So what is a “Subject To” transaction anyway?
Basic Overview
The infamous Subject To (Sub2)…I get a lot of questions about this type of transaction. It, along with its counterpart the Wraparound (which we will get to another day), always seem to throw people for a loop. The biggest cause for confusion on this transaction is that most people cannot separate the idea of Title/Ownership, and Debt.
In the Sub2 transaction, the Title/Ownership of the property is transferred to the buyer while the debt attached to the property remains in place under the current seller. So, to put it simply, title to the property will be under the buyers name, and the Mortgage will remain in sellers name. The current buyer does not assume the mortgage and the mortgage does not change names—this means that the seller will be responsible and liable under the mortgage until it is paid in full (although the buyer will be making payments on the mortgage).
Information You’ll Need
When acquiring a Subject To transaction there are a few key pieces of information you will want to procure from the seller. First, obtain a mortgage statement, and if necessary and payoff and/or reinstatement from the bank. Just because a seller says they owe X amount, doesn’t mean they do. Always verify the remaining balance of the loan, current payments, escrow balances and any amounts delinquent. You will also want to get a hold of a copy of the promissory note to ensure that it is not an ARM and that it does not have a balloon payment. Without an official statement from the lender, you may walk in to a transaction that is not what it seems to be.
Second, compile information about the seller(s) including the last 4 of their socials, driver’s license numbers, dates of birth and previous addresses over the last 10 years. This information will be very important when completing a title search. Along with their personal info, get a brief family/marital history. While title on the deed to a property may only show one person, they could have gotten married in between the time they purchased and the present. Even though only one spouses is on the deed, Texas presumes that property is Community Property, and you will likely want the joinder of the spouse in the transfer. If there is a deceased owner, the family history will be crucial—especially if there was no probate or administration of that persons estate.
Third, check to see if there is an HOA and whether the payments to the HOA are current. If the homeowner is delinquent on their mortgage payments, it is very common for them to be delinquent on HOA payments as well. These payments can accrue a lot of fees over short periods of time. So getting a statement from the HOA regarding amounts owed before closing will help you determine whether you want to pursue the transaction or not.
Contracts
There are a couple of contract options for a Sub2. I provide a one page contract on my website suitable for Subject To closings through my office. Or, you may use the TREC 1-4 Family Resale contract along with the assumption addendum and an additional Subject To Addendum (you will want an attorney to draft a Subject To Addendum as neither TREC nor TAR provide one). The most important thing to remember when getting a Sub2 under contract is to note in the contract that the sale is subject to the existing financing and that the financing will not be paid off at closing. You will also want to note that the buyer is not assuming the underlying financing. If you plan on assigning your Sub2, remember to put that the contract is assignable as well.
Other Notes
Other issues I get questions about are home owners insurance and taxes on a Subject To. In most cases, the parties choose to leave the existing insurance in place as it is paid through escrow with the mortgage. However, if you plan to keep the property for a long period of time or do some renovations, you may want to look in to a new policy that covers you and the previous owner as an additional insured. Property taxes on a Sub2 transaction are not escrowed at closing. Like insurance, taxes have been escrowed and are paid up through the date of closing with the mortgage payments. If the regular payments are delinquent, the reinstatement amount should cover any amounts for taxes that were not paid.
Along with property taxes/insurance, claiming interest for federal tax purposes is often brought up. While you and your seller should always seek the advice of a CPA, in general, the seller will only claim the interest they paid up through closing. Just because their name remains on the loan doesn’t mean they get to continually claim that interest when they aren’t paying it. Whoever is paying that interest, should be claiming it.
You will also want to ensure that you are complying with Texas Property Code Section 5.016- the seven-day notice rule. Under this section the seller is supposed to give the buyer a seven-day notice before closing that the loan will remain in place and allow them the same seven-days to rescind the contract and earnest money—penalty free. The seller is also supposed to give the lender a seven-day notice of intent to sell with current financing in place.
Speaking of the lender—it is important to talk to you seller about the possible of the note being called due for transferring the property. While it is uncommon, it does happen. It is a right the bank has to call the note due in its entirety for transferring the property without the consent of the lender. Having a plan with the seller should this arise is very important. Not only does it affect you as a buyer, but can affect the seller should the property ultimately be foreclosed because of it.
The Sub2 is one of the most basic acquisition techniques in real estate investing. Acquiring a Subject To property can allow you to rehab, hold, resell or owner finance the property. Knowing what it is and how to property complete a Sub2 transaction will benefit all investors greatly—whether you’re new to the game or a pro.
If you have any questions about Subject To transactions, or you want to get one closed, give me a call! I can get your Sub2 closed fast and will make sure you’re taken care of, from contract to close.
Disclaimer: the information provided in this article is for general educational purposes only and is not to be considered legal advice that anyone may rely on. Every situation is different and if you have a legal issue you should consult an attorney or related professional regarding the specifics of your individual circumstance. This firm does not represent you or anyone else unless it is expressly retained in writing to do so.