One of the challenges that real estate investors face is finding financing for their deals. Traditional lenders may have strict requirements, high interest rates, or limited funds. However, there are other ways to finance real estate deals that do not involve banks or conventional loans. These are called creative financing strategies, and they can help investors acquire properties with little or no money down, lower monthly payments, and more flexibility. One of these creative financing strategies is buying property “subject to” the underlying financing.

What is Buying Property “Subject To” the Underlying Financing?

Buying property “subject to” the underlying financing means that the buyer takes over the seller’s existing mortgage loan without assuming it formally. The buyer pays the seller a lump sum or a series of payments for the equity in the property, and then pays the monthly mortgage payments directly to the lender. The seller remains on the loan until the buyer pays off the loan or refinances it. The buyer gets the deed and the ownership of the property.

What are the Benefits of Buying Property “Subject To” the Underlying Financing?

Buying property “subject to” the underlying financing can be beneficial for both the seller and the buyer in different ways. Here are some of the benefits for each party:

• For the Seller:
• Get rid of an unwanted property. The seller may want to sell their property quickly and easily for various reasons, such as divorce, relocation, financial hardship, or foreclosure. By selling their property “subject to” the underlying financing, they can avoid paying closing costs, commissions, or fees, and transfer their liability and responsibility to the buyer.
• Preserve their credit rating. The seller may have a good credit rating that they want to maintain, or a bad credit rating that they want to improve. By selling their property “subject to” the underlying financing, they can avoid having a foreclosure or a short sale on their credit report, which can negatively affect their credit score and their ability to get future loans.
• Receive cash or income. The seller may need some cash or income to pay off their debts, cover their expenses, or invest in other opportunities. By selling their property “subject to” the underlying financing, they can receive a lump sum or a series of payments from the buyer for their equity in the property, which they can use for their purposes.
• For the Buyer:
• Acquire property with little or no money down. The buyer may not have enough money for a down payment, closing costs, or fees to buy a property with a conventional loan. By buying property “subject to” the underlying financing, they can acquire property with little or no money out of pocket, since they only pay for the seller’s equity in the property if any.
• Take advantage of favorable loan terms. The buyer may not qualify for a conventional loan due to their credit history, income, or debt ratio. By buying property “subject to” the underlying financing, they can take advantage of the existing loan terms that the seller has with the lender, such as low interest rate, fixed rate, long term, or assumable loan.
• Build equity and cash flow. The buyer may want to build equity and cash flow from their property by renting it out, flipping it, or refinancing it. By buying property “subject to” the underlying financing, they can increase their equity by paying down the principal balance of the loan over time, and increase their cash flow by collecting rent that exceeds their monthly mortgage payments.

What are the Precautions of Buying Property “Subject To” the Underlying Financing?

Buying property “subject to” the underlying financing can also involve some risks and challenges for both the seller and the buyer. Here are some of the precautions that each party should take:

• For the Seller:
• Check for due-on-sale clause. The due-on-sale clause is a provision in most mortgage contracts that allows the lender to demand full payment of the loan balance if the borrower transfers ownership of the property without their consent. The seller should check if their loan has this clause, and if so, how likely it is that the lender will enforce it. The seller should also inform the buyer about this clause and its consequences. Proper disclosures from a experience qualified real estate attorney is very important.
• Get a power of attorney. A power of attorney is a legal document that allows one person to act on behalf of another person in certain matters. The seller should get a power of attorney from the buyer that allows them to access and monitor their loan account, make payments, if necessary, communicate with the lender if needed, and sell or refinance the property if desired.
• Get a release of liability. A release of liability is a legal document that frees one party from any obligation or responsibility towards another party in relation to a specific matter. The seller should get a release of liability from the buyer that states that the buyer assumes full responsibility for the loan payments, taxes, insurance, maintenance, and repairs of the property, and that the seller is not liable for any default, damage, or loss that may occur.
• For the Buyer:
• Do your due diligence. The buyer should do their due diligence on the property and the loan before buying it “subject to” the underlying financing. The buyer should inspect and appraise the property, check for any liens or encumbrances, verify the loan balance and payment history, review the loan terms and conditions, and calculate the cash flow and return on investment.
• Get a land trust. A land trust is a legal entity that holds title to real estate for the benefit of one or more beneficiaries. The buyer should get a land trust that names them or their entity as the beneficiary and a fiduciary to the buyer as the trustee. The buyer should then transfer the deed and the ownership of the property to the land trust, and have the seller sign a warranty deed that relinquishes their interest in the property. This way, the buyer can avoid triggering the due-on-sale clause, protect their privacy, and avoid any legal issues with the seller.
• Get insurance. The buyer should get insurance policy for the property that covers any damage or loss that may occur. The policy should also cover any liability or risk that they may face as the owner of the property. The buyer and seller should be listed as “loss payee,” and the policy should remain in effect until the loan balance is paid off, at which time a new policy is issued solely in the buyer’s name and for the benefit of the buyer.