Could Subject-To Transactions Become the Next “Conventional” Real Estate Deal?
In the past, subject-to transactions were the height of “creative” real estate investing and innovative real estate financing. After all, most of the people who were interested in buying properties did so in more conventional ways, by applying for a loan and then buying based on what the loan and their savings for a down payment indicated that they could afford. Real estate investors were the first to buy “subject-to” because their multiple property holdings often made it difficult for them to purchase properties in this conventional manner because lenders do not like to make loans to people with large amounts of outstanding debt – in many cases even if they are able to repay it and are making all payments on time.
However, as real estate markets have changed and people are finding themselves less and less able to buy in the “conventional” manner, more and more sellers are opting to include buying “subject-to” the existing mortgage as an option in order to sell their homes in a glutted market. These sellers are so eager to get rid of their homes that they are willing to take a small down payment and buyer’s word that they will continue to make payments in order to move out. You have probably noticed that a large number of homes are now labeled “seller financing” available even when real estate agents are listing them. This used to be the exclusive territory of FSBOs and investors, but all that is changing.
The biggest ramification that this has for you as an investor is simple: it makes it that much easier to find deals. And in this market, when the deals are plentiful but they can be hard to get your hands on, that is a very important thing. I have found that most real estate agents are happy to work with me to find subject-to-ready properties even though they will make a small commission on the deal because it helps them keep moving their own inventory. Even better, many agents will actually work with investors to show potential sellers why a subject-to deal can be a good option for everyone, which I have found is extremely helpful because the agent often appears to the seller as a more neutral party than the potential buyer. I have found multiple lease-option properties that the seller ultimately was willing to sell as a subject-to by working closely with an agent.
So is the subject-to property the next “conventional” deal? I don’t think so. In the end, I think that most people will still prefer to take out regular mortgages with regular lenders, and when the market picks up for sellers again they will be less likely to want to sell subject-to. However, I do think that this period of time will be incredibly helpful to real estate investors interested in subject-to investing because it has made the entire concept more accessible and acceptable.
Peter Vekselman has been successfully investing in real estate since 1996. He has completed over 1200 real estate deals, owned a construction company, been a private lender, and owned a property management company. Peter currently works with clients all over the US helping them achieve riches in real estate investing. For more information please visit www.CoachingByPeter.com.
Questions and Answers
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The key reason why some firms thrive while some implode during an financial recession is still a puzzle to many people business-owning business owners. Some wrongly assume that all businesses should suffer via recessionary cycles. But the truth is that some companies are usually essentially recession-proof, and it is not necessarily because they are much larger, better known, or a lot more generously capitalized.
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As you are watching the real estate market “crumble” and the deals multiply exponentially, you may be thinking to yourself (and any economist would agree with you) “A bad economy is a great time to spend money.” All political issues and platforms aside, for real estate investors this is nothing short of the bare, honest truth. When the market sinks, the deals come out and a buyer with cash has his or her choice of the lot.
A subject-to transaction is a real estate deal in which the buyer purchases the property subject to the existing mortgage. This means that they assume the current payments at the current interest rates and their payments, present and future, are subject to the terms of the loan. This is an extremely useful and valuable tool to have in your real estate investing arsenal, particularly in the current market when traditional lender-financing is hard to come by.
As we’ve already discussed, part of successful long-term real estate investing is having an effective way to get out of the investment – preferably while generating wealth at the same time. Sometimes, however, you need to get out of a long-term real estate investment fast, which can create trouble for a real estate investor who only planned for a calm, prolonged exit that could happen at their leisure.
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