How to Tackle Subject to Real Estate – Complete Guide

Subject to can be a game changer for you as a real estate investor or even wholesaler.

It’s the hot button today with lots of gurus selling courses on it.

But we’re going to show HOW to tackle it no matter the level you’re at without you buying a freaking course on it!

Because, it’s not a new thing.

Subject to transactions have been done for decades. And for good reason. Because it help you close more deals and even create a cash flow income stream.

We’ll dive into more detail, let’s get started!

What is a “Subject to” Transaction in Real Estate?

“Subject to” – a phrase that’s been buzzing around real estate circles for quite some time, but what does it really mean? In essence, a “subject to” real estate transaction, often abbreviated as “sub2”, refers to buying a property “subject to” the existing financing. Here’s a simple breakdown:

Existing Mortgage Stays in Place: Unlike a traditional real estate purchase where old loans are paid off and new ones are established, a “subject to” transaction means the original mortgage remains unchanged. The title of the property transfers to the buyer, but the loan remains in the seller’s name.

– Continued Payments: The new owner (the investor or buyer) then takes over the mortgage payments on behalf of the original owner (the seller). This can be particularly beneficial when the existing mortgage rate is favorable compared to current market rates.

– Win-Win for Both Parties: Sellers benefit by getting relief from their mortgage payments, especially if they’re facing financial challenges. Buyers, on the other hand, can acquire properties without the need for new financing or with little to no down payment.

To visualize this, imagine passing a baton in a relay race. The race (or mortgage) continues, but a new runner (or property owner) takes over.

Remember: As simple as this sounds, “subject to” deals involve intricate details and potential risks. They require a thorough understanding and due diligence.

But when executed correctly, they can be a versatile tool in any real estate investor’s toolkit.

Difference Between “Subject To” and Assuming the Loan

Ah, here’s where many budding investors get a tad muddled. “Subject to” and assuming the loan sound like twins, but they’re more like distant cousins in the real estate realm. Let’s break it down, so you’ll never confuse the two again.

1. Ownership vs. Responsibility: In a “subject to” transaction, you’re acquiring the property “subject to” the existing financing. The loan remains in the seller’s name, but you, the investor, now control the property. You’re responsible for the payments, but you’re not personally liable for the loan. It’s a bit like getting the keys to a friend’s car—you can drive it, but it’s not in your name. On the other hand, when you assume a loan, you’re stepping into the seller’s shoes and taking over both the property and the responsibility of the loan. It’s now your name on the dotted line, and the lender sees you as the party accountable.

2. Lender Approval: One of the significant differences boils down to the lender’s involvement. For a loan assumption, you’ll typically need the lender’s approval since you’re essentially asking them to transfer the risk from the original borrower to you. It’s like applying for a new loan, with all the hoops, checks, and paperwork that come with it. In contrast, “subject to” is a more under-the-table arrangement. The loan remains unchanged in the lender’s eyes, and they aren’t typically part of the process, though there are risks, as we discussed earlier.

3. Liability: With “subject to”, if things go south, the fallout hits the seller’s credit, as the loan’s still in their name. Meanwhile, with loan assumption, it’s your credit on the line, since you’ve taken on the loan’s legal responsibility.

4. Flexibility vs. Formality: “Subject to” transactions offer a level of flexibility—you’re not undergoing rigorous lender checks and can often close deals faster. It’s a more creative and sometimes stealthy approach. Assuming the loan is a formal, recognized process, with all the procedural tidbits you’d expect from a standard loan application.

In essence, while both strategies offer a pathway to acquire property without obtaining new financing, the path you choose depends on your risk appetite, the relationship with the seller, and the property’s unique circumstances. But knowing the differences? That’s the first step to mastering both.

When to Use “Subject to” in Real Estate

So, you’ve got a grip on what “subject to” is all about. But when is the right moment to whip it out of your investor toolbox?

The beauty of “subject to” is its adaptability. It often shines brightest when a seller is in a pinch, perhaps facing foreclosure or grappling with a property they simply can’t afford to keep.

Rather than watching the home go down the foreclosure rabbit hole, the seller can pass the property (and its payments) to an investor, while still maintaining the existing mortgage.

For wholesalers, “subject to” can be a powerful negotiation tool, especially when trying to secure a property without a massive cash outlay upfront. In essence, it’s like a magic trick that can save a distressed seller while giving the investor a fantastic opportunity without a traditional bank’s confines.

Think of it as the ace up your sleeve when standard methods just aren’t cutting it.

Is “Subject to” Legal?

First and foremost, while “subject to” strategies have their roots deeply embedded in real estate practices, it’s crucial to get a universal truth out there: always consult with a real estate attorney before diving into any transaction.

With that said, yes, “subject to” transactions are generally legal.

