Why Would a Seller Sell “Subject-To”?
Buying a property subject-to the existing loan is attractive to you as an investor because you do not have to use your own credit to apply for a loan. Instead, the original loan on the property is kept in place, and you take over the payments, mitigating any risk you would be taking by using your own credit.
However, why would a seller agree to this? After all, they are leaving a loan in place that they are liable for. The answer is easy—they are motivated.
Will every seller be motivated enough to sell their property this way? No, but many will be. Not only will you help them solve a potential financial crisis they might be facing if they cannot afford their loan payments, but you will also have the chance to make a hefty profit.
In my business, I only do deals that will not only benefit me, but that will also solve a problem for the seller. It has to be mutually beneficial.
What are some reasons a seller might be motivated enough to sell subject-to?
- To stop foreclosure
- Save their credit
- Need money
- Want to move or buy another house
- Have already moved to another house
In many of these situations, I have been able to purchase a house subject-to from people in foreclosure, and it creates a win-win. Instead of losing their house and ruining their credit, I was able to get the deed, stop the foreclosure and bring the loan current on payments, saving their credit.
Here are some specific examples that might entice a seller to sell subject-to:
- Because you will be making a profit, you can give them some money to cover their moving costs.
- If there is equity, they might get a check at closing.
- In many cases their credit will be improved because the lender reports to the credit bureau that the loan has been brought current, thus boosting their credit score.
- They need a quick solution and do not have the time to wait for a traditional sale through a real estate agent.
- The peace of mind they get by removing that foreclosure pressure off their back.
Not all sellers that will agree to a subject-to deal will be in foreclosure. In fact, over the years I’ve purchased many houses subject-to from people who were current on their payments. For instance, if they want to buy a new home and aren’t able to get financing with their existing loan in place, they can show the lender that someone else will be making the payments which will increase their debt-to-income ratio allowing them to get approved for the new loan.
I remember many couples that were about to lose the contract on their new home because their current home would not sell. They were not able to get a new loan to complete the purchase of that new home because that existing loan was out there counting against their debt-to-income ratio. I have also purchased properties subject-to from sellers who had already purchased another home and were tired of making double payments.
As you can see, there are many examples of situations where you can help homeowners by purchasing their house subject to the existing financing. The key is understanding how you can help these sellers and building credibility with them, so they want to work with you.