If you’re an investor looking to scale your portfolio without sinking loads of cash into every deal, Subject To might be the solution you’ve been searching for. This strategy isn’t just another way to buy real estate—it’s a game plan that enables investors to acquire properties quickly, often without traditional financing hassles.
But what exactly is Subject To, and how does it work? Let’s break it down step by step so you can understand its benefits, risks, and how to make it work for you.
Understanding Subject To
Subject To is short for “subject to the existing financing staying in place.” In practice, it means you purchase a property while leaving the current loan intact under the seller’s name. You, as the buyer, take ownership of the property and assume responsibility for the loan payments, but the loan itself doesn’t transfer into your name.
To address a common misconception, this is not a loan assumption. Loan assumptions require lender approval, tons of paperwork, and transferring the loan into the buyer’s name. In a Subject To agreement, the lender remains unaware of the transaction because everything about the loan stays as-is, with you stepping in to make payments.
How Subject To Differs From Lease Options
Newer investors sometimes confuse Subject To deals with lease options, but they’re not the same.
- Lease Options: The buyer rents the property for a set period, with an option to purchase later. Title doesn’t transfer to the buyer immediately.
- Subject To: Title transfers to the buyer on day one. You own the home outright, even though you don’t take out a new loan to purchase it.
This immediate transfer of property rights is what makes Subject To an acquisition model rather than a temporary arrangement like a lease.
How the Subject To Process Works
A successful Subject To deal involves a few key steps:
- The Seller Transfers the Deed: The seller gives you the warranty deed, which makes you the legal owner of the property.
- Existing Loan Stays Active: The seller’s original loan remains with their lender. You, the buyer, agree to pay the monthly mortgage on the seller’s behalf.
- Deed of Trust to Secure Performance (DTS-P): You agree to give the seller additional legal clawbacks, allowing them to foreclose and take back the property if you fail to meet your payment obligations.
This process allows buyers to acquire properties without applying for a new loan or using personal credit. It’s a structure that fast-tracks real estate deals, but only if you understand the paperwork.
Why You Should Never Say “Taking Over Payments”
It’s vital to clearly explain this arrangement to a seller without causing confusion. Saying you’re “taking over payments” can mislead the seller into thinking the bank has relieved them of their legal responsibility. That’s not the case.
The seller’s name remains on the loan. They remain legally liable if payments stop or foreclosure occurs. That’s why it’s better to phrase it as “making payments on the seller’s behalf.” You need to manage expectations while being upfront about the risks and benefits for everyone involved.
Key Benefits of Subject To
For both buyers and sellers, Subject To deals offer unique advantages.
For Investors
- No Institutional Lending: You avoid long bank approval processes, underwriting, and credit checks.
- Higher Loan-to-Value (LTV): Investors can profit from properties with little to no equity.
- Minimal Upfront Costs: Most deals require far less cash than typical purchases.
- Flexible Exit Strategies: You can rent, flip, wholesale, or use owner-financing to turn a profit.
For Sellers
- Avoid Foreclosure: A seller struggling with payments keeps the bank from repossessing the property.
- Credit Improvement: Monthly payments made on time boost the seller’s credit score.
The Risk of the Due-On-Sale Clause
One risk unique to Subject To deals is the due-on-sale clause. This clause allows the lender to call the full loan balance due if the property’s ownership changes. While this sounds concerning, it’s rarely enforced.
Why? Historically, banks prioritize receiving payments over initiating legal action. If the loan stays current, lenders typically don’t bother calling the clause. Still, it’s vital to fully disclose this to the seller so they understand the small risk involved.
Finding Subject To Deals
Subject To opportunities often show up in these scenarios:
- Distressed Sellers: Homeowners facing foreclosure or severe financial strain are ideal candidates.
- Low or No-Equity Properties: Homes with little equity often attract fewer buyers, making them available for Subject To deals.
- Divorce Cases: Couples splitting assets quickly are often motivated to sell.
- Vacant Homes: Owners holding on to unused properties may want to eliminate the expense of ownership.
You don’t need a dedicated “Subject To deals” list. These opportunities often come from the same leads most investors already pursue.
Real-World Example: The Numbers Behind a Subject To Deal
Let’s say you find a property valued at $150,000. The seller owes $75,000 to their lender and is eight months behind, with $8,000 in missed payments. The home also needs $12,000 in repairs.
Here’s what a potential deal might look like:
- Purchase Price: $75,000
- Rehab Costs: $12,000
- Missed Payments: $8,000
- Total Investment: $95,000
Once you’ve acquired the property, you could sell it via a wraparound mortgage, turn it into a rental, or flip it for profit.
Handling Seller Concerns: “Can I Buy Another Home?”
One of the most common seller concerns is, “Can I still qualify for a new home loan?”
The answer depends on their new lender’s underwriting process. Historically, lenders often don’t count Subject To loans against a seller’s debt-to-income ratio, especially if the payments are current. Sellers can sometimes qualify for a new mortgage the same month they sell via Subject To.
Highlight this historical trend but avoid making absolute guarantees, as approval ultimately rests with the lender.
Keys to Success
- Full Disclosure: Always be transparent with sellers about the risks and structure of the deal.
- Financial Preparedness: Even if the deal has little upfront cost, have reserves ready for missed payments or unexpected expenses.
- Good Contracts: Work with attorneys experienced in Subject To agreements. Incorrect paperwork can derail the deal and open you to liability.
Final Thoughts
Subject To is a powerful strategy for investors looking to acquire real estate creatively. It works especially well for properties with high LTVs or sellers in challenging situations. However, it requires a deep understanding of the process, open communication with sellers, and ethical responsibility to honor your agreements.
By mastering this strategy and structuring deals properly, you can open doors to more opportunities and help sellers move forward with confidence.
