What are the Risks of Buying a Property Subto?
I love creative financing.
I talk about it, I live it, I might even breathe it and not even know it.
I love it because it opens up a lot of opportunities for people not only starting in real estate investing, but seasoned investors can use it to build up their portfolios.
More than that, it also gives distressed homeowners another avenue to sell a home or even buy another one.
Subject to or subto is probably one of the most beneficial ways to use creative financing, but there can be some risks involved when doing so.
Now, the great thing is these risks can be avoided if you know what the risks are and how to approach them should they come up.
2 Big Risks of Buying a Property Subject To
So what are the risks, the big risks of buying a property using subject to?
Well, there’s actually two really big risks when you’re doing subject to on a property:
Due on sale clauses
Due on Sale Clause
What exactly is a due on sale clause?
Due on sale clauses are agreements where a borrower is required to pay the remainder of their mortgage loan off immediately during the sale or transfer of property.
This has to be done before we as the buyer can take ownership of the property. In subject to, we’d be taking on the payments.
Now, the best way to avoid any issues with due on sale clauses is to make sure you have these 3 crucial things:
Guys, you would be surprised at how many people get caught with a due for sale clause because they didn’t do one of those three things correctly.
A perfect example is, when I first started in this business, I had a business partner whose only job was to make the payments on any house that we owned.
Well, unknown to me and my team, he wasn’t making payments and we ended up getting a due on sale from the bank on a property we had just bought.
Turns out, he hadn’t been making payments for 3 months.
We’re a lot better at making sure all of our Ts are crossed and Is are dotted, but these three steps are extremely important.
This is another risk when it comes to buying property subto, but this is affected more by the paperwork that you do.
Here’s a good example – someone I knew, not one of my students, but just someone in the same space, bought a house subto about five or so years ago.
After having the house for that long, he decided he wanted to sell it. But here’s the thing:
Because he hadn’t done his paperwork correctly and didn’t include a power of attorney clause, when he tried to go to the bank to refinance and sell the property, he couldn’t.
And unfortunately, the seller who had originally sold him the property had passed away, so there was no one to give the authorization to the bank.
Those are two of the biggest risks related to subto buying.
As you see, it all comes down to making sure that you’ve done your paperwork right; this means finding partners and other resources to ensure your contracts and everything is on the up and up.