Subject To
Subject to – How and Why It Works
By Buyincomeproperty.com
Nov 24, 2005, 15:14

When a seller is extremely motivated, there could very well be a financial crisis involved. It could be that a divorce, illness or simply poor money management has finally taken its toll and lenders are threatening foreclosure. There could have been a death or even a move. Whatever the reason, a subject to sale may be the best option for both seller and buyer.

Very simply put, a subject to sale means that the seller allows the buyer to take over the payments on the mortgage with the understanding that the buyer owns the property at the end of the mortgage term. Sometimes a subject to sale includes a down payment, just as if the buyer were taking out a mortgage of his own. So why not just go through the steps to complete a new mortgage instead of using the subject to method? It could be that interest rates are higher than at the time of the initial mortgage, making it the subject to option in the best interests of the buyer.

But can subject to sales possibly be legal? Keep in mind that a mortgage contract will generally hold some clause that say the person taking out the mortgage can’t sell the property. However, lenders are not usually in the real estate business. If there have already been issues regarding late mortgage payments, it may be a relief to have someone in the house who is able to make timely payments.

There are some negatives to the subject to method of selling. The current owner is still responsible for the mortgage. That means that he’ll be responsible for payments if the new buyer doesn’t. Late payments reflect on the mortgage-holder’s credit history, not on the credit history of the new buyer. By the same token, the buyer doesn’t get credit for good payment practices.

Another potential problem with subject to sales is that the owner may ultimately be left with the property. A down payment will help ensure that the buyer has a vested interest in the property and will maintain it and stay, but even that down payment may not be enough to cover damages after the buyer moves out.

Still, a down payment and the subject to sale is typically preferable to renting because most people do tend to take pride in ownership. The same can be seen in subject to, lease to purchase and rent to own options. A renter knows he or she will simply move away at the end of the lease or the end of the month if there’s no lease. When a person enters into a subject to sale, he or she probably keeps in mind that they’ll be the one to pay for repairs if a leaky faucet isn’t fixed or the termite company doesn’t come by.

When the subject to option is used, both buyer and seller should get it in writing. A subject to contract will help both parties understand the details of the subject to sale, and to agree to the roles each will play in the subject to deal.