Subject to financing is one of the tools every real estate investor should understand and use as needed to build a real estate portfolio. Subject to financing is when the investor or purchaser takes rights to the title for a property while the seller’s existing mortgage stays in place. In the simplest terms, the real estate deal is “subject to” the seller’s mortgage financing the deal.
Subject to financing is a creative way to invest in real estate. However, as with any real estate investment opportunity, take the time to understand the risks and benefits. Also, work with a qualified real estate attorney to ensure the contract is valid and represents your best interests.
How Subject To Financing Works
For Subject to financing deals, the existing financing is taken over by the buyer. However, the mortgage or loan remains in the seller’s name and with the same terms. In these cases, the real estate investor pays the mortgage payment and gains the right to sell the property. A contract is established between the buyer and the seller to dictate the terms of the agreement.
With subject to financing, it’s a good idea to purchase title insurance. Title insurance protects the buyer from the risk that another person or entity could have a lien on the property. Just like with any other real estate deal, another lien holder could prevent the sale of the property.
Why Invest With Subject To Financing?
Subject to financing sounds risky for both the buyer and seller. However, in some cases, this option is the best way to close a deal. For sellers facing foreclosure or behind on payments, subject to financing means the mortgage can be brought current. In these cases, subject to financing may benefit the seller’s credit.
It’s important to read the fine print for the mortgage. Many mortgage lender agreements don’t allow transfer of the mortgage. This is called a Due on Sale clause, which means the mortgage lender may demand total repayment of the loan if they discover the mortgage is being paid by someone other than the person originally responsible for the loan. Oftentimes, the mortgage company never enacts this clause. It’s just important to understand the risk.
Benefits of Subject To Financing
Subject to financing offers many benefits, especially to the real estate investor. The biggest benefit is that the buyer has a long-term financing option without having to go through all the loan requirements from the mortgage lender. This means that a buyer or real estate investor that may not be able to receive a traditional mortgage, still has a financing option.
Another benefit for both the buyer and the seller is a quicker closing timeframe and fewer closing costs. With subject to financing, fees for real estate agents and closing costs are avoided. However, some fees, like for title insurance may still apply. Also, with subject to financing the down payment amount is usually less than what a traditional lender requires, but the past due amount will need to be covered at a minimum.
As interest rates rise, subject to financing may mean a lower interest rate. Since the current mortgage remains intact, the existing interest rate for the loan applies. This may also mean that the monthly payment amount is lower than what a new mortgage would require.
How to Make Money with Subject To Financing
As with any real estate investing deal, the goal is to make a profit. Subject to financing, with its many financial benefits, can easily render a profit. One way to make money off of subject to financing is by renting or leasing the property. If you are able to charge a monthly rental fee that covers the mortgage and maintenance cost, the difference will be immediate profit.
Another way to gain a profit is by selling the property. Because the real estate investor has the rights to the title, the property may be sold. After the mortgage is paid and any agreed to amounts paid to the seller, the remaining sum goes to the buyer. A subject to deal may be used to flip a property. It’s up to you, as the investor, to make any improvements before the sale.
Close the Deal with Subject To Financing
Be smart with your real estate investing business by educating yourself on the different financing options available. Today’s real estate investors have a variety of tools to deepen your knowledge of the industry. Invest in your business by partnering with a real estate investing coach, attending industry conferences, networking and taking online courses. Also, watch free videos and read relevant blog articles and eBooks.
Don’t limit yourself to traditional financing options. Instead, get creative with financing solutions, like subject to financing for your real estate investing business.