The catch? Some mortgage agreements contain a “due on sale” clause, which, in theory, allows the lender to call the full loan balance when the property changes hands.

But here’s the twist: while the clause exists, there are very few documented cases of lenders exercising this right in a “subject to” scenario.

Still, like any gamble, it’s best to know the stakes before rolling the dice.

How to Avoid the Risk of the “Due on Sale” Clause

Dipping into the world of “subject to” real estate, there’s that lingering shadow of the “due on sale” clause that might just be making you a tad uneasy. But, with some strategic steps, you can sidestep this potential pitfall and make your transaction smoother than a well-mixed protein shake.

1. Stay Stealthy: One classic strategy is simply not to alert the mortgage company about the transaction. This might sound sneaky, but remember, you’re still ensuring the loan gets paid. You’re just not making a song and dance about the change in who’s handling the payments.

2. Steer Clear of Name Changes: Avoid placing your name directly on the loan. Instead, consider using an entity such as a trust or an LLC. By transferring the property title to a trust, with you or your company as the beneficiary, you keep things discreet. This way, the loan remains under the original borrower’s name, yet you control the property.

3. Maintain Regular Payments: Ensure the mortgage payments continue as usual. Any changes in the payment pattern might draw unnecessary attention. Utilize the same mode of payment, whether it’s a bank draft or a mailed check, to make sure things fly under the radar.

4. Build Strong Relationships: Keep a positive relationship with the seller. If the bank does raise a question, a cooperative seller can assert their right to rent the property, potentially quelling any concerns.

Now, while these tactics can reduce the risk of the “due on sale” clause being invoked, they don’t erase it entirely. So, keep those lines of communication open with the seller and always have a contingency plan.

It’s a bit like a tightrope walk; with the right balance and focus, you can get to the other side without a hitch. Just don’t forget to consult with an attorney to ensure you’re stepping correctly.

What Properties Work Best for “Subject To”?

Dive into the real estate world, and you’ll quickly notice it’s not a one-size-fits-all playground. But when it comes to “subject to” deals, certain properties just… well, they shine a little brighter in this light.

So, what’s the secret sauce? Which houses have that je ne sais quoi for this method?

First, properties with little to no equity are prime candidates.

These are the homes where traditional selling might not make financial sense for the owner.

Think about it: after realtor fees, closing costs, and other expenses, they might walk away with peanuts—or even owe money. However, beware of underwater properties, where homeowners owe more than the house is worth. Those can become tricky and don’t usually fit the “subject to” model seamlessly.

Now, distressed situations?


This strategy often thrives in these scenarios. Whether it’s a looming foreclosure, a sudden job transfer, or an unexpected medical issue, life’s curveballs can make “subject to” an attractive option for homeowners.

But here’s a twist: You don’t always have to wait for someone to be in a bind. Even those well-heeled individuals with an investment property they’re just tired of dealing with might be open to a “subject to” offer. Present it as a hassle-free way for them to move on, and you might just land a deal.

In essence, while “subject to” might seem tailor-made for certain situations, don’t box yourself in. With the right pitch and understanding, a variety of properties can fit this bill. It’s all about spotting the potential.

How to Accomplish “Subject To” Transactions

Alright, eager beavers, let’s get into the nitty-gritty of pulling off a “subject to” deal. It’s a dance, a bit of art mixed with science. And I promise, it’s easier than assembling that piece of IKEA furniture you’ve been avoiding.

*Identify Potential Deals: Not every seller or property is ripe for a “subject to” transaction. Look for:

– Distressed sellers facing foreclosure or other financial troubles.

– Properties with significant equity, meaning the mortgage balance is considerably less than the home’s value.

– Situations where traditional sales or refinancing might not work, e.g., the homeowner’s credit isn’t good enough for a refinance.

* Building Rapport with the Seller:

Listen First: Understand their situation. Are they in financial distress? Relocating? Understand their *why*.

Educate, Don’t Overwhelm: Explain the “subject to” process in simple terms. Emphasize that their mortgage remains intact, but you’ll be taking care of it.

*Crafting Your Pitch:

Be upfront. Explain that this isn’t a full cash-out situation, but they can avoid foreclosure or sell without the headaches of the traditional process.

Highlight benefits: Swift transaction, potential relief from looming financial pressures, no need for property repairs.
* Always mention that they should consult a lawyer or financial advisor. It shows transparency on your part.

*Making It Official – The Paperwork:

Purchase Agreement: This should clearly state that you’re buying the property “subject to” its existing financing.

Authorization to Release Information: Allows you to communicate with the seller’s mortgage company.

Property Deed: The seller deeds the property to you. You now control it.

CYA (Cover Your Assets) Letter: Have the seller acknowledge they’re aware the mortgage isn’t being fully paid off in your purchase.

Power of Attorney: Specific to the property, allowing you to make decisions and sign documents related to it.

