Is "subject to" on a house or owner financing illegal?
Nobody wants to make themself poor to live in a house.
I don’t want to spend any money to get a loan from a bank and then carry around a major liability as the economy changes. So, instead, I’m creative about getting investments.
I have a slew of creative ways to get a property, but my favorite ways are owner financing and subject to.
Both of these methods are perfectly legal, but they can also be used in ways that are questionable or even illegal. That’s why people can be wary of them.
What’s owner financing?
Basically, owner financing is where the owner of a property agrees to act as the lender for me, the buyer. Instead of me having to go and get a mortgage from a bank, the seller agrees to hold the mortgage and receive my payments.
This is the perfect option for buyers who have trouble qualifying for traditional financing like entrepreneurs, people who don’t want huge liabilities, or for sellers who want to sell their property quickly and make more money without the hassle.
What’s subject to and is it legal?
"Subject to" refers to a situation where the buyer agrees to take over the existing mortgage on a property, without formally transferring the mortgage into their own name. The buyer makes payments to the lender as agreed, but the seller remains the legally responsible party for the mortgage.
Sellers and buyers worry about the risks here because some banks have “do on sale” clauses. I have a whole bunch of trainings on how to deal with these clauses, so there’s no worry there.
But the question I hear most often from sellers is they worry about what happens if I don’t make the payments that they’re still technically on the hook for. The answer is in the contract.
I suggest writing up a contract between buyers and sellers that says that if you miss the payments, they get the house back. This makes it way less risky for sellers and makes it a ‘win-win’ for them because they get ownership of a property that you’ve paid off.
It’s like a potentially free house for them. That’s not going to happen because we cash flow those properties and make sure they’re paid off on time, but writing up a contract this way can help ease the tension of everyone involved.
We want to work with home sellers. We don’t want them to feel backed into a corner like this is their only option. We want them to see what they can stand to gain and pay them what’s fair.
Using creative financing just makes it fair for everyone involved.