Understanding Subject-To Deals: A Beginner’s Guide to Building Your Portfolio
What Is a Subject-To Deal?
A Subject-To deal is a creative financing strategy where an investor takes over payments on an existing mortgage without formally assuming the loan. Ownership of the property transfers to the investor, but the original mortgage remains in the seller’s name.
When working with a wholesaler, the wholesaler identifies a motivated seller and brings the deal to the investor, saving you time and effort while presenting opportunities with built-in equity or cash flow potential.
How a Subject-To Deal Works Through a Wholesaler
- Wholesaler Finds the Deal
- The wholesaler identifies a motivated seller who is open to selling subject-to their existing mortgage.
- Assigns or Double Closes the Contract
- The wholesaler negotiates terms with the seller and either assigns the contract to the investor or conducts a double closing to transfer ownership.
- Investor Takes Over Payments
- After closing, the investor takes over the mortgage payments while leveraging the property for rental income, appreciation, or other strategies.
Breaking Down a Hypothetical Subject-To Deal
Let’s use a real-world-inspired case study to illustrate how this works when you buy from a wholesaler.
Property Details:
- Market Value: $250,000
- Seller’s Mortgage Balance: $200,000
- Monthly Mortgage Payment: $1,200 (including taxes and insurance)
- Interest Rate on Mortgage: 3.5%
The Deal Brought by a Wholesaler:
- The seller is struggling with payments and agrees to sell the property subject-to their existing loan.
- The wholesaler negotiates a price of $10,000 to the seller and adds an assignment fee of $7,000.
Investor’s Costs:
- Entry Fee:
- Assignment Fee to Wholesaler: $7,000
- Seller Payment: $10,000
- Closing Costs: $3,000
- Mortgage Catch-Up (if behind): $5,000
- Repairs: $7,000
- Ongoing Costs:
- Monthly Mortgage Payment: $1,200
- Maintenance Reserve: $200
Exit Strategy:
The investor rents the property for $1,800/month, netting $400/month after mortgage and reserves, while benefiting from appreciation and future equity.
What Does the Entry Fee Consist Of When Working with a Wholesaler?
The entry fee in a wholesaler-provided Subject-To deal typically includes:
- Wholesaler’s Fee:
- The assignment fee paid to the wholesaler for finding and negotiating the deal.
- Seller Payment:
- Any cash offered to the seller to incentivize them to agree to the deal.
- Closing Costs:
- Includes title work, escrow fees, and recording fees.
- Mortgage Catch-Up:
- Funds to bring the seller’s mortgage current if they’re behind on payments.
- Repairs and Improvements:
- The cost to make the property rentable or marketable for resale.
Where Can Entry Fee Funds Come From?
As a new investor, you don’t have to rely on personal savings to cover the entry fee. Here are common funding options:
- Private Lenders:
- Individuals who lend money in exchange for interest or equity in the deal.
- Self-Directed IRAs:
- Retirement funds can be invested in real estate through a self-directed IRA.
- Hard Money Loans:
- Short-term loans designed for real estate investors.
- Creative Partnerships:
- Partner with someone who provides the entry fee in exchange for shared profits.
- Business Credit Lines:
- Use a business line of credit to finance the entry fee.
Why Work with a Wholesaler on Subject-To Deals?
- Saves Time:
- Wholesalers find and negotiate deals, so you focus on analyzing and closing.
- Access to Opportunities:
- Wholesalers often specialize in distressed properties, where Subject-To deals make the most sense.
- Built-In Profit Margins:
- Deals are often pre-negotiated for profit potential.
What Are the Risks of Subject-To Deals?
- Due-On-Sale Clause:
- The lender could demand full repayment of the mortgage if they discover the property was transferred.
- Payment Obligations:
- Failing to make payments harms the seller’s credit and could lead to legal action.
- Overpaying Entry Fees:
- Ensure the wholesaler’s assignment fee doesn’t erode your profit margins.
- Cash Flow Challenges:
- Evaluate whether the property will cash flow or appreciate sufficiently to justify the investment.
Pro Tip: Always work with a real estate attorney to structure your Subject-To deals properly.
FAQs About Subject-To Deals Through Wholesalers
1. Is the wholesaler’s assignment fee negotiable?
- Often, yes. Wholesalers may lower their fee to close the deal if it doesn’t meet your profit criteria.
2. What happens if the seller defaults after you take over the property?
- Once the deal closes, the seller has no further liability except for their credit tied to the loan.
3. Are Subject-To deals legal?
- Yes, but they must be structured correctly to avoid legal or lender issues.
How Bluebonnet Home Rescue Can Help
At Bluebonnet Home Rescue, we specialize in creative financing solutions, including Subject-To deals. We can help you:
- Analyze deals brought by wholesalers.
- Connect with private lenders and funding partners.
- Structure agreements to minimize risk and maximize profitability.
Final Thoughts
Subject-To deals purchased from wholesalers offer an excellent way to start building your real estate portfolio. By understanding the costs, funding options, and strategies to mitigate risks, you can create cash flow opportunities without traditional financing.
Ready to explore Subject-To deals? Contact Bluebonnet Home Rescue for expert guidance and deal evaluation today!