.
However, this arrangement requires thorough documentation to protect both parties. The contract ensures there are no misunderstandings about the responsibilities and expectations going forward.
Start With the Right Mindset
Before diving into the paperwork, establish trust. Begin by asking the seller if they have any remaining questions. This simple step ensures they feel heard and comfortable. Transparency is the foundation of the relationship.
Always encourage sellers to read the contract carefully. Let them take their time and stress that they’re under no pressure. Ethical practices are essential in this business. Sellers need to fully understand the agreement and feel that everything is above board. The more genuine and patient you are, the smoother the process will be.
The Marriage Analogy: Building a Long-Term Relationship
Think of the subject-to arrangement as a marriage. Both parties are tied together for a long-term commitment bound by the contract. If trust falters later, problems arise. Clear communication and full disclosure during the contracting process prevent future misunderstandings.
Explain to the seller that they’ll likely remain on the mortgage for several years until you sell or transfer the property. Assure them you’ll maintain timely payments while leaving the loan in their name as agreed.
Addressing the Elephant in the Room: The Due-On-Sale Clause
The due-on-sale clause allows the lender to demand full repayment if a property transfers ownership. Be upfront about this. Let sellers know that while the clause exists, timely payments keep the lender satisfied. In practice, banks want their money, not to repossess a home. Honesty here builds credibility.
Reassure the seller by explaining your track record of successfully managing subject-to deals. Transparency about risks upfront helps sellers feel safer moving forward.
Breaking Down the Contract: What the Seller Needs to Know
Contracts can feel intimidating, especially when layered with legal language. Start by acknowledging the stack of documents but explain their purpose clearly:
- Pages 1–9: The standard Texas Real Estate Commission (TREC) residential contract form. This is required for all real estate transactions in Texas.
- Addendum A: The section that outlines the subject-to terms, including how financing will work and key provisions unique to this type of sale.
Focus on walking the seller through the contract step by step, highlighting relevant sections and leaving space for questions.
Start by confirming the seller’s name, property address, and legal description of the property. Ensure everything is accurate—they need to feel confident that even these basics are correct.
Next, review the sales price. If the seller owes $100,000 on their mortgage and you’re covering their arrears, clarify how these numbers align. Be clear about additional costs such as closing fees or back payments.
Sellers’ Disclosures and Surveys
Texas law requires sellers to disclose property details, such as the condition of appliances or the electrical system, in a document called the “Sellers’ Disclosure Notice.” If the seller hasn’t already completed it, give them time to do so.
Surveys—those “blueprints” of property lines—are optional. If the seller has one, request it, but it’s not an absolute requirement.
Closing Timeline
Set a closing date, typically 60 days out. This gives you time to find a buyer or finalize plans while making the process clear for the seller. Emphasize that you’ll aim to close earlier if possible.
In cases of foreclosure, adjust the timeline to align with bank deadlines. For example, Texas foreclosures occur on the first Tuesday of each month, so you’d want to close the prior Friday.
Special Provisions
Add any unique agreements, such as appliances included in the deal. Remind the seller that if it’s not written, it doesn’t count. Clarity here saves headaches later.
Addendum A: The Subject-To Playbook
Addendum A dives deeper into the specifics of the deal. Think of it as the “engine” of the contract, covering the following:
- Loan Details: Explains that you’ll take over their existing loan without the lender’s consent. Any arrears (missed payments) and the current loan balance are clearly outlined.
- Assignment Rights: Allows you to reassign the contract to another entity or investor. Walk the seller through how this works while reassuring them it won’t negatively impact them.
- Option Period: Reinforce that the 60-day option period gives you time to finalize the deal or back out if necessary.
- Insurance: Discuss how you’ll either add yourself to the insurance policy or replace it with a one-year prepaid policy.
Repetition in the contract is intentional—it ensures the seller fully understands every detail. Take time to explain key clauses, especially those they’ll encounter multiple times.
Transparency Around Closing Costs and Payments
Negotiation isn’t just about numbers—it’s about psychology. Start by splitting closing costs 50/50. This allows you to “give in” later by offering to pay 100%, making the seller feel like they’ve gained something.
Similarly, talk through arrears (missed payments). If the seller is behind on payments, place these costs under the buyer’s closing expenses. Explain how this benefits both parties financially.
When it comes to escrow accounts—money set aside for taxes and insurance—clarify that they won’t receive refunds. Instead, these balances are left intact for continuity. Transparency here avoids confusion later.
A power of attorney grants you limited authority over actions related to the seller’s property. This simplifies dealing with insurance or lender issues. Limit its scope to the specific property and ensure it’s notarized.
Authorization to release loan information is equally critical. Without it, the lender won’t talk to you. The seller will need to provide their name, loan number, and the last four digits of their Social Security number on this form.
Acknowledging the Seller’s Rights and Responsibilities
Subject-to deals involve several acknowledgments that the seller must sign, including:
- Understanding their continued liability: Explain that while you’ll make payments, the loan will technically remain in their name until paid off.
- Contingencies and legal clarity: Reiterate that any verbal agreements are invalid unless written in the contract.
Closing attorneys also provide full disclosures per state law. Reinforce that any remaining questions should be addressed now. Transparency is key.
Setting Expectations Post-Signing
Once the contract is finalized, outline next steps. A checklist works well here:
- Sellers should provide documents like their mortgage statement, deed of trust, and insurance details.
- Explain the timeline for transferring ownership.
- Clarify how you’ll market the property while respecting their privacy (e.g., arranging showings if the seller still resides there).
Leave the seller with signed copies of the contract and encourage them to contact you with any follow-up questions. An open line of communication builds trust.
Final Thoughts
Subject-to deals can be complex, but they’re built on clear communication and ethical practices. By patiently walking sellers through the contracting process and addressing potential concerns upfront, you foster confidence.
A strong relationship with the seller ensures smoother negotiations and fewer hiccups down the road. With clarity and transparency, you’re not just completing a deal—you’re building a solid reputation in the world of creative finance.
