What is a ‘Subject To’ Real Estate Contract?
The term "subject to" in the context of real estate is a contractual modifier denoting that the buyer is agreeing to purchase the property with knowledge of and to an existing loan on the home. It does not mean that the loan is being transferred, assumed or taken over by the buyer; but it means that the buyer is purchasing "subject to" being obligated to the debt on the home.
This means that the existing note and deed of trust stay in the seller’s name and the seller remains responsible for the mortgage payment. Essentially, the buyer is taking over the property while the seller remains liable to the lender.
As a practical matter , subject to purchase refers to the idea that a new owner is responsible only for the property and not responsible for any of the debt that may be secured to the property, except for any debt that they might sign a document admitting that they are responsible for.
A seller would agree to a purchase "subject to" when they have not built up enough equity in a property through depreciation or increase of the market price that they can afford to sell their home and pay off the existing mortgage.
The concept of a subject to purchase is common is a lot of different contracts and real estate transactions. It is sometimes used in loans, leases, and ground leases.
Advantages of a ‘Subject To’ Contract
Both buyers and sellers can benefit from a "subject to" real estate contract. For the seller, being able to fully finance the sale can mean the ability to get top market value for the property – all while getting the debt out of your name.
The buyer can benefit from this type of transaction by having the ability to purchase a property by just taking over the loan from the seller. This gives greater flexibility to them for financing than they might otherwise have obtained with a property that has little to no debt against it.
For the seller, being able to offer the buyer a payment way below what the market value of the property is could be a good selling point. This could sell the house much quicker than the seller would have done otherwise.
‘Subject To’ Real Estate Risks
There are many risks involved with "subject to" real estate contracts and these contracts are rarely without some type of negative consequences. Liability may fall on the buyer, the seller or both. Here are just a few negative consequences to using this type of contract template:
Lender Involvement
First of all, there is the possibility that your loan’s lender will object to your buying an existing mortgage. Since you’re buying a property that has an existing mortgage, the lender may force the owner to sell it within a period of 30 days after default. The owner will typically pay the loan in full if he or she defaults on the payments. If you have the deed to the property but the loan is in the seller’s name, the bank may demand that they be paid their money within 60 days. This means that you may not be able to keep the property for long if the bank forecloses on it.
If the seller is behind on his or her mortgage payments, the lender may force the seller to make all of the back payments by declaring that those payments are due. Although the house belongs to you as the buyer, the bank may find a way to take possession of the home if you can’t get the payments caught up or renegotiate the loan with the lender. If you don’t pay the back payments or renegotiate the loan, the bank will likely place the home into foreclosure.
Foreclosure
Just like when you take out a new mortgage, paying the balance of the loan is mandatory after you buy the house. If you don’t pay for any reason, the bank will take the home from you and you’ll lose anything you’ve invested in it. The bank could also sue you personally for the difference between what you owe on the loan and the amount the bank makes by selling the property after foreclosure. Depending on how much you’ve already paid into the property, you could end up losing a substantial sum of money because you failed to pay the bank.
‘Subject To’ Contract Template Essentials
A "Subject To" real estate contract template should include the following key elements:
A provision detailing that the buyer assumes responsibility for the existing mortgage, including the monthly payment.
A clause outlining that the buyer will take over all taxes and insurance on the property.
A stipulation that the contract is binding if the mortgage is assumable or if the seller uses their best good faith effort to facilitate a transfer of the mortgage to the buyer. The new buyer is to assume all obligations of the seller under the terms of the mortgage.
A clause stating that if the lender cannot transfer the loan to the assumption of the buyer , the seller will continue to make the mortgage payments until the loan is paid off.
A contingency stating that the buyer will get a current statement from the lender as to the amount required to pay off the mortgage on the date of closing.
Clauses regarding the seller and buyer closing costs.
A provision ensuring that the buyer will receive the original note executed by the seller to the lender at the time of closing and shall hold the note until the mortgage has been paid in full or otherwise satisfied.
