Understanding "Subject To" Offers and Why You Should Avoid Them
Are you thinking about selling your home? In the current market, some properties are taking longer to sell, which can make homeowners anxious about quick sales. This stress is heightened in situations like income changes, job relocations, divorces, or other major life events. While many legitimate investors are searching for good deals, there are also inexperienced or unscrupulous buyers looking to exploit vulnerable sellers.
A concerning trend in the real estate market involves "Subject To" offers, a method promoted by influencer investors on social media platforms such as Instagram and TikTok. Although this approach is legal in most states and might sometimes benefit distressed sellers, it has increasingly become a tool for scammers.
"Subject To" transactions can be risky for homeowners, sellers, and real estate agents. Let’s explore what "Subject To" offers entail, why they can be problematic, and why you should approach them with caution.
What is a "Subject To" Real Estate Transaction?
A "Subject To" transaction involves a buyer, usually an investor, purchasing a property while the existing loan remains in the seller's name. Essentially, the buyer takes over the mortgage payments, and the deed transfers into their name, but the seller's name stays on the original loan and financial liability. This arrangement is often pitched as a way for overburdened homeowners to escape their mortgage obligations and receive some cash in the process. "Subject To" investors tend to look for homes that have been on the market for a while and may be overpriced. Recently, they have been targeting homes purchased during the market peak in 2021-2022, knowing that many homeowners have low equity but very low-interest rates.
Risks Associated with "Subject To" Transactions
Potential Scams: Some unethical investors might exploit "Subject To" transactions by taking control of the property, collecting rent without making the mortgage payments, and allowing the loan to default. They rely on the lengthy foreclosure process, leaving the seller with a damaged credit score and a foreclosed property. In extreme cases, scammers might strip the property of its appliances, carpets, fixtures, and other finishes.
Seller’s Liability: After selling the property, the seller remains liable for the mortgage. If the buyer stops making payments, the seller's credit score will suffer, impacting their ability to secure future loans. The seller might also face late fees, penalties, or foreclosure if the buyer defaults. Additionally, a buyer or tenant could become a squatter, making it difficult for the seller to reclaim the property.
Credit Impact: The seller's credit score is at risk if the buyer fails to make timely payments. While on-time payments could improve the seller's credit score, this benefit depends entirely on the buyer's reliability.
Due-On-Sale Clause: Most mortgage contracts have a Due-On-Sale Clause, allowing the lender to demand full repayment of the loan if the property is sold. In a "Subject To" transaction, this clause is triggered by the transfer of the property. If the lender enforces this clause, the seller must pay off the entire loan, jeopardizing both the seller's credit and the buyer's title. Scammers may falsely assure that lenders will overlook the transfer as long as payments are made, but this claim is unfounded.
Mortgage Impact: Since "Subject To" purchases typically occur without notifying the lender, many sellers fail to update their mailing address with the lender. As a result, any missed payment notices or default letters are sent to the property, and the seller may remain unaware for months that the new owner has not been making payments.
Alternatives to "Subject To" Transactions
Assumption of Mortgage: Unlike "Subject To" deals, an Assumption of Mortgage involves the buyer formally assuming the seller's existing loan. This process requires lender approval, ensuring that the buyer is creditworthy. Once approved, the seller is released from the mortgage, eliminating the associated risks. Learn more about Assumable Mortgages.
Conclusion
While "Subject To" offers might appear to be a quick solution for homeowners in distress, they come with considerable risks. Sellers remain responsible for the existing mortgage, which can hinder their ability to purchase another home due to the lingering debt. Additionally, if the buyer defaults on the mortgage payments, the seller's credit score can suffer significant damage. Moreover, the Due-On-Sale Clause found in most mortgage contracts can result in lenders demanding immediate repayment of the loan.
There are legitimate investors who use this method to create mutually beneficial arrangements, but the difficulty lies in distinguishing between honest investors and scammers. Therefore, if you are considering a "Subject To" offer, it is crucial to seek legal counsel to understand all potential risks and to protect yourself.
Approach "Subject To" offers with extreme caution. Consulting with a trusted real estate attorney will help you fully grasp the implications and shield yourself from potential scams. In the intricate realm of real estate transactions, safeguarding your financial well-being and peace of mind should always be a priority.
