How Subject-To Deals Work in Real Estate and What to Watch For
Let’s break down how these deals really work, when they make sense, and what you should carefully watch for before structuring one.
Austin Beverigde
Tennessee
, Goliath Teammate
In the world of creative real estate investing, few strategies offer as much leverage as the subject-to deal, short for “purchasing a property subject to the existing financing.”
This approach lets investors acquire properties without new loans, often saving time, paperwork, and capital. But it also comes with layers of nuance, risk, and ethical responsibility.
Let’s break down how these deals really work, when they make sense, and what you should carefully watch for before structuring one.
1. What Is a Subject-To Deal?
In a subject-to transaction, the buyer takes ownership of the property but keeps the seller’s mortgage in place.
You’re buying “subject to” that existing loan, meaning you’re taking control of the asset, but the mortgage remains under the seller’s name.
The Seller still has the loan on record.
The Buyer (you): gains the deed, makes the mortgage payments, and controls the property.
The Bank doesn’t usually need to approve it, as long as payments remain current.
Example:
A seller is behind on payments, owes $220,000 on a property worth $250,000, and can’t afford the mortgage anymore. You agree to buy the home “subject to” that existing loan, catching up on missed payments, and taking over the monthly obligations. The loan stays in the seller’s name, but you control the property.
2. Why Subject-To Deals Appeal to Investors
a. Low Capital Requirement
You can control a property with little to no down payment, avoiding traditional financing hurdles.
b. Fast Closings
No new loan origination or underwriting means deals can close in days, not weeks.
c. Cash Flow Opportunities
By keeping existing low-interest financing in place, your monthly costs are lower, and margins can grow, especially in a rising-rate environment.
d. Motivated Seller Advantage
Distressed or relocation sellers often prefer a fast, low-hassle exit. Subject-to deals can provide exactly that.
3. How the Process Works
A subject-to deal generally involves these steps:
Identify a Motivated Seller - Typically behind on payments, moving quickly, or facing foreclosure.
Evaluate Equity and Loan Terms - Know how much is owed, the interest rate, payment history, and arrears.
Negotiate Terms - Agree on how you’ll handle arrears, future payments, and any cash to the seller.
Use Proper Documentation - You’ll need a Purchase Agreement, Subject-To Addendum, and a Power of Attorney for communication with the lender.
Close with a Title Company Familiar with Creative Deals - Some title companies won’t handle these; choose one experienced in investor transactions.
Take Over Payments and Protect Everyone - Ensure automatic payments to maintain trust and prevent default.
4. Example: How It Plays Out
Imagine this:
Seller owes $180,000 at 4% interest, with a $1,100 monthly payment.
Property rents for $1,800/month.
You take over payments “subject to” the existing loan, catching up on $2,200 in arrears.
Now you own the property (deed in your name), control the rent, and make $700/month, spread without new financing or credit checks.
If you later resell the home on a wrap or lease option, you can collect additional profits on exit.
5. Key Documents in a Subject-To Deal
Purchase and Sale Agreement
Clearly defines purchase price and states “subject to existing financing.”Disclosure of Existing Loan
Confirms that the seller understands the loan remains in their name.Authorization to Release Information
Let's you communicate directly with the lender to confirm loan details.Land Trust or LLC Transfer (Optional)
Sometimes used for privacy or due-on-sale mitigation.Insurance Addendum
Ensures both you and the seller are protected as interested parties.
6. The “Due-on-Sale” Clause
Most mortgages include a due-on-sale clause, allowing the lender to call the full loan balance due if the property transfers ownership.
While lenders rarely exercise it as long as payments are on time, it’s still a risk.
You can mitigate it by:
Keeping insurance current and updated.
Using a land trust in some cases (consult an attorney).
Maintaining direct, consistent payments to the lender.
The reality: lenders want performing loans, not foreclosures, but it’s still a clause worth respecting.
7. Common Risks and How to Manage Them
Risk | Explanation | How to Protect Yourself |
Seller Stops Cooperating | They could hurt your credibility if they contact the bank or disrupt insurance. | Use written agreements, communication limits, and automated payments. |
Due-on-Sale Triggered | Rare but possible if the lender notices the transfer. | Stay compliant, pay on time, and maintain insurance properly. |
Insurance or Tax Notices | Still go to the seller’s address. | Redirect mail, set up escrow alerts, and ensure timely payments. |
Title Issues | Liens or judgments can complicate future sales. | Always close through title; avoid “kitchen table” deals. |
Ethical Missteps | Sellers must fully understand they’re leaving the loan in their name. | Provide clear disclosures; never mislead sellers. |
8. When Subject-To Deals Make the Most Sense
Sellers are behind on payments or facing foreclosure.
Sellers with low-interest loans can preserve.
Investors who plan to hold rentals, lease options, or wraps for cash flow.
Markets with tight lending or high interest rates, where new financing kills margins.
9. When They Don’t Make Sense
Sellers with little motivation or emotional attachment.
Homes with no existing equity or deferred maintenance beyond cash flow tolerance.
Situations with adjustable-rate loans or balloon clauses that introduce risk.
10. The Legal and Ethical Checklist
Always disclose terms in writing.
Use a real estate attorney familiar with creative deals.
Avoid “off-the-books” transfers or handshake arrangements.
Confirm seller understands they’re keeping the loan but transferring the deed.
Set up automated mortgage payments through a neutral third party if possible.
A deal isn’t successful if the seller later feels blindsided.
11. Exit Strategies with Subject-To Deals
You can profit from subject-to transactions in several ways:
Rental Cash Flow: Hold and collect rent.
Lease Option: Rent to tenant-buyers at a higher price.
Wrap Mortgage Sale: Sell on owner-financing terms, wrapping the existing loan for a spread.
Fix and Flip: If equity is strong enough, renovate and sell conventionally.
Just ensure your plan respects the existing financing and payment schedule.
Final Thoughts: Power Meets Responsibility
Subject-to deals give investors incredible leverage, but also serious ethical and operational responsibility.
They work best for investors who combine creativity with clarity, knowing how to protect sellers, communicate transparently, and manage loans reliably.
If done right, they can be win-win: the seller avoids foreclosure, you acquire property with favorable terms, and the lender continues receiving payments.
But if done recklessly, they can damage reputations fast.
