Help a Reader: What is “Subject To” Real Estate?

I recently received this email from a reader:

“I was roaming the internet when I came across houses listed as “take over payment” properties. I did a quick google search and got another term for the – “subject to” properties. Do you know anything about this? An investor agrees to make the payments on your house, they find a renter, and then ultimately sell or refinance your house. You remain responsible for the payments but they pay them. The bank doesn’t know anything about it. Apparently it’s legit, or can be, but also seems shady. Thoughts?”

I’m going to take a stab at a basic definition and share my thoughts, but I encourage you real estate financing gurus to chime in with your knowledge.

What is “Subject To” Real Estate?

When a piece of real estate is sold “subject to”, ownership (deed) is transferred, but the underlying loan remains in place, instead of getting paid off. The seller’s mortgage remains in place. The buyer simply takes over payment. Therefore, the real estate property is “subject to” the seller’s mortgage.

From what I gather, most mortgage loans these days include a due on sale clause, which gives the lender the right to call the loan due after learning of this transfer of ownership. Whether they actually exercise this right is a different story. Supposedly, lenders rarely go this route.

I’ve also read that the lender doesn’t really ever have to know about the transfer. So, then they would never have a reason to call the loan due immediately. From what I gather, this isn’t illegal (of course, every State is going to vary), but it definitely is not normal practice.

Due on sale clause issues aside, should someone sell their house “subject to”? When you sell your house subject to, you are not removing yourself from the obligation of your mortgage. Additionally, you are letting someone else do whatever they want with the asset that is collateral for your mortgage. I see two negative things happening to the seller:

  1. The buyer stops making the mortgage payment and your credit is destroyed.
  2. The buyer moves in a tennant who destroys the home, ruining the value of the collateral of your loan. I’m not sure how insurance would work in this situation, so that’s an unexplored factor here.

For someone facing a current foreclosure, the risks above might be acceptable. But for someone just looking to get out of an underwater house, this probably isn’t a smart move.

For buyers, I’m assuming “subject to” houses are attractive because you don’t have to put any money down or qualify for the purchase.

I’d be interested to hear from anyone who’s either purchased or sold a “subject to” house.

Last Edited: December 3, 2011 @ 1:41 amThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. fergusonsarah says:

    I don’t have any knowledge about real estate, but thank you for sharing your good insight here.

  2. Terry Pratt says:

    One piece of this is simple:

    If the mortgage was written as “owner-occupied” there are problems in store if the mortgagor moves out and the house is rented to a tenant. (Lenders write different terms for owner-occ and for rental properties, so the type of property mortgaged will be clearly stated.)

    The mortgagor’s insurance (until proper rental property insurance is in force) will not cover damage done by a tenant after the mortgagor moves out. So any prospective third party needs to have proper insurance in place before renting out the house.