As interest rates continue to rise, the “Subject-To” method of acquiring real estate will increase in popularity. We’re seeing an uptick in inquiries about subject-to. The extremely low mortgage interest rates we’ve experienced over the past decade are simply too low for investors to ignore. Investors who use the subject-to method keep the seller’s existing mortgage(s) in place in order to keep acquisition and holding costs low. Buyer closing costs are reduced significantly as there are no new lender fees and pre-paids. Monthly payments typically stay low as well.
An investor-friendly title company can facilitate subject-to transactions. And yes, as a buyer in a subject-to deal, you CAN get owners title insurance. The parties simply execute a few extra documents than in the typical sale.
But back to the subject of this post. While interest rates are still historically pretty low, they are now increasing rapidly. Many homeowners who purchased or refinanced recently have mortgages carrying the lowest interest rates in history. Many would-be sellers are deciding to stay where they are due to those favorable existing loan terms. But that isn’t always possible. Some owners falls on hard times and can no longer afford even the mortgage with that low rate. That’s where this investing method can come into play. If the parties can structure a deal which leaves the cheap financing in place, it can often be a win-win for both buyer and seller. The buyer gets great terms and lower closing costs (no new loan, points, fees, escrows, etc.) The seller finds someone to take over payments, put some cash in his/her pocket, and avoids foreclosure. And the seller’s interest is secured… he/she can foreclose or take back title if the buyer stops making payments.
Of course there are pitfalls to avoid when investing with this method. In our experience the major risks are (1) undercapitalization and buyer default, (2) failure to have a good exit strategy in the event the loan balance is accelerated by the lender, and (3) the seller filing for bankruptcy. Plus, making sure the property is properly insured can be tricky. We’ll go into each of these issues in more detail in the next few posts.