Subject-To Basics

I primarily wholesale and that’s what I encourage all of my students to do first because it’s the quickest way to build up capital with the smallest amount of risk. But what happens when you come across a motivated seller and there’s no equity in the home to get the price low enough to wholesale? Don’t fret! There might be potential to do a Subject-To, and in this article I’m going to explain the 30,000 ft. overview of how you can turn those wholesale duds into Subject-To deals.

Very simply, a Subject-To is a fancy way of saying you are taking the property “subject-to” the existing lien. Meaning they have an existing lien, typically a mortgage, where they still owe too much for you to make a low enough all cash offer. In order for these to work, as in nearly every deal, the seller has to have motivation to sell; otherwise they won’t be interested in this strategy. This is because when we take a property Subject-To, the existing lien will stay in the sellers name but Title will be in our name and we will own the property.

To put things very simply here is what a perfect Subject-To scenario could look like:

  • ARV (After Repair Value) - $200,000
  • Existing Mortgage Payoff - $150,000
  • Repairs needed - $0
  • PITI (Principle, Interest, Taxes, Insurance) - $1,000
  • Market rent in area - $1,550

So here is why this is a perfect scenario for a Subject-To. In a typical wholesale scenario we would need to get this property for about $125,000, but the mortgage payoff is $150,000 so that’s not an option because no seller will come to closing with $25,000. So instead we can take this property “Subject-To” the existing loan for $150,000 automatically giving us $50,000 in equity because the ARV is $200,000. On top of that, market rent in the area is $1,550 and the PITI is only $1,000 so we can cash flow $550/mo.

Almost no deal will be this simple but just remember everything is negotiable and can be altered to make a deal work if there is motivation. So get out there and turn those wholesale duds into Subject-To deals!

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