What is “Subject To” Real Estate?

I recently received this email from a reader:

“I was roaming the internet when I came across houses listed as “take over payment” properties. I did a quick Google search and got another term for them – “subject to” properties. Do you know anything about this? An investor agrees to make the payments on your house, they find a renter, and then ultimately sell or refinance your house. You remain responsible for the payments but they pay them. The bank doesn’t know anything about it. Apparently it’s legit, or can be, but also seems shady. Thoughts?”

Below you’ll find a basic definition and my additional thoughts, but I encourage you to talk to a licensed real estate agent if it’s something you’re considering or have come across.

What is “Subject To” Real Estate?

In it’s simplest form, a deal negotiated as “subject to” refers to the situation where a property is bought or sold with an existing mortgage, but the buyer claims the property while the seller actually retains the original mortgage.

In essence, the seller’s mortgage payments are made by the buyer but the lender is not notified of the property’s transaction.

As a purchaser, this might be an ideal situation if:

1. your are not creditworthy
2. you want to save on closing fees
3. you can take advantage of a lower interest rate

As the seller, however, the reasons are usually because of:

1. liquidity issues
2. debt relief
3. imminent foreclosure

For the buyer, facing foreclosure is a very risky part of the deal, so clear and transparent communication with the seller is advised, as well as working with a real estate agent and attorney to ensure you have a proper agreement in order.

So you can see how it go it’s name—the real estate property is “subject to” the seller’s mortgage.

Subject To vs. Traditional Mortgages

Most traditional mortgage loans include a due on sale clause.

This gives the lender the right to call the loan due (in full) after learning of this transfer of ownership. Whether they actually exercise this right is a different story.

Supposedly, lenders rarely go this route, but with tightening real estate environments and increasing loan rates, it could be financially sound for them to do so.

Is It Legal?

The lender doesn’t really ever have to know about the transfer. Technically speaking, HUD1 mentions subject to real estate in more than one place (lines 203/503).

You also have to consider, especially in the cases of foreclosure, banks may have lots of underperforming loans, where someone who is paying the mortgage is more valuable to them than someone who is not.

So, then they would never have a reason to call the loan due immediately if someone has a written agreement to assume the payments.

Is Subject To Better than Assumable Mortgages?

Due on sale clause issues aside, should someone sell their house “subject to”?

When you sell your house subject to, you are not removing yourself from the obligation of your mortgage. This is different than an assumable mortgage where the responsible party for the original loan and underlying asset legally changes on paper.

Additionally, you are letting someone else do whatever they want with the asset that is collateral for your mortgage.

I see two negative things happening to the seller:

1. The buyer stops making the mortgage payment and your credit is destroyed.
2. The buyer moves in a tenant who destroys the home, ruining the value of the collateral of your loan. I’m not sure how insurance would work in this situation, so that’s an unexplored factor here.

For someone facing a current foreclosure, the risks above might be acceptable. But for someone just looking to get out of an underwater house, this may not be the best move.

For buyers, I’m assuming “subject to” houses are attractive because you don’t have to put any money down or qualify for the purchase. In a rising interest rate environment, it may be even more appealing.

I’d be interested to hear from anyone who’s either purchased or sold a “subject to” house.