“Subject To” Transactions: Pros, Cons, and Title Considerations
Subject to transactions are a creative financing strategy where an investor acquires a property “subject to” the existing mortgage—meaning the loan stays in the seller’s name, but the investor becomes the title owner of the property and makes the loan payments.
This strategy can be an attractive option for both investors and distressed sellers. Investors gain control of a property without securing a new mortgage, while sellers can avoid foreclosure or unload a property they can no longer afford. However, subject to investing comes with legal, financial, and title considerations that must be carefully managed to avoid complications.
Understanding how subject-to deals work, their advantages and risks, and their title implications is essential for both investors and sellers that are involved in these types of transactions.
How Does a Subject-To Deal Work?
A subject to transaction typically follows these steps:
- Agreement Between Seller and Investor: The seller agrees to transfer ownership of the property to the investor while leaving the existing mortgage in place.
- Title Transfer: A Warranty Deed (with the mortgage as an exception) or a Quitclaim Deed is used to transfer ownership to the investor. However, the mortgage remains in the seller’s name.
- Loan Payments Continue: The investor takes over making payments on the mortgage, either directly to the lender or through a servicing company.
- Exit Strategy: The investor can hold the property as a rental, sell it to another party, or refinance the existing mortgage with a new loan in their own name.
A properly structured subject-to deal ensures both parties understand the arrangement, potential risks, and legal protections available.
Types of “Subject To” Transactions
There are three main types of subject-to deals investors may encounter:
1. Straight Subject-To
The investor takes over payments and gives the seller some or no cash up front. This is often used when a seller is behind on payments and just wants to walk away from a property that has little or no equity.
2. Subject-To with a Seller Carryback
In addition to taking over the existing mortgage, the investor also agrees to pay the seller a portion of their equity over time through a second loan or installment agreement.
3. Wraparound Mortgage
The investor creates a new mortgage that wraps around the existing loan. The investor collects payments from a new buyer while continuing to pay the original lender.
Pros of Subject-To Investing
No Need for New Financing
Investors can acquire property without applying for a new mortgage, making it an attractive option for those who may not qualify for traditional financing. Often times, they can also take advantage of lower interest rates than those available for new mortgage loans.
Lower Upfront Costs
Since subject-to deals do not require large down payments, investors can leverage real estate opportunities with minimal capital.
Quick Transactions
Compared to traditional financing, subject-to transactions close faster because they bypass the mortgage approval process.
Potential for Immediate Cash Flow
If the mortgage terms are favorable, investors can rent or resell the property and generate income right away.
Helping Distressed Sellers
Sellers who are facing foreclosure or financial hardship can walk away from their mortgage obligations without going through a short sale or bankruptcy.
Risks of Subject-To Investing
Due-on-Sale Clause Risks
Most mortgages contain a due-on-sale clause, which allows lenders to demand full repayment if ownership of the property changes. While some lenders do not enforce this clause if the rest of the loan terms are adhered to (i.e., timely payments, maintaining insurance in the original borrower’s name, etc.), the due-on-sale clause still remains a potential risk for default under the original loan terms.
Title Issues and Encumbrances
Investors must conduct a thorough title search to ensure that there are no existing liens, judgments, or title defects that could cause future problems.
Seller Credit Risk
Since the mortgage stays in the seller’s name, any missed payments by the investor could impact the seller’s credit score and possibly lead to foreclosure.
Difficulties in Reselling or Refinancing
Exiting a subject-to deal can be complicated if the investor needs to refinance or if the property has low equity. Maintaining contact with the seller and having a signed third-party authorization form (or limited power of attorney) is crucial.
Legal and Ethical Considerations
Some states have specific regulations regarding subject to transactions, and improperly structured deals can lead to legal disputes, especially if a seller later claims they did not understand the agreement.
Title Considerations for Subject-To Transactions
Title issues can make or break a subject-to deal. Investors must take the following precautions to protect their investment and avoid legal trouble.
1. Perform a Full Title Search
A Florida title search helps uncover any liens, unpaid taxes, judgments, or ownership disputes that could affect the transaction. If the title is clouded (other than the mortgage that is being taken subject to), it must be cleared before closing.
2. Use a Trust or LLC
Some investors transfer ownership into a limited liability company (LLC) to help minimize personal liability or a Florida land trust to reduce the risk of triggering the due-on-sale clause.
3. Obtain Title Insurance
Investors will still typically obtain title insurance to protect against title defects. The title insurance policy will list the mortgage as an exception to coverage.
4. Confirm Existing Liens and Mortgage Terms
Before finalizing a subject-to deal, investors should verify:
- Current loan balance
- Interest rate and monthly payment
- Any prepayment penalties
- Whether the mortgage is in good standing
Failing to confirm these details can lead to unexpected financial burdens.
5. Document the Agreement Properly
A well-structured subject-to deal should include (at a minimum):
- A purchase agreement outlining terms and conditions
- A disclosure form ensuring the seller understands the risks
- A limited power of attorney to handle mortgage-related matters
- An agreement that details the parties’ obligations post-closing
Proper legal documentation helps prevent disputes and legal challenges down the road.
Is Subject-To Investing Right for You?
Subject-to investing can be a powerful strategy for acquiring real estate with minimal capital, but it’s not without risks. Before pursuing this approach, investors should:
- Consult with a real estate attorney to ensure compliance with Florida laws
- Conduct a thorough title search to uncover any hidden risks
- Understand the lender’s position on due-on-sale clauses
- Establish a strong exit strategy to mitigate financial exposure
Subject-to deals can help sellers who are in a difficult situation while providing investors with a viable method of buying real estate with little money down—but they require careful planning and risk management.
How Marina Title Can Help with Subject-To Transactions
At Marina Title, we provide comprehensive title services for real estate investors, including helping with subject to transactions, seller financing, and other creative financing strategies. Whether you’re an experienced investor or exploring creative financing for the first time, our team can help you structure the transaction.
Call us today at 855-513-5880 or send us a message via our Secure Contact Form to learn more about our real estate and title services. We provide title, escrow, and closing services throughout the State of Florida.
