A Creative Real Estate Deal - Win-Win for Buyer and Seller

Seeing a "Subject To" clause in a Real Estate transaction is common. You will see this most of the time as part of the financing section of the contract. Typically it says that the Buyer will buy the house subject to them getting a mortgage of x amount of money at x% interest rate. If for some reason, buyer isn't granted the mortgage, the real estate deal is cancelled.

This same concept can be used as a win-win situation for both the buyer/investor and seller. The important part is both parties need to understand the obligations to one another and a real estate lawyer must be hired to write up the paperwork. You will not avoid most of the expenses of a real estate transaction like closing costs, title, recording fees, and all the other myriad of expenses that occur during real estate transfers so it isn't a cost free transaction.

While the transactions costs can't be avoided, there are advantages. The seller can sell their house at the asking price. The buyer/investor can often get the house with very little down payment. No one has to qualify for a bank loan.

By leaving out the traditional parties of a real estate transaction like real estate agents and loan officers, the transaction can be more profitable for the buyer/investor and the seller. Leverage is the key to successfully profit from real estate. Leverage is typically represented by the money you put into an investment. The less money you need to invest, the greater your leverage. "Subject To" clauses can make your leverage very high.

An example will clarify the creative use of a "Subject To" agreement

Linda and Bob Piper bought their home six years ago for $120,000. After 6 years, they owe about $105,000. The six years have been good to the value of the house as it is now appraised for $195,000. Linda and Bob have a large credit card debt they want to pay so they take out a second mortgage of $70,000. They pay off the debt, buy a car, take a vacation, pay some medical bills and 9 months later, the $70,000 is gone.

Three weeks after their money is depleted, Bob gets an offer for a higher paying job in a different city. Linda and Bob discuss the situation and decide to take the new position. They now need to sell their house.

The local real estate agents tell them that basically they will have to pay their commission out of their pocket as the amount of equity remaining in the house is not enough to pay costs and a commission. Bob is discouraged.

He reads an ad in the newspapers that says "We Buy Houses". He calls the number and finds that the person will buy the house but will only give Bob $140,000 for it. Well, that won't work.

In frustration, Bob and Linda advertise their house as a "For Sale By Owner". Their asking price is priced for a quick sale of $190,000. Everyone who responds to the ad offers a low ball offer. This upsets Bob greatly. One Day Tom calls and says to Bob that he will buy his home and pay $190,000. Bob's elated and they get together.

Tom explains to Bob and Linda that he needs to make a profit and will make an offer with a "Subject To" clause. The clause simply states that Bob and Linda will delay the profit on the house for two years while Tom takes over the mortgage payments.

Details of the "Subject To" clause:

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Keep the current mortgages in place for two years when the house will be sold at Bob's asking price plus 10% of whatever profit is made by Tom

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An escrow account will be setup to insure compliance by both parties

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The property to 'claimed' over to Tom, with the deed staying with the attorney until the house is sold to Tom in two years.

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Bob and Linda will not have to pay any mortgage payments

Tom rents the house to help pay the mortgage payments. At the end of two years, Tom sells the house for $230,000 and pays Bob and Linda's mortgage company the remaining $170,000 mortgage and 10% of the $60,000 profit Tom made. Everybody wins!