Real Estate Solutions: Subject To and Seller Financing
Welcome to our expert guide on real estate's best-kept secrets: Subject To (SUBTO) and Seller Financing. As experienced professionals in the real estate industry, we understand the complexities and challenges you face in selling your home. Our goal is to offer you smart, efficient, and most importantly, trustworthy solutions in your real estate journey.
What is Subject To or Subto?
How is Subto different from a traditional real estate transaction?
The short answer: not much. The same things happen in a subject-to transaction that happen in a traditional transaction: Escrow with an attorney or title company is opened, Earnest Money is deposited, a title search is conducted, and the deed transfers from the sellers to the buyer’s name. The only difference? The mortgage stays in the seller’s name.
Think of it like buying your groceries on your AMEX at Costco (even though we all know Costco only takes a visa). Who owns the groceries? AMEX or you? You do! You’re just using AMEX’s money to buy them. When you leave Costco, you show them your receipt at the door and they check through it and make sure it all looks good.
The Process of a Subject To Transaction
The process mirrors the familiar steps of a traditional sale, ensuring a sense of comfort and security. From opening an escrow to transferring the deed, we handle every detail with the utmost professionalism and transparency. We liken it to using a credit card for a purchase - straightforward, secure, and reliable.
What is Seller Finance also known as Seller Carry Back or Owner Finance?
Selling a house with seller financing, also known as owner financing, is a real estate transaction where the seller of the property provides the financing to the buyer instead of the buyer obtaining a loan from a traditional lender like a bank. In this arrangement, the buyer agrees to pay the seller in installments, typically including interest, over a specified period.
In seller financing, the seller essentially acts as the bank. The buyer signs a promissory note agreeing to the terms of the loan, which includes the interest rate, repayment schedule, and consequences of default. The buyer gets the ownership of the house and makes regular payments to the seller based on the agreed terms.
This method can be advantageous for sellers who want to move a property quickly or for buyers who might not qualify for traditional financing due to credit issues. It also offers sellers a potential ongoing income stream and can be a way to defer some capital gains taxes. However, it's important for both parties to work with legal and financial professionals to ensure the terms are clear and legally binding and to understand the risks involved, such as the buyer's default on payments.
Who is an ideal person to sell their home creatively? Why would someone sell thier home subject to the existing mortgage?
We get it - selling a home via SUBTO or seller finance isn’t everyone’s first choice. Getting that cash payout usually is choice #1.
We don’t want to be your plan A, B, or even C. We want to be your plan Z. We encourage sellers to try to sell on market, traditionally first. We want to make sure you’ve exhausted all your options before coming to us or you’re ready to go!
Selling a home subject to or seller finance is NOT FOR EVERYONE, but it is for some people, such as:
People who have had their home on the market for an extended amount of time with no sales despite continuing to drop the sales price and are ready to be done with it.
People who may have costly repairs to do before selling the home and do not want to spend the time and money to get it ready for MLS listing.
People who don’t want to go through the hastle of getting a home staged and ready to be listed.
People who do not want to pay ~8% of the sales price to sell their house (Buyers agent at 3%, Seller’s agent at 3%, closing costs.
People who may have purchased or refinanced in the last couple of years and have no equity. Making it so they will have to bring cash to close.
People who are in pre-foreclosure and have missed several mortgage and utility payments. We are able to stop the foreclosure process, pay back your arrears (back payments to your lender and utilities, and help you build your credit score up).
Pros to selling a home via subject to
Guaranteed Full Retail Price: The seller receives the full retail value of the property.
Credit Enhancement: Consistent, on-time payment reports significantly improve the seller's credit score.
Zero Commission Fees: We absorb all real estate agent commissions, including fees for the seller's agent.
No Closing Costs: We handle 100% of the closing costs, ensuring no financial burden on the seller.
Capital Gains Tax Exemption: The transaction is structured to avoid capital gains tax liabilities.
Immediate Process: Elimination of delays typically associated with waiting for buyers.
No Home Staging Required: The property is sold as-is, removing the need for staging.
Privacy Assurance: Prevents numerous potential buyers from accessing the property.
No Pre-Sale Repairs: The property is sold without the need for repairs or renovations.
Firm Pricing Policy: We maintain the integrity of the price without succumbing to reduction requests.
Expedited Loan Approval: We eliminate the waiting period for buyer’s loan approvals.
Protection Against Undervalued Offers: Safeguards against lowball offers common in investor purchases.
Debt Resolution: We address any arrears or liens, including back payments, prior to closing.
