SubTo is short for “subject to real estate,” which is a type of financing offering where a buyer makes an offer on a property and agrees to take on the existing mortgage. The seller does not receive any cash upfront but instead receives their benefits after the transaction closes.
- Ability to save on closing costs
- Can produce significant capital gains tax savings over time
- Faster time to reach a sale, and the ability to sell your property as-is without the need for repairs
- Released from property tax, homeowners insurance, and various maintenance expenses
These strategies are beneficial for sellers who would like to get rid of a property faster, with less hassle, or who would like to get more money out of the sale.
When you sell your house in a conventional method, you’ll have to pay 9-11% between agent commissions, closing costs, and possible seller credit when negotiating with the buyer. For example, if you are selling a house for $450,000 USD, the amount you’d get after the sale would be between $400,500 – $409,500.
Selling via Sub-To or with Seller Finance can result in the seller saving those additional costs and getting more money from the sale. This means that this strategy is perfect for those owners who might have low equity and who would not benefit from a traditional sale.
Other sellers who might benefit from this could be those who might be going underwater with their mortgage payments and might be risking foreclosure.
Generally, the seller will get 75% of the total mortgage removed after one year and 100% of the mortgage removed the following year. Lenders should be able to confirm that mortgage payments have been made on time, so this should not affect the DTI ratio.
Everything will be done through a title company and an escrow officer. The idea is to set up everything legally like a traditional sale. This protects both parties.
We have never missed a payment, but if this were to happen, the seller would be protected by a Deed of Trust, which should specify that in the event of a missed payment or default, the seller can start the process of foreclosure to sell the property.
Foreclosure is the legal process that allows for a piece of property to be sold in order to satisfy certain debts that are owed by the property owner
The most common foreclosure process in Texas is non-judicial, which means the seller can foreclose without going to court, so long as the deed of trust contains a power of sale clause. A power of sale clause is a paragraph in the deed of trust that authorizes the non-judicial foreclosure sale.
Depending on the situation and how creative the financing is, there might be more options for the duration of the loan.
If we decide to do a fix-and-flip, we would finish up paying the seller’s mortgage as soon as the property is sold, which could take a few months.
If we end up refinancing at some point in the future, we would be getting a new mortgage which would mean that the older one would be paid off.