Using the “Subject to” Method to Sell Your Home Fast

If you are reading this, you probably searched for the term “Subject to” or Sub2 because you heard about it from an investor or home buyer. This page is going to walk you through what “Subject to” is, why someone might sell their home that way, and what to watch out for when selling your home Sub2.

Let’s use an example home seller named Tina. Tina purchased a house with only a 3.5% down payment about six months ago. Tina’s employer is having issues due to the Coronavirus shut down and had to lay Tina off of work. The government stimulus checks combined with Tina’s unemployment were not nearly enough to cover all of her bills.

Tina has no idea when things will be getting back to “normal” and needs to find a long term solution to her problem.  Tina decided it would be best to sell her house and move back in with family while she gets her finances back in order.  She talked to a Realtor and got a CMA and a seller’s estimated net proceeds form from the agent.

Tina was surprised to learn that she had not really paid down the loan balance at all in the short time she had been paying her mortgage. Since her home had not appreciated much in value in the last six months, and because she put very little down payment, she has no equity in the home when you factor in real estate agent commissions, seller closing costs, and transfer taxes.  The agent even mentions that Tina may need to consider attempting a Short Sale with the lender if Tina cannot get a full price offer to sell the home.

Selling on the market, paying commissions, and possibly having a short sale on her credit record did not sound appealing to Tina. She thought she would get another opinion, so she searched for people that advertise “We Buy Houses” and found an investor that says he will buy her house “Cash”.  After speaking with him, she finds out that his offer is much less than she owes on her home.  Tina is frustrated at this point and doesn’t know what to do.

After more searching on Google, she comes across Sound Home Buyer, because We Buy Houses and we have multiple methods of buying houses on either cash or terms.

Tina owes about $171,000 on her home, and she paid $179,000 for it.  Her payment was roughly $900 and the home would probably rent for $1150 on the rental market.  Now, one of the first questions we ask anyone in this situation is “have you thought about renting out your home?” and Tina had. She said that she could not handle the stress of dealing with tenants and if she used a property management company she would have no profit.

Could Tina sell the house for what is owed? Not with all the closing costs and commissions she would typically have to pay.

As an alternative, we made a suggestion: we would buy the home as-is, pay all closing costs, and take over the existing payments on the home so that Tina could simply walk away knowing that she does not need to make the payments anymore and she can start over from her relatives home.  This method is called selling your home “subject to” the existing mortgage.

Is “Subject to” New?

Actually, it is kind of old.  If you have ever looked at a HUD-1 form, you can see there is a whole section that references loans being taken Subject to. The “subject to” method was very common in the 70s and 80s when interest rates were higher. As values continued to go up and interest rates continued to go down, less people sold their homes subject to because mortgages were easy to get with low rates.  However, in the Great Recession of 2008-2011 many home sellers decided to sell their home “subject to” the existing mortgage because they did not want a short sale or foreclosure on their credit.

Homeowners can and do sell their homes “subject to” in any type of market.  However, it is more common in Buyer’s markets than it is in a Seller’s market. Real estate markets are cyclical. There will be another downturn, and when that happens the best option for many home sellers will be to sell their home “subject to” the existing mortgage.

Some homeowners don’t have time to sell a house for sale by owner, arrange open houses, talk to possible buyers, and “maybe” get an offer that works. Sometimes homeowners just need to sell their homes as quickly and easily as possible.

What if you need to sell the home but the home needs some expensive repairs? Repairs can take weeks, months, or years, and many homeowners don’t have the time or expertise to do it. You can sell your home As-Is in a subject to sale and avoid all of those repairs.

Why Choose “Subject To” Method

The “Subject to” method of selling a home is quicker because there are no banks, inspections, or appraisals to deal with. Just scheduling inspections and appraisals can take weeks. Taking over your debt and transferring the deed is pretty easy.

Most home loans contain something called the ‘due on sale clause,’ which is also referred to as the ‘acceleration clause.’ When the ‘due on sale clause’ is implemented, the lender can request for the loan’s full balance to be paid because the home has been sold.

However, this clause is not a law. It’s only a contractural option or choice the mortgage company could execute. The fact is, it VERY rarely happens, especially when loans are paid on time. Banks do not want to own homes, they want performing assets on their books. Since we pay the payments, the loans are performing.

Agents are under no ethical or legal obligation to alert the lender about the transfer. There are cases where the lender won’t be able to enforce the ‘due on sale’ clause, such as when the homeowner puts their property into a trust for estate planning, or in cases involving the transfer of property between family members and former spouses. While lots of mortgage agreements do contain ‘due on sale’ clauses, people still use the ‘Subject to’ method all the time.

Most lenders understand the costs and hardships their borrowers run into over a 30-year mortgage. They also know the expense involved with foreclosing on a property.  Since the buyer pays the same mortgage payments as the former owner, the lender is still going to get their money back. For this reason, it is not usually cost-effective for the lender to chase the ‘due on sale’ clause in the first place. Even when two parties conduct a ‘Subject to’ transaction, they will typically succeed.

When to Sell Using “Subject To”

Homeowners should never pick the ‘Subject to’ method as their first choice when it comes to selling. However, there are circumstances where it can make sense. When homeowners have found the ideal buyer, but the buyer is either unwilling to or unqualified to get a new mortgage, selling ‘Subject to’ method can be a win-win.

The “Subject to” method is totally legal, despite popular opinion. This method lets buyers and sellers get past a lot of the obstacles they face, so, understandably, some people are doubtful of it. However, some real estate agents and experts will recommend the “Subject to” method to clients who are in circumstances where they have a lot to lose and limited time to sell a property.

The “Subject to” method is different than owner financing. In owner financing, the owner finances the property and holds the note rather than a bank. Owner financing is a good choice for homeowners who own a house but do not have mortgage debt. If there is a lot of equity to factor in, owner financing may also be a better choice for some sellers than a conventional sale. When the owner doesn’t have much equity, the ‘Subject to’ method is a good option for some sellers.

Why Buyers Love the “Subject to” Method

The “Subject to” method seems to discussed as to how it is beneficial to the seller. The seller is usually the one who is initiating the negotiation while the buyer responds, so it is reasonable to see it that way. However, the ‘Subject to’ method does have many advantages for the buyer as well.

Conventional lenders want large down payments. Many buyers either choose to not put money down or do not have down payment available. With the “Subject to” method, it’s similar to someone handing them the keys to a home with the mortgage in place. The buyer can pay the house off just like any other homeowner. When you utilize the ‘Subject to’ method, the buyer is allowed to buy the home without jumping through all the hoops associated with conventional financing.

Buying a house is almost as stressful as selling a house. When the “Subject to” method is used, buyers can purchase homes quickly and easily, which makes things less stressful for everyone.

However, the relationship between the buyer and seller isn’t over when the “Subject to” method purchase is closed. If buyers don’t pay, the proceedings for the foreclosure may eventually start. Both sides can be affected if that happens.

Still, there are many circumstances in which buyers can take on the mortgage payments but not a huge down payment. There are also circumstances where the sellers will gain from rapidly selling their properties. The ‘due on sale’ clause is rarely enforced. In most cases, everyone benefits. It is a win-win.