Why “Subject To” is One of Your Best Creative Finance Options In This Market

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With mortgage interest rates climbing from 3% to 8% over the last couple of years, housing affordability and security have become increasingly strained nationwide. According to a recent analysis, foreclosure filings in the United States have increased 3% quarter over quarter and 9% year over year.

Distressed homeowners are finding relief through strategic property deals with real estate investors through a mechanism commonly referred to as “subject to.”

What Does “Subject To” Mean in Real Estate?

“Subject to” in real estate refers to a situation where a property has an existing mortgage or lien that remains in place even after the property is sold to a new owner. 

When a property is sold “subject to” an existing mortgage or lien, the buyer takes over ownership of the property but does not assume responsibility for the debt associated with the existing mortgage or lien. The original borrower remains responsible for the mortgage, but the new owner takes possession of the property.

With increased home foreclosure filings, there is increasing availability of “subject to” properties available for purchase in today’s market. Both distressed homeowners and real estate investors can benefit from considering a “subject to” property deal.

If the existing mortgage on the property is at a lower rate (e.g., 3%), acquiring the property “subject to” that mortgage allows the investor to benefit from the lower-interest rate environment, thus saving money on financing costs compared to obtaining a new mortgage at the higher 8% rate. There is also the potential for higher investment returns if the property’s potential appreciation or rental income outweighs the costs associated with the property. 

Lastly, acquiring a property “subject to” an existing mortgage also requires limited upfront capital compared to obtaining new financing, making it an attractive option for investors with limited available funds or issues qualifying for a new loan.

From the homeowner’s perspective, transferring the property to a new owner provides relief from the responsibility of making additional mortgage payments and covering property maintenance costs. Avoiding foreclosure by selling the property “subject to” the existing mortgage can protect the homeowner’s credit score to some extent as well. 

Lastly, selling “subject to” allows the original owner to sell the property relatively quickly, without the need for extensive marketing or waiting for the buyer to secure new financing.

Benefits and Considerations of “Subject To”

With all the benefits of a “subject to” property, there are also considerations for investors regarding the risks associated with acquiring properties “subject to” existing mortgages. Investors may be prudent to approach these transactions more cautiously, conducting thorough due diligence to assess the financial health of the property and the original owner’s situation to mitigate potential risks.

One of the ways an investor should mitigate their personal risk when acquiring “subject to” properties is by consulting an insurance expert. A “subject to” insurance policy differs from regular landlord insurance due to the unique circumstances surrounding properties acquired “subject to” existing mortgages. If an insurance policy is not properly structured, the investor can face out-of-pocket expenses in the event of a property claim or personal liability. 

Here are some key distinctions to keep in mind.

Title considerations

A “subject to” insurance policy might need to include specific provisions related to the transfer of ownership while an existing mortgage remains in place. It might focus more on title insurance aspects to protect against any issues arising from the previous ownership or existing liens.

Liability and property coverage

While both types of policies include liability and property coverage, a “subject to” policy might need to address potential risks arising from the previous owner’s financial situation, such as missed mortgage payments or defaults impacting the property.

Mortgage default coverage

A “subject to” policy might require additional coverage to protect against the original owner’s default on the mortgage after the transfer of ownership. This coverage might be unique to properties acquired in such circumstances.

Specific language and clauses

“Subject to” insurance policies might contain specific language or clauses that address the transfer of ownership, the existing mortgage, and the responsibilities of both the original owner and the new owner (investor).

Legal and title review

Given the complexities of properties acquired “subject to” existing mortgages, these insurance policies might involve more extensive legal and title reviews to ensure adequate coverage and compliance with the terms of the property transfer.

Customization for unique risks

 A “subject to” insurance policy needs to be customized to mitigate risks unique to this type of property acquisition. This might involve tailoring coverage to address potential issues related to the existing mortgage or the financial status of the original owner.

In essence, while both regular landlord insurance and “subject to” insurance policies cover liabilities and property risks associated with rental properties, the “subject to” policy requires specific adjustments and considerations to address the intricacies of acquiring properties with existing mortgages. These policies aim to protect the new owner (investor) while navigating the complexities of the transfer and the ongoing mortgage obligations of the original owner.

Final Thoughts

It’s important to note that although we use the verbiage “subject to insurance policy” here, all investment properties are written on a dwelling form insurance policy, whether it is purchased “subject to” or through conventional methods. There is no such thing as a “subject to” insurance policy, just like there is no such thing as a midterm rental insurance policy. These are terms that investors use on how they purchase a property and what the planned occupancy will be for the dwelling. 

What is most critical is how the dwelling insurance policy is uniquely structured in order to provide the protection needed. It is up to the expertise of your licensed insurance agent to accurately write the policy to ensure you are properly protected. For that reason, it is critical to work with an agent who is familiar with this unique policy structure.

Steadily, America’s best-rated landlord insurance provider, specializes in “subject to” property insurance and has trained agents available to answer any questions on this unique policy type. Get a quote online in minutes at steadily.com, or call 1-888-966-1611 to learn more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.