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Creative Finance FAQs

What is a Subject To deal? 

A Subject To deal involves buying a property "subject to" the existing mortgage. The buyer of the property takes ownership / title without having to take out a new mortgage. The lien doesn’t get paid off at the time of sale, it stays with the property. The terms of the sale are negotiated between the existing mortgage holder as the seller and the new buyer. The key components of a Subject To deal will typically involve a monthly payment, equity interest rate, etc. A Subject To deal does not involve the buyer assuming the existing mortgage for the property under their name. The mortgage will stay in the seller's name and the buyer will make negotiated payments 1 of 2 ways. Direct to mortgage company or the common way using a 3rd party loan servicing company.

Is Subject to legal? 

Yes.

What are the benefits to the seller in a “Subject To” deal?

- Often a higher purchase price than what they can get on the market

- Potential “Cash flow” on their equity without having to deal with tenants or maintenance

- With 3rd party payment servicing they can have the DTI of the loan dropped from their file 

- Less of a tax burden, not forced to do a 1031 exchange into high prices and high rates 

- Potential to close quickly 

What are the benefits to the buyer in a “Subject To” deal?

- Lower interest rate beating current market rates

- Lower down payment

- Not having to qualify for a loan allows for higher offers versus all cash offers

- Potential to close quickly. 

Does the deed change over into the buyer's name? 

Yes, there is a closing, and a new deed/title is recorded with the new owner's name.

How much are closing costs?

These creative deals are treated like a cash deal, so closing costs are typically 1% - 3%. In Florida, where there is a high transfer tax, they are 3%. 

How does a realtor get paid? 

The seller pays out of the net proceeds of the sale unless stated different in our offer.  All deals are structured a little differently as they are from different sellers.

Seller - worst case scenario: What if the buyer defaults / stops paying? 

As part of the closing documents, a loan servicing company is used used as an intermediary unless there's a different arrangement.  I add a term into all my contracts that if the buyer is more than X days late (usually 30-60), the seller has the right to exercise their right and roll the property back into their name. This avoids foreclosure which can be lengthy and costly. The seller would be able to keep the down payment, all mortgage and equity payments made towards the home, and then resell it. Essentially double dip, but not ideal as buyers usually perform, re-sell, or re-finance eliminating future burden clearing seller's name.

Buyer - worst case scenario: What if the loan gets called due? 

As part of the closing documents, I recommend that the buyer and seller pre-sign a Quit Claim Deed. If the loan gets called due from the mortgage company due to a change of the name on title, the seller is given a grace period (usually 9 months) to cure or fix the issue. In this time the seller can Quit Claim the loan back into their name and then do a lease option contract with the buyer. This would be the exact same terms, but the buyer would not own the property until they refinance into their own loan. 

*Having a loan called due is incredibly rare. I know folks who have bought over 100 Subject To deals and have yet to see it.

Why a loan is unlikely to get called due:

Banks don't make money on the absolute value of the interest rates. They make money on the 'spread' between the Fed rate and the market interest rate. The 'spread' stays relatively constant whether the market interest rates are higher or lower. E.g. when banks were doling out 3% interest rate mortgages, the Fed was at 1.5%. Now when interest rates are 7%, the Fed is around 5.5%. Banks 'lock in' their profits at the time the mortgage is approved. So they're not losing money now that the interest rates are higher.

Therefore, there's little interest on part of the banks to 'call their loans' and incur substantial legal and other costs, especially when the loan is getting serviced. And, if they try to foreclose, that’s even more legal fees. So long as the loan is current, they’re happy.

How does insurance work?

Insurance can work 1 of 2 ways: 

1) The seller keeps their insurance in place, and lists buyer as additional insured, this is the best to not draw any more attention to the sale. This is also important in states like Florida where insurance goes up a lot arbitrarily upon a sale. Or 2) the buyer can get their own insurance, but the seller must be listed as additional insured. 

Are these terms negotiable? 

Everything is negotiable, and yet you will find that there are some terms that sellers are firmer on. It’s important to understand that there are 4 main levers (when one goes down, others can go up): 

-Price. Over market-rate purchase price is typical, as a trade-off for locking in a lower interest rate on the existing mortgage. 

-Down payment. Buyers like to see 50k or less to make a deal appealing, the lower the better. If you ask for more here, the purchase price goes down.

-Equity Interest % - If you decide to take monthly payments on your equity, you may charge interest.  

-Equity Payments - These can be amortized or interest only 

If you plan to negotiate one of these down, another will likely go up.  

Will the seller share their cleaner and handyman contacts?

Yes. 

What happens to the escrow balance?

It is considered a part of the mortgage and transfers to the buyer; no credit is issued at closing. 

Can I use my own lawyer as the closing attorney (instead of a title company)? 

Yes, but they need to be licensed in the state the home being sold is in, and very familiar with creative financing contracts. 

Subject to Sale Steps

Before our call please send me:

- Address

- Price you want to sell for (If you know, otherwise we can figure it out together)

- Amount remaining on the mortgage (In your statement)

- Interest rate

- Monthly payment (are taxes & insurance included?)

- HOA fees

- Photos or Airbnb listing (if you have one)

Offer: I create terms with the seller that seem like they would be appealing to an investor. If they don't fit our partner's buy box, or ours, then I advertise through deal lists, email, and socials. 

I field verbal offers from potential buyers and handle any negotiations. Once I receive a verbal acceptance with the seller, I get TC DEAL PROS involved to get the file going. TC DEAL PROS is a transaction coordinator (TC) company that specializes in creative deals. Their fee is $1200 (paid by buyer).  They create the initial contract which Buyer & Seller review and sign.

TC DEAL PROS connects us with a state-specific Title Company or Lawyer to handle title work, closing documents, and getting everything recorded. 

Inspection: I always recommend an inspection and schedule one while the initial paperwork is going back and forth.  Sometimes we may need a 2nd or more walkthroughs which seller will be notified.

Close Date: I usually prioritize a quick closing (~2-3 weeks), but Title is the hold up, so I call them once the contract is signed and ask them when a realistic closing date is. Closing on the 30th/31st or 1st will make it easiest to schedule future payments. Most buyers / sellers are out of state, so I figure out if they plan to sign themselves with a mail away packet at a UPS store or want a mobile notary and coordinate accordingly. 

Final Week: Buyer calls to move all utilities in their name.

Few days before close:  Settlement statements are sent for Buyer & Seller to review, reflecting seller commission, fees, & disbursements

Share seller’s contractor contacts: Cleaner (if furnished), handyman, etc.

After Close: Seller gives buyer sign-in access to the mortgage portal to add their autopay bank information. Buyer gets added as “additional insured” to the seller's insurance policy. 

*Note* If buyer wants to get their own policy, they run the risk of insurance going up, this is especially true in Florida and Texas. Buyer will have to be added as an additional insured on the policy since the mortgage is in the seller’s name. 

*Note* Subject to is not illegal but can be confusing for the average insurance adjuster, don’t explain it to them, just say that buyer is the property manager and needs to be added as an additional insured, it's a frequent practice. 

If there is an equity payment, buyer will set this up as a recurring ACH deposit by getting the seller's routing and account number. 

Seller will be notified immediately once property is sold, or refinanced from their name.

*Reach out to Angel at pbjivestmentsoftexas@gmail.com or Angel@pbjinvestmentsoftexas.com if you have a question or want to put in an offer. Immediate response at (346)763-7300*