In real estate transactions, clarity is key. One tool that ensures clarity is a real estate addendum tailored for “subject to” purchases and owner financing deals. This document outlines the terms, expectations, and responsibilities of all parties involved—making complex transactions smoother for everyone.
If you’re a member of CreativeCashFlow.com, this addendum is available in the resources section. Non-members can contact Hornet Associates to request a copy. Below, we’ll break down the addendum into simple, actionable points to help you understand its purpose, key terms, and use in negotiations.
Purpose of the Addendum
The addendum is designed for transactions where the buyer takes over the seller’s existing mortgage payments (“subject to”) or arranges owner financing. It protects both parties while establishing transparency. Whether you’re an investor trying to close deals efficiently or a seller looking for peace of mind, this document is your roadmap.
What Does It Mean to Assign a Contract?
One of the fundamental rights in the addendum is the buyer’s ability to assign the contract to another party. This allows flexibility in two scenarios:
- For asset protection: A buyer may start the deal under one company name and close it under another. This prevents any single entity from holding too many liabilities.
- For investor substitution: If the buyer cannot finalize the deal, a trusted investor may step in. Rest assured, the original buyer will carefully vet any substitute party to maintain integrity in the transaction.
This clause offers both peace of mind and adaptability should circumstances change during the process.
Understanding the 60-Day Option Period
The addendum provides a 60-day window for the buyer to find a suitable purchaser for the property. If more time is needed, there’s an option to extend by 30 days—but only if both parties agree.
While extensions are rarely required, this clause ensures you won’t feel rushed or uncertain during the process. Communication is essential, so stay in touch with the buyer to ensure progress is on track.
Buying a Property “Subject To”
“Subject to” transactions allow buyers to take over loan payments without formally assuming the mortgage. Here’s how it works:
- The seller’s loan remains active, with their name on the mortgage.
- The buyer pays the loan directly to the lender on the seller’s behalf.
- The lender is not informed or asked for permission (“no consent needed”).
This arrangement reduces complexity and keeps the original loan terms intact. Sellers should note that while their name stays on the loan, they are no longer responsible for payments.
Addressing the Do on Sale Clause
The “do on sale” clause can seem intimidating, but it’s rarely enforced if payments are made on time. This clause allows a lender to demand full repayment of the loan if ownership changes without their consent. However, as long as the buyer maintains consistent payments, lenders typically won’t act on this clause.
If you’re selling, feel free to ask questions. Buyers should address any concerns early and explain how these deals work in real-world scenarios.
Making It Clear: This Is an Investment
Transparency is important. Buyers should openly share that they’re investors aiming to turn a profit. This honesty can help build trust. Sellers, remember: professional investors stay successful by prioritizing smooth transactions and maintaining good reputations.
Property Marketing and Seller Considerations
Once the contract is signed, the buyer begins marketing the property for resale. This process often includes:
- Listing the property on MLS.
- Placing a “For Sale” sign in the front yard with the buyer’s contact information.
- Installing a lockbox on the property for secure access during showings.
If sellers still live in the home, buyers should give plenty of notice—usually an hour or two—before any showings. Sellers can use this time to tidy up or step out. Communication is critical to ensuring respectful arrangements for all parties.
Handling Loan Amount Discrepancies
Loan numbers can fluctuate slightly between initial estimates and final closing. The addendum accounts for this by including clauses to adjust the purchase price accordingly:
- If the loan amount is higher than the stated price, the buyer pays the higher figure.
- If the loan amount is lower, the buyer pays the lower figure.
This flexibility eliminates delays caused by uncertainty over exact numbers. Sellers don’t need precise figures upfront—just an estimate. Buyers later verify specifics directly with the lender.
Mortgage Payments and Negotiation Tips
After closing, the buyer assumes responsibility for all future loan payments. If sellers are behind on payments, buyers may “catch up” the loan to bring it current.
For buyers, consider negotiating for the seller to cover the next payment before closing. This can free up more resources for other deal expenses. Sellers benefit too, as this ensures the loan remains in good standing during the transition.
Addressing Closing Costs
Closing costs are another key point of negotiation. A common approach is splitting the costs 50/50 between buyer and seller. However, buyers can offer to pay all closing costs as a concession to finalize the deal faster.
Negotiation is about give-and-take. Offering to cover closing costs can leave sellers feeling like they’ve “won” something, encouraging them to move forward with confidence.
Insurance Policies and Escrow
Buyers usually require the property to have a one-year prepaid insurance policy. If there’s a gap between the transaction closing and the resale, buyers might temporarily add themselves to the seller’s existing insurance.
For escrow accounts, funds allocated for taxes and insurance are typically left in place. Reimbursing these amounts at closing is unnecessary since they’ve already been accounted for by the lender.
Sellers have the right to request financial information about the buyer or any future purchasers. While this is rarely an issue, buyers should offer transparency to foster trust. Note that any financial vetting will already have occurred to ensure the next buyer is qualified.
Streamlining the Contract Process
Once all terms are agreed upon, the final steps include initialing, signing, and dating the contract. Sellers should review the document carefully with buyers and feel free to ask any lingering questions.
Buyers should prepare by requesting mortgage statements and other relevant details early. Having these on hand simplifies negotiations and ensures a smoother signing process.
Building Trust Through Communication
Successful real estate transactions depend on clear, honest communication. Sellers should feel confident that buyers have their best interests at heart, while buyers should stay transparent about their intentions and process.
By following the guidelines in this addendum, both parties can avoid misunderstandings and keep the deal moving forward.
Wrapping It Up
Real estate addendums are more than just paperwork—they’re your guide to a well-structured, straightforward transaction. By addressing key concerns, planning for contingencies, and fostering transparency, the process becomes manageable for both buyers and sellers.
Smooth deals are built on trust. Focus on clear communication, respect throughout the process, and mutual understanding. Whether you’re buying “subject to” or acting as the seller, the right tools and preparation make all the difference.
