Buying Subject To - Real Estate Term of The Week

(August 2, 2012)

housing termsBuying subject-to (an existing loan) is a method I use fairly often when buying properties. It's not for everyone, but it's a great solution for sellers under time and financial constraints. When buying subject to, the property is transferred into the buyers name and the existing mortgage remains in the original owner's name. Generally, the buyer compensates the seller with an agreed upon cash amount in addition to taking over the loan.

In most instances, I buy properties subject to when sellers need to sell FAST. This is commonly the case with homeowners facing foreclosure. When a home is about to be auctioned off, there is no time for all the hoops lenders require you to jump through. Buying subject to puts the property in my name fast so that I can immediately start making payments to stop the foreclosure. An added bonus to this solution is getting the seller's credit score back on track. Bringing the mortgage current and making the monthly payments will slowly, but surely, strengthen credit scores to where they once were. Also, selling subject to will keep a foreclosure off the seller's record to allow them to move on immediately. While I sometimes keep the property as a rental, I usually fix up the property and resell it within a couple months. When sold, the loan gets paid off completely.

2 years ago I purchased a condo subject to in Los Angeles. The seller was not in financial distress, but was renting to a family member whom he no longer got along with. The hassle of not receiving rent on time, if at all, was making this once great investment property into a HUGE headache. Knowing that the tenant would cause trouble if he started bringing realtors in, he decided to sell to an investor, me.

The reason I didn't take out a new mortgage on this property was because he owed about what the property was worth (it had lost value over the years). Instead of pulling out a new loan, where I would be paying mainly interest on it for years to come, I assumed his loan that was already allotting a hefty amount of the monthly payment to the principal balance. The property has been rented ever since and has been a great investment for me.

Whether for financial urgency or strict time constraints, selling subject to can be a great option. Just make sure you know who you're selling to. Check references, payment histories on other properties they own, and most importantly trust your gut.

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Jennifer Shenbaum

Written by Jennifer Shenbaum

Jennifer Shenbaum is a real estate investor based in Southern California. She is a veteran of the housing market crash of 2007. Best of all, she offers free remodeling ideas to all who ask.

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