Real estate investing comes with countless strategies, but few are as misunderstood—or as powerful—as the “Subject To” method. Grant Kemp, a respected voice in real estate, breaks down everything you need to know about this strategy: how it works, why it’s effective, and how to use it to grow your investment portfolio.
If you’re looking for a way to invest in real estate without traditional bank loans or large cash reserves, Subject To might just be the strategy for you.
Understanding the Subject To Strategy
Subject To, short for “subject to the existing mortgage,” allows you to purchase property without paying off the seller’s existing mortgage. Instead, you agree to take over their mortgage payments while the loan remains in their name.
Think of it as stepping into someone else’s financial shoes—you gain ownership of the property, but the original mortgage stays exactly as it is. It’s a creative way for real estate investors to acquire property when traditional financing is out of reach.
Breaking Down the Basics
Let’s simplify the core idea. When you buy a property using Subject To, you’re saying to the seller:
- “I will buy your house, but the existing mortgage will stay in place.”
This means the debt remains in the seller’s name, but the ownership of the property transfers to you, typically using a document called a warranty deed.
This is different than what most are used to. In traditional financing, when someone buys a home, they take out a new loan, pay off the seller’s old loan, and take full responsibility for the debt. Subject To skips that step, and the existing loan doesn’t change hands.
Why Choose Subject To?
Lower Barriers to Entry
One of the biggest benefits is that you don’t need significant cash upfront or a strong credit score to make this work. For new investors, that’s a game-changer. Traditional methods require either hard money loans or bank financing. With Subject To, you bypass those hurdles.
Use Existing Low-Interest Rates
Many existing mortgages carry far lower interest rates than what you’d get from a lender today. By keeping the seller’s mortgage in place, you can “inherit” their lower rate, saving you money.
Expand Your Portfolio Quickly
Fannie Mae and Freddie Mac limit investors to eight to ten mortgages at a time. Subject To allows you to sidestep that limit because you’re not taking on new debt in your name. That means scaling your portfolio becomes far easier.
The Risks and Challenges
Subject To isn’t without its complications. Here are a few things to watch out for:
- “Due on Sale” Clause
Most mortgages include a clause allowing the bank to demand full payment if the property is sold. Although this clause is rarely enforced (as long as payments continue), the risk still exists.
- Responsibility Falls on You
While the mortgage remains in the seller’s name, it’s your job to make the payments. Failing to pay impacts their credit, and could result in foreclosure.
- Building Seller Trust
Sellers need to trust that you’ll uphold your end of the deal. They’re still on the hook for the mortgage, so transparency is crucial.
Key Documents You’ll Need
Making a Subject To deal legally sound requires proper documentation. Here are the essentials:
- Warranty Deed: Transfers ownership to you.
- Deed of Trust to Secure Performance (DTSP): Protects the seller by giving them recourse if you fail to perform (e.g., foreclosure).
- Authorization to Release Information: Lets you communicate directly with the seller’s lender.
- Power of Attorney: Allows you to manage payments and deal with banks on behalf of the seller.
Working with an experienced real estate attorney is essential. Don’t cut corners here—legal mistakes could be costly.
How the Subject To Process Works
Here’s a simplified breakdown of how a Subject To deal unfolds:
- Find a Motivated Seller
Typically, these are sellers in foreclosure, behind on payments, or unable to sell their house traditionally.
- Negotiate Terms
You’ll agree to take over the mortgage payments and any other terms (e.g., catch-up payments, additional cash).
- Transfer Ownership
Ownership is transferred to you through a warranty deed, but the mortgage stays in the seller’s name.
- Make Payments
You assume responsibility for ongoing mortgage payments. It’s best to pay the lender directly for transparency.
- Control the Property
As the new owner, you can rent, sell, or even flip the property depending on your investment goals.
Protecting the Seller
To win a seller’s trust, you must reassure them. The Deed of Trust to Secure Performance is a key tool here. It allows the seller to foreclose on you if you fail to make payments. Frame this as a safety net for them.
Additionally, explain the benefits:
- Their credit will improve as you make on-time payments.
- They’ll avoid foreclosure, which can devastate their financial future.
- They’ll no longer have the stress of managing the property.
How to Handle the “Due on Sale” Clause
The “due on sale” clause gives the bank the right (not the obligation) to demand full repayment of the loan if the property is sold. Here’s the good news—it’s rarely enforced. Banks care more about getting paid than owning real estate.
To minimize risk:
- Ensure mortgage payments are always on time.
- Keep insurance policies updated with the seller’s name alongside yours.
- Avoid discussing the sale with the bank unless necessary.
With proper management, the clause is highly unlikely to become a problem.
Finding Deals for Subject To
You can apply this strategy to almost any lead, but some are more common than others:
- Foreclosures: Sellers facing foreclosure often embrace this option. It allows them to save their credit and move on.
- Low-Equity Sellers: Subject To works well when sellers can’t sell traditionally because they lack equity.
Economic downturns often create ideal conditions for Subject To deals. When financing dries up for buyers, seller-financing options like Subject To see growing popularity.
The Role of Third-Party Servicing
Some Subject To investors opt for third-party loan servicing companies. These companies handle payments, ensuring the bank, seller, and investor remain on the same page. While not required, it’s an excellent way to build trust and stay organized.
Selling or Profiting From Subject To Properties
Once you own a property bought Subject To, your profit options are numerous:
- Owner Financing: Sell it with a wraparound mortgage at a higher interest rate.
- Flipping: Renovate and sell for a one-time profit.
- Renting: Generate monthly income by renting it out.
The flexibility makes this method suitable for both short-term and long-term strategies.
Why Subject To Is Worth Mastering
Subject To is a powerful way to invest in real estate with minimal upfront costs or personal financial exposure. While it involves moving parts and legal considerations, the potential for high returns without major risk makes it incredibly attractive.
Like any investment strategy, education is key. By learning the ins and outs, you’ll build confidence and succeed in this often-overlooked niche of real estate investing.
