Subject To Transactions: Can You Get Out?

Recently, someone asked me whether–as the previous owner–it’s possible to get out of a “Subject To” (or “Sub2”) deal.

First, let me explain what a “Subject To” deal is. Suppose you own a property and you just want to get out. More precisely, you just want to get rid of the mortgage. You don’t want to (or can’t) pay it any more.

An investor comes along and makes this offer: “Deed the house to me. Keep the mortgage in your own name. However, I will pay the mortgage for you. I’ll make up any missed payments. That will relieve you of the burden of paying the mortgage, and will help your credit. Then, in a year or two, I will refinance the property and your mortgage will terminate; I’ll have a mortgage in my name.”

The key to a “Subject To” is understanding that there’s a difference between a deed (or title)–that’s the document that conveys ownership–and the mortgage, which is the IOU to the bank. Usually, when you buy a house you get the deed AND a mortgage. But they’re two separate things. It’s possible to own a property without a mortgage–let’s say you paid all cash, or you’ve paid the mortgage off. It’s also possible to deed the property to someone else and yet still have a mortgage.

In a “Subject To,” you’ve deeded the property to someone else, but you’re still responsible (to the bank) for the mortgage. The buyer or investor promises to make those mortgage payments, but legally you’re the one responsible for them. It’s called “Subject To” because the buyer has bought your property subject to the existing mortgage.

“Subject Tos” often work out well. But it can be risky for the seller, especially if the buyer or investor doesn’t make your mortgage payments.

Back to the main question: If you’ve sold your house “Subject To,” what can you do if you want the mortgage taken out of your name? In the case of the person who asked me, the person wanted to buy another home. Problem was: The person still was responsible for the mortgage on the first home. It would be very difficult for him to buy a second home, and be responsible for a second property’s mortgage, when he still owed money on the first property’s mortgage. 

My answer: 

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The mortgage is still in your name. However, the investor owns the house. Basically, the only way out is for the mortgage to be put in someone else’s name. Among the options:

(1) The investor could refinance, putting the property into his name. (Not likely to occur, but you can ask. Many investors don’t like spending their own money. And in today’s economic climate, it’s very, very difficult for investors to own multiple properties–the limit in many cases right now is four–with the mortgages in their own names.)

(2) The investor can sell the property to someone else–either the current tenant or to someone else. (The investor might like to do this, but that depends on whether there’s any equity in the property. It depends on whether it fits into the investor’s business model, and whether the investor can find a buyer for the property at the right price.)

So, contact the investor and explain your situation.

The upside is that, I assume, the investor has lived up to his end of the deal. That he’s been making your payments on time. And, therefore, that your credit history–at least regarding the mortgage–is good. So there’s definitely been some value to the Subject To. Plus, I’m assuming you were in financial difficulty when you did the deal, and the housing portion of the burden has been eliminated. And that’s a good thing, too.

One other possibility–more creative–is for the investor to put the property into a land trust. For a variety of reasons, you’d retain 10% ownership in the trust; he’d have 90%. The advantage to you is that when the property’s put into the trust, though the mortgage remains in your name, there are various ways to communicate to lenders that the trust is responsible for the mortgage. (This isn’t the way it’s usually done, but that same question comes up when land trusts are used to acquire property and the seller wants to know whether he’ll be able to buy a new property. Answer: There often is.) For more information on that option, go to (or suggest your investor go to) http://www.landtrust.net. There are also other advantages for both you and the investor.
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Bottom line: “Subject Tos” can work out well for both the seller and the buyer. But you have to understand what you’re getting into. And you also have to look ahead and plan your “exit strategy.”

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One Response to Subject To Transactions: Can You Get Out?

  1. TC says:

    You could also do a lease option deal. Lease with the option to buy the home from the seller. Another investor would understand that you have another mortgage Subject To and wouldn’t care most likely.

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