Foreclosure and Short Sale Mitigation: Our approach can assist in halting pre-foreclosure and short sale processes, safeguarding the seller's credit.
Credit Score Preservation: We aim to prevent negative impacts on the seller's credit score and continue to support its enhancement.
Transition to Lender Role: The seller transitions from homeowner to a lender status, transforming the property from a liability to an asset.
Post-Mortgage Benefits: Upon full mortgage payment, the seller enjoys continuous income if a seller finance agreement is in place.
Potential for Monthly Cash Flow: The seller may have the opportunity to generate monthly income as a secondary note holder in seller finance scenarios.
Secured Performance Deed: A performance deed, managed by a servicing company, ensures the seller's rights to reclaim the property in case of payment defaults.
Extensive Network Access: The buyer benefits from a wide network of colleagues nationwide, aiding in the identification of additional investment opportunities.
Cons to selling a home subject to
Continuation of Seller's Mortgage Obligations: The seller remains on for the mortgage even after the sale of the property.
Purchasing a New Property Post-Sale: In terms of debt-to-income (DTI) ratio considerations for acquiring another residence, the first year post-sale sees a 75% alleviation in the DTI calculation, progressing to a complete 100% relief from the debt obligation after one year.
Timeline for Seller's Relocation: There is no immediate requirement for the seller to vacate the property. However, relocation must be completed by the close of escrow. Alternatively, a portion of the proceeds may be withheld until the property is fully vacated.
What’s in it for the Buyer?
The buyer is able to obtain a lower rate than traditional financing. At the time of writing this, the interest rates on a new mortgage is 7%. That’s the difference of a few thousand dollars if the same price was applied to a 3% rate
Buying a house is a lengthy process, We like to buy and close quickly.
Flexibility on terms. It’s nice to have some flexibility on terms. Not everyone wants a 10-30% down payment, with a 7.5% rate, over 30 years.
Frequently Asked Questions
Is this legal?
Yes, as you’ll see in the fill-able HUD-1 This is a standard form that title/escrow companies and attorneys use to build settlement statements.
Please note lines 203 and 503. CFR-2012-title24-vol5-part3500-appA.pdf (govinfo.gov) This link is the instructions to fill out the HUD1. Note this is a Code of Federal Regulation (CFR) document. Page 396, the second paragraph states: "Line 203 is used for cases in which the Borrower is assuming or taking title subject to an existing loan or lien on the property." Would the federal government put this in the Code of Federal Regulation if it wasn’t legal?
How will I know the mortgage payment will get paid on time?
We set up a third-party servicing company to withdraw money from our account and make direct payments to the mortgage. Setting up a third-party servicer also shows proof that payments are being made by the buyer when the seller goes to wipe out their Debt-To-Income on this property with any other lender and “double dip”. Sellers who we have worked with in the past often tell us that they hope we miss a payment
What happens if you miss a payment?
We won't. But we write into our contract a performance clause: a 'Deed in Lieu of foreclosure'. This states that if we stop paying the mortgage after XX amount of days, the seller can be deeded back the house without having to go through a costly foreclosure.
This document is pre-signed and held at the servicing company. With this, the house is effectively transferred back in the seller's name if the buyer defaults over a 30-day period. The seller in this situation would inherit the property back and benefit from any and all loan pay-down payments, improvements made to the property, and appreciation that the property has seen. The seller could then sell the property again for even more money (because I have paid down the mortgage) if they didn’t want to keep it.
Who is liable if there are repairs or maintenance needed on the property?
The seller would not be responsible for any repairs or maintenance on the property after the deed is transferred. The person responsible for any repairs or maintenance would be whoever is on the deed of the property. Since the seller’s name would only remain on the mortgage and the deed would change into the buyer's name, then the buyer would be responsible for all of the repairs and maintenance.
What happens if the Due-On-Sale Clause is called?
This can happen if the bank calls the note due for any reason. This rarely happens, in $500 million of subject-to-transactions, my partner, Pace and I have had 4 called. So it is a possibility but not likely. Why? The bank is in the business of lending money, not owning homes. As long as I am making payments, they want to save the money and time that is required to foreclose on a property.
And if it's called, we have experience with it and we have a strategy called contract for deed. Which deeds the house back into the seller's name, and we do a lease option. This will satisfy the bank's request.
Our SubjectTo and Seller Finance Portfolio
We have been doing SubjectTo and Seller Finance transactions since 2019. The following is a link to the properties that we have purchased and continue to hold in our portfolio. In addition to these properties that we chose to hold, there are many more that we have sold to other homeowners and investors.