Welcome to Creative Financing

So what alternative do we have when the seller has an existing mortgage on the property? Has no equity, facing foreclosure, or has to relocate asap. This is where the subject-to-strategy could be used.

Subject-to is short for subject to the existing financing. Sometimes it’s even abbreviated to sub-to. The simplest way to explain this is rather than buying the property and paying off the existing loan instead, you’re going to assume or take over the existing loan payments that are already in place.

By taking over the payments, the seller is able to walk from the property and is relieved of making the loan payments, insurance, taxes, and any/all other costs of ownership because you’re assuming all of those costs and responsibilities.

Sounds simple enough in theory but here’s where it gets tricky. Remember I said that the owner can’t sell the property without paying off the existing loan? That means even though you take over the payments, the loan stays in the owner’s name. The bank will not transfer the liability or loan into your name.

This is a risk to the owner because in the event you stop making the loan payments, for whatever reason, who is the bank going to hold responsible? The original owner, not you. So how does the investor get ownership without transferring the liability of the loan?

What most investors do is create a contract that transfers the deed to them but not the liability. This allows the investor to control the property and rent it or sell it and realize any upside equity. Of course, when the investor sells the property, the original existing loan will get paid off at that time.

Technically, transferring the deed triggers a clause in the loan called “due on sale,” where the lender could call the loan due but the reality is the lender has no way of knowing that you and the owner did a sub-to deal and honestly, as long as the lender is getting the monthly payment, they really don’t care, why would they?