How to Use Subject-to Real Estate Without Legal Risks
how-to-use-subject-to-real-estate-without-legal-risks
Austin Beveridge
Tennessee
, Goliath Teammate
Entering the world of subject-to real estate can feel daunting, especially with the potential legal risks involved. Many investors worry about how to protect themselves while still taking advantage of this unique financing strategy. Fortunately, there are modern structures and legal measures that can help you navigate these waters safely.
Quick Answer: To engage in subject-to real estate without legal risks, consider using a well-drafted purchase agreement, an escrow account for payments, and a title company to handle the transaction. Additionally, always conduct thorough due diligence on the property and its existing mortgage. These steps can help you safeguard your investment and minimize potential liabilities.
Understanding Subject-To Real Estate
Subject-to real estate refers to a method where a buyer takes over the existing mortgage of a seller without formally assuming the loan. This can be a great way to acquire properties with favorable financing terms. However, it also comes with risks, particularly if the seller defaults or if the lender calls the loan due.
How It Works
In a subject-to transaction, the buyer makes payments on the seller's mortgage while the mortgage remains in the seller's name. This means the buyer benefits from the existing mortgage terms without officially taking over the loan. However, the seller remains legally responsible for the mortgage, which can create complications.
Steps to Protect Yourself Legally
1. Draft a Solid Purchase Agreement
Your purchase agreement should clearly outline the terms of the transaction, including payment schedules and responsibilities. This document serves as your primary legal protection.
2. Use an Escrow Account
Utilizing an escrow account for mortgage payments can help ensure that payments are made on time and provide a paper trail. This adds a layer of security for both parties.
3. Involve a Title Company
A title company can perform due diligence on the property and ensure that there are no liens or other encumbrances that could jeopardize your investment.
Costs Involved
While subject-to transactions can save money on closing costs, there are still expenses to consider:
Title search fees
Escrow fees
Legal fees for drafting agreements
Inspection costs
Realistic Examples
Before: A Risky Scenario
Imagine a buyer who enters a subject-to agreement without a proper purchase contract. After a few months, the seller defaults on the mortgage, and the lender calls the loan due. The buyer is left with no legal recourse and could lose the property.
After: A Secure Transaction
Now consider a buyer who uses a well-drafted purchase agreement, sets up an escrow account, and involves a title company. When the seller defaults, the buyer has legal protections and can negotiate with the lender or the seller.
Checklist for Safe Subject-To Transactions
Draft a comprehensive purchase agreement.
Set up an escrow account for mortgage payments.
Conduct a thorough title search.
Get a property inspection.
Consult with a real estate attorney.
Keep detailed records of all transactions.
Understand the existing mortgage terms.
Common Mistakes to Avoid
Many investors make critical mistakes that can jeopardize their subject-to deals:
Not having a written agreement: This can lead to misunderstandings and legal issues.
Skipping due diligence: Failing to research the property and its mortgage can result in unexpected liabilities.
Ignoring the lender's due-on-sale clause: This can trigger the lender to call the loan due.
Not involving professionals: Trying to handle everything alone can lead to costly mistakes.
FAQs
What is a subject-to real estate transaction?
A subject-to real estate transaction occurs when a buyer takes over the payments of a seller's existing mortgage without formally assuming the loan. The mortgage remains in the seller's name, which can provide benefits and risks for both parties.
What are the risks of subject-to transactions?
The primary risks include the potential for the lender to call the loan due, the seller defaulting on the mortgage, and legal complications if the transaction isn't properly documented.
How can I protect myself in a subject-to deal?
To protect yourself, draft a solid purchase agreement, use an escrow account for payments, conduct thorough due diligence, and involve a title company in the transaction.
Can I sell a property I bought subject-to?
Yes, you can sell a property acquired through a subject-to transaction, but you must disclose the existing mortgage to potential buyers and ensure that the lender's due-on-sale clause is addressed.
Is it legal to do subject-to deals?
Yes, subject-to deals are legal, but they must be conducted carefully and with proper documentation to avoid legal issues. Always consult a real estate attorney for guidance.
