The Investor’s Guide to Crafting Subject-To Deals That Sellers Accept
This guide will walk you through the steps to structure a subject-to deal, ensuring both you and the seller benefit from the transaction.
Zach Fitch
Tennessee
, Goliath Teammate
In the world of real estate investing, subject-to deals offer a unique opportunity for investors to acquire properties without the need for new financing. This approach can be particularly effective when dealing with pre-foreclosure sellers who are motivated to avoid foreclosure. This guide will walk you through the steps to structure a subject-to deal, ensuring both you and the seller benefit from the transaction.
Understanding Subject-To Deals
A subject-to deal involves purchasing a property subject to the existing mortgage. The buyer takes over the mortgage payments without formally assuming the loan. This can be advantageous for both parties: the seller avoids foreclosure and potential credit damage, while the buyer acquires a property with minimal upfront costs.
Key Components of a Subject-To Deal
Existing Mortgage: The buyer continues making payments on the seller's existing mortgage.
Deed Transfer: The property's deed is transferred to the buyer, giving them ownership.
Seller's Credit: The mortgage remains in the seller's name, impacting their credit positively as payments are made.
Due-on-Sale Clause: Most mortgages have this clause, allowing the lender to demand full payment if the property is sold. While rarely enforced, it's a risk to consider.
Step-by-Step Execution
Step 1: Identify Pre-Foreclosure Opportunities
Begin by identifying properties in pre-foreclosure. These are homes where the owner has missed mortgage payments, and the lender has initiated foreclosure proceedings. Use local courthouse records, online databases, or work with a real estate agent specializing in distressed properties.
Step 2: Approach the Seller
Approach the seller with empathy and understanding. They are likely under significant stress, and a respectful, solution-oriented approach will be most effective. Explain the benefits of a subject-to deal, emphasizing how it can help them avoid foreclosure and preserve their credit.
Step 3: Conduct Due Diligence
Before proceeding, perform thorough due diligence:
Title Search: Ensure there are no additional liens or encumbrances on the property.
Mortgage Details: Verify the terms of the existing mortgage, including interest rate, balance, and any arrears.
Property Condition: Inspect the property to assess any repair needs or issues that may affect its value.
Step 4: Negotiate Terms
Negotiate terms that are mutually beneficial. Key points to discuss include:
Purchase Price: Often the outstanding mortgage balance plus any arrears.
Closing Costs: Determine who will cover these expenses.
Possession Date: Agree on when the buyer will take possession of the property.
Step 5: Draft the Agreement
Work with a real estate attorney to draft a comprehensive purchase agreement. This should include:
Subject-To Clause: Clearly outline that the purchase is subject to the existing mortgage.
Seller Disclosures: Ensure all known property issues are disclosed.
Contingencies: Include any necessary contingencies, such as inspection or financing.
Step 6: Close the Deal
Coordinate with a title company or closing attorney to finalize the transaction. Ensure all documents are signed, and the deed is properly recorded. The buyer should begin making mortgage payments immediately to prevent further default.
Mitigating Risks
Addressing the Due-on-Sale Clause
While the due-on-sale clause is a potential risk, it is rarely enforced if payments are current. However, to mitigate this risk:
Maintain Communication: Keep open lines of communication with the lender.
Insurance: Ensure the homeowner's insurance remains in place and lists the buyer as an additional insured.
Payment Timeliness: Make all mortgage payments on time to avoid drawing lender attention.
Protecting the Seller
To protect the seller's interests:
Formal Agreement: Ensure all terms are clearly documented.
Credit Monitoring: Encourage the seller to monitor their credit to ensure payments are reported accurately.
Exit Strategy: Discuss potential exit strategies if the buyer defaults, such as a deed in lieu of foreclosure.
Example Script for Initial Seller Conversation
"Hi [Seller's Name], my name is [Your Name], and I specialize in helping homeowners in challenging situations. I understand you're facing foreclosure, and I want to discuss a potential solution that could help you avoid it. By selling your property subject-to the existing mortgage, you can preserve your credit and move forward without the burden of foreclosure. Would you be open to discussing how this might work for you?"
Conclusion
Structuring a subject-to deal with a pre-foreclosure seller requires careful planning, empathy, and a clear understanding of the process. By following the steps outlined in this guide, you can create win-win scenarios that benefit both you and the seller, while expanding your real estate portfolio with minimal upfront investment. Always consult with legal and real estate professionals to ensure compliance with local laws and regulations.
