Strategic Alliance Real Estate Investing

Buying a House “Subject To”

Have you heard about buying a San Antonio house “Subject To?” Someday, we may see interest rates rise.  When that happens, it will be useful to have an arrow in the  quiver called “buying subject to.” In today’s economy with low interest rates, homebuyers tend to avoid subject to transactions. However, interest rates aren’t the only factor used to determine whether a buyer might make a purchase offer with a subject to financing.

Buying a House Subject To?

First off, let’s define our terms. Buying “subject to” means buying a home subject to the existing mortgage. In this case, we are not talking about contingencies in our offer sheet.

The Balance defines the term this way, “It means the seller is not paying off the existing mortgage and the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer’s purchase price.”

A Homebuyer in San Antonio can offer three types of subject to options:

  1. A straight subject to cash-to-loan. The most common type of subject to occurs when the buyer pays the difference between the purchase price and the seller’s existing loan balance. For example, if the seller’s existing loan balance is $150,000 and the sales price is $200,000, the buyer must give the seller $50,000 in cash.
  2. A straight subject to with seller carryback.  Also known as seller or owner financing or a second mortgage. It can also be a seller carryback as in a land contract or a lease option sale instrument. The Balance cites this example: “if the sales price is $200,000, the existing loan balance is $150,000, and the buyer is making a down payment of $20,000, the seller would carry the remaining balance of $30,000 at a separate interest rate. The terms negotiated between the parties. The buyer would agree to make one payment to the seller’s lender and a separate payment at a different interest rate to the seller.”
  3. Buying a house subject to with a Wrap-around.  A wrap-around subject to gives the seller an override of interest because the seller makes money on the existing mortgage balance. Let’s say the existing mortgage carries an interest rate of 5%. If the sales price is $200,000 and the buyer puts down $20,000, the seller’s carryback would be $180,000. At a rate of 6%, the seller makes 1% on the existing mortgage of $150,000 and 6% on the balance of $30,000. The buyer would pay 6% on $180,000.

There is a fourth way of buying San Antonio house subject to.

  1. Suppose a real estate investor evaluates the seller’s property. He sees what needs to be done to the house to meet today’s buyer’s needs, and makes an offer. However, the buyer knows the seller is in trouble or needs to sell fast. Part of the offer is an agreement by the seller to convey the deed to the buyer, leaving the mortgage in the seller’s name. The buyer makes the payments along with any missed payments. Curing the default saves the house from foreclosure and saves the credit of the seller.

Why would any seller convey the deed?

Charlie France of CRE Online tells us, “The two main reasons are “time” and “debt relief.” If someone is being transferred, divorcing, buying a new home, or financially strapped, a real estate acting as problem solver can buy TODAY, so you can move tomorrow.

A real estate investor can offer the seller instant debt relief and help them out of their situation. At the same time, he can help a buyer looking for a house. Many times home buyers find it difficult to get financing when all their income is from self-employment. They may have perfect credit and cannot purchase a home using conventional methods.”

How is “subject to” different than assuming a mortgage. Assuming a mortgage means more than taking over the loan. If you assume the loan, the bank will make you qualify for the loan and restrict the amount of money you can borrow in the future. When you purchase a house “subject to” you make the bank happy because they are getting paid and there are incentives from the government to maintain the status quo.

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