A statement regarding how interest will be carried on the note until it is paid in full.
An indemnity clause whereby the buyer agrees to indemnify the seller for any actions or inactions by the buyer during the property ownership period and any foreclosure actions brought against the seller due to the defaulted loan.
A contract provision whereby the seller will execute a power of attorney for the buyer authorizing the buyer to conduct the closing on behalf of the seller and to pursue any deficiency lawsuit due to the default on the loan.
A disclaimer that the seller advises the buyer to seek the advice of a lawyer to review the closing documents and to explain the liabilities or responsibilities to the buyer.
The buyer shall assume all of the sellers’ obligations under the loan after the closing date.
How to Write a ‘Subject To’ Real Estate Contract
The first step in drafting an effective "subject to" real estate contract is to obtain a copy of the contract you intend to use. Depending on your jurisdiction, there are a variety of "subject to" real estate contract templates available. For example, in New Jersey, there are State Bar Association, realtor association, or individual practice bar association forms. In other jurisdictions, these contract templates may be obtained from the state or local association of realtors or the state or local bar association.
Once a copy of the "subject to" real estate contract template is obtained, it will have a number of clauses that may need to be modified for use in a "subject to" transaction. In particular, there will likely be provisions in the contract that require the buyer to deliver a deposit with the executed contract or within a day or two after execution.
Given that the "subject to" deal is typically entered into with a property owner who is in financial distress and has agreed to allow the buyer to make payments to the seller’s existing lender or lenders in lieu of foreclosure, the seller will not have any cash to pay the deposit required by the contract. As such, one possibility is to strike out the portion of the contract requiring a deposit under the circumstances of a "subject to" deal.
However, striking out the portion of the contract requiring a deposit may lead to a contract rejected by contract review professionals at the seller’s lender. As such, some forms of "subject to" contracts, especially those used by real estate agents that have already been recorded by the seller, contain provisions allowing for a de minimus deposit to be made that would satisfy the requirement of the contract without requiring the buyer to put up actual cash. Typically, the deposit provision in these "subject to" contracts requires the buyer to put up only $5 with the contract (and any additional amounts that may be required under the contract form are stricken out). The $5 deposit can also be made in the form of a cashier’s check, which can then be deposited and returned to the buyer by the seller’s lender at the closing of the transaction. Regardless, when entering into a "subject to" real estate transaction, it is important to draft or select the right form of "subject to" real estate contract to ensure compliance with the contract requirements of the existing lender or lenders.
Real-Life ‘Subject To’ Transactions
One way to understand "Subject To" transactions is to hear real-life examples provided by the people who benefited from them. The following stories are provided by members of the "Subject To" community:
I have a $160,000 mortgage and my house is worth about $80,000. I have never missed a payment and my credit score is in the 700s. How could I sell my house? Somehow get rid of my mortgage?
I was able to find a "Subject To" buyer who was willing to take over my payments. He literally took over my mortgage payments, my maintenance on the house and my insurance. The monthly cash flow from the house ended up paying down the mortgage at a faster rate, and now I don’t have a mortgage on the house! When I have cash, I make a principle payment and that basically pays down the house while still allowing me passive cash flow from other properties! It’s worked out very well for me – and my credit is still great because I paid on time.
My husband and I used our first "Subject To" real estate contract template to purchase a condo for $118 , 500 while it was actually worth $150,000. We didn’t have to pay the higher price because the owner was willing to leave the second mortgage on the property until it could be refinanced at a later date. In addition, we didn’t pay closing costs or points because the seller absorbed all additional charges on the transaction. We made a deal that benefited everyone. The seller was able to sell her home without paying arbitration fees, the fees of listing with a real estate agent and making two mortgage payments until the condo was sold. We were able to buy a bigger condo without incurring all the fees and interest payments on a new loan for a mortgage. Plus we didn’t have to worry about hiring inspectors. We couldn’t have made that deal without the right "Subject To" contract!