*Engaging with Escrow or Closing Attorney:

– Make sure they’re familiar with “subject to” transactions. Not all are.
-Communicate that the original loan will stay in place but will be covered by you.
-Ensure they prepare the necessary disclosures and documents, ensuring all parties understand the terms.
-A title search is a must—to ensure no hidden liens or surprises await.

Remember, each deal is unique. Always consider seeking the counsel of a knowledgeable real estate attorney familiar with “subject to” transactions in your area. This guide gives you the play, but having an experienced teammate can be invaluable in the game.

How to find these subject-to-properties

The number best way to find these distressed properties without breaking the bank is by driving for dollars.

Check out our article on the number 1 best tool for driving for dollars, Deal Machine. 

The other methods might include: 

  1. Pull a niche list from Propstream — see our guide on Propstream here.
  2. Clean that list using ReiSift — Check out our guide on the number 1 list stacking tool ReiSift.
  3. Cold call that list — see how to skip trace that list here.
  4. Mail that list
  5. Repeat every month
  6. Place responded leads into your CRM — see top ten CRM guide here.
  7. Follow up frequently.

How to Ask for “Subject To”

The dance of presenting a “subject to” offer is a delicate one. It’s not about shoving an offer down their throats, but rather laying out a beneficial solution for both parties. So, when you’re face-to-face with a seller, it’s essential to communicate with empathy, clarity, and confidence.

Here’s a script to guide you through this conversation:

“Hey [Seller’s Name], I completely understand that selling a house can be overwhelming, especially considering the equity situation. I’ve helped several homeowners in circumstances similar to yours, and one solution we could explore is a ‘subject to’ arrangement. Basically, I’d take over your monthly mortgage payments, which would relieve you of that financial burden immediately. You’d still remain on the loan, but I’d be responsible for the property and its associated costs. It’s a strategy that’s been around for decades, helping homeowners like you get out of tricky situations without the hassle of a traditional sale. Of course, this is just one potential solution, and I want to ensure it aligns with your needs and comfort level. How does that sound?”

Remember, it’s crucial to read the room, adjust the conversation based on the seller’s reactions, and be prepared to answer questions or provide further information.

Wrap Mortgages – How to Cash Flow with “Subject To”

If you’ve been hanging around the real estate circuit for a while, you might have stumbled upon a term called “wrap mortgage” or “wraparound mortgage”.

Now, if you’re scratching your head wondering what this sorcery is, let me illuminate you!

A wrap mortgage is, essentially, a new mortgage that’s “wrapped around” an existing one.

Imagine it like a financial burrito – the original mortgage (the tasty fillings) is surrounded by this new mortgage (the tortilla). But here’s where the flavor really kicks in: the buyer makes payments based on this larger, wraparound loan amount, and you, as the seller, keep the difference between the two loans as profit. Say, the original loan is $100,000 at 5% interest and you wrap it with a new loan of $120,000 at 6% interest. The buyer pays you on the $120,000, but you’re only paying out on the $100,000.

Voila! Profit!

Now, when considering renting vs. a wrap mortgage, the wrap shines in a few areas.

With a wrap, you technically own the “paper” – the mortgage – rather than the property. This means no late-night calls about leaky faucets or broken AC units. You’re free from the typical landlord responsibilities and maintenance woes.

Performing it is quite straightforward: once you’ve acquired a property “subject to”, you can then sell the property using a wrap mortgage. The buyer gives you a down payment, you set the terms, and then they pay you based on those terms, wrapping around the existing loan. Always ensure all parties understand the terms, and it’s wise to involve legal counsel to make sure all ducks are in a row.

So, next time you hear about wraps in the real estate arena, think beyond burritos and envision a world where your cash flow sizzles!

Here’s a quick video on wrap mortgages:

Wrapping Up “Subject To” Real Estate

The allure of real estate, like many ventures, lies in its many nuances, tactics, and strategies – “subject to” being one of those golden nuggets. You’ve now journeyed through the winding paths of this approach, from understanding its unique edges to deciphering the clever wrap mortgage strategy.

Is “subject to” a silver bullet? No. Like all strategies, it requires knowledge, expertise, and a dash of finesse. But when used wisely, it can be an extraordinary tool in your real estate toolkit. Think of it as a secret handshake in the world of property investing. Many will hear of it, but only the curious and diligent will truly grasp its power.

Don’t get lost in the sea of gurus and courses. As promised, you’ve been handed the blueprint without spending a dime on a shiny course. The world of “subject to” is vast, filled with potential pitfalls but also brimming with opportunities. It’s up to you now: will you dive in, get your hands dirty, and unlock its potential?

Remember, in real estate, as in life, the best education is experience. So, armed with this newfound knowledge, go forth, negotiate, and conquer the real estate landscape!

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