What is “Subject-To”?

Posted by Lou Gimbutis on Mar 10, 2020 9:00:00 AM

What is Subject-to_
This is a somewhat arcane concept, but can be an incredibly powerful tool in the hands of the creative Investor.

In its simplest terms, "subject-to" refers to buying a house with an existing loan on it, without paying off the existing loan.  You, the investor, simply begin making payments on the loan.

This is really an incredibly simple concept, but one that people struggle to grasp for the simple reason that they see ownership of the house and liability for the mortgage as one and the same.  They are not.

The simplest way to illustrate this is with an analogy: John and Nancy are married.  Nancy’s credit sucks, so the mortgage goes into John’s name only.  Years later, they are divorced, and the judge awards the house to Nancy.  John’s name does NOT come off of the loan.  The judge has not the power to do such a thing.  John signed a 30-year mortgage, and nothing short of a refinance, or 30 years of payments, will remove John from the mortgage.  Nancy’s name is not added to the mortgage.  However, Nancy gets the deed to the house, and John gets no further ownership interest in the house whatsoever.  He can’t stay the night there from time to time without Nancy’s permission.  He can’t sell the house, nor is he entitled to a penny if Nancy does (she doesn’t even need his signature).  The judge has created a “subject-to” transaction.

It does not take a judge to accomplish this same end, nor must the parties have shared a domestic partnership.  An investor, with the aid of an attorney and proper paperwork, can do the exact same thing with a properly motivated seller.  I’ve done it approximately 30 times.  It is a tool of leverage without parallel in creative real estate, but as with any form of leverage, it must be treated with extreme caution and used wisely.  You have an ethical and moral obligation if you have promised to make payments on the loan (remember, “John” is the one whose credit gets trashed if payments are not made).  I promise my sellers in writing, in front of an attorney.  Just one of the advantages of subject-to is the fact that most institutional lenders cut investors off at ten investment loans, regardless of their financial strength. There is no such “glass ceiling” with subject to.  There are many other advantages, and your local REIA teaches classes on this powerful technique.

Lou Gimbutis, owner of Property Solutions, LLC, https://www.cashforlandnc.com/, has been buying and selling houses full-time since 2004, first in Michigan, then after moving to NC in 2007.  He serves as Director of Education for the Metrolina Real Estate Investor’s Association.

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