One of the things that distresses me about our industry is the amount of wrong or incomplete information available to investors. Some myths block what otherwise would be a great deal, while others would have you believe that a bad deal is actually great. For example, we encourage purchasing homes “subject-to” the existing mortgage as an option to finance the purchase of an investment property. This means that title to the property is transferred to the purchaser, but the loan remains in the original borrower’s name with payments made by the purchaser. Unfortunately, many myths exist around this method which could rob you of your profits. Let’s take this opportunity to dispel 5 of the most common.

Myth #1: Buying A House “Subject-To” The Existing Mortgage Is Illegal.

Absolutely not true! Some states are attempting to pass legislation to regulate “subject-to purchases because of unscrupulous investors. Check with your local attorney to determine the status in your state because most still have no laws passed.

This myth has been around a lot longer than these new laws in a few states. The reason is that most mortgages have a “due-on-sale” clause which states that if the house is sold without paying off the mortgage, the lender has the “right” to call the entire loan due. The key here is that they have a “right” – not an “obligation”. In other words, it’s their choice. Before doing my first “subject-to” deal I asked several attorneys in town who represent lenders to see if they had ever heard of a bank call a loan due because of a sale. In every instance they said: not as long as the payments were made timely. Why? Because banks are in the money business – not in the real estate business. If they call the loan due, and it goes into foreclosure, they have a poor performing loan on the books (for which they have to increase their reserves), they incur additional costs, and they inherit a property. Their other choice is to just continue to accept timely payments from the new owner. Which makes more sense?

Note: This is only true when the mortgage holder is a bank. If the mortgage holder is a private individual, they may in fact prefer to have the house rather than timely payments.

Myth #2: Buying “Subject-To” Is Complicated And Requires A Ton Of Paperwork.

The truth is that all you have to do is write it into the Purchase and Sales Agreement (PSA). I write it in right next to the Purchase Price. Here’s an example using my PSA:

Total Purchase Price to be paid by Buyer is $80,000.00, payable as follows: “subject-to” existing first mortgage with Acme Finance with a balance of approximately $77,500, and monthly PITI payments of $695; remainder of Sellers equity to be paid in cash at closing.

That’s it. You and the Seller have now agreed that you’ll purchase the home subject-to their mortgage. As a precaution, I have the Seller sign a disclosure that they know and understand that the loan has a due-on-sale clause which the lending institution can invoke since the property is being sold. It also discloses that I make no promise as to when the loan will be paid in full, or how long it will remain in their name. I also prepare a letter from the borrower informing the bank that all future correspondence should be forwarded to me, and that I have the right to act for the Seller in every way regarding the loan so they’ll disclose loan information to me in the future.

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