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Investing in Real Estate Using "Subject To" Financing

I’m actually not to fond of this strategy. I’ve never used it personally and I don’t use it with my clients however, it’s very popular with those so called gurus on late night infomercials and people always ask me about it so I figure that I’d at least explain what it is. In all fairness, I’ll say that the subject-to method is a great way to finance a real estate investment quickly, though it will be a short-term solution. The name "subject-to" comes from the phrase "subject to existing financing." This means that you buy the property on the condition that the existing financing stay in place. The title is transferred, but the loan will stay in the seller's name, and the buyer will make the payments. The reason why this is a short-term fix is because seller's aren't going to be very comfortable leaving the loan in their name for an extended period of time. Some investors will use this method when they don't want to come up with a down payment, knowing they can refinance in six months and get the loan put in their name. This method is commonly used when buying pre-foreclosure properties. The investor gets into the property with zero down or by just paying the mortgage arrearages and the seller is willing because they have to get rid of the property immediately.

There are a few reasons that I don’t like this strategy;

  1. In order to do it right, you must place the property in a land trust in order to hide the fact that you assumed the mortgage from the bank. If the bank finds out, they could call the mortgage due in full putting the seller back in the same position as they were before.

  2. It’s unethical. As a real estate professional, I have built my reputation on Trust. The fact that I have to try to hide the assumption from the bank just makes me uncomfortable. I know that banks are big institutions and its not like I’m hurting anyone but I just feel like my integrity would come into question and I’m just not comfortable with that.

  3. It’s not as easy as the “gurus” make it seem. Just imagine Joe Investor coming into your home to make his purchase offer. He sits down on your couch and tells you that you have to sign the deed to your home over to him (giving him ownership) but the mortgage stays in Your name (and if he defaults on the loan, there’s no penalty for him but you’ll end up with the foreclosure on your credit). Oh yeah, and make sure you don’t tell the bank or anyone else about this deal. I understand that it happens all the time, but it’s very hard to find a seller that’s willing to do something like that.

Again, I don’t use this strategy in my personally investing or with my clients. However, If you use this method to finance a real estate investment, just make sure you uphold your end and make the payments on time.