Buying or selling a home with a “Subject to” clause
Not sure if you heard about this. It is a growing trend and starts happening when markets change.
Here are the basics:
You want to sell your home and a buyer comes in and gives you a down payment of sorts. $5000 or more normally, but there are people trying to do it for nothing down.
Then you sell them your home “subject to” a mortgage that you have.
In other words, you keep the existing note on the property, and you sign over the deed or title to the buyer. Now they own the home, and you are responsible for making the payments.
In every article or example I have seen, there has been little, if any, benefit for the seller. This alone should make you be concerned.
Hopefully you can already see what’s wrong with this – especially from a seller’s perspective! You are signing over the home and unless you were crafty, you don’t have any way to collect if they don’t make payment. Here is a list of some things that can go wrong.
- They stop making the payment – ruin your credit.
- They stop making the payment and you make it – on a home you don’t own.
- The lender does a due in full action.
What if nothing goes wrong and they make payments on time every month? What’s wrong with this? Well, the first thing to say is, it is still on your credit report, and you will have to qualify for a new loan with those payments. AND you most likely have no instrument in place to force them to pay off the loan. This means that you will have that on your credit until they sell or payoff the loan that is in your name.
Why would someone sell their home like this?
Almost always out of desperation. Usually, they are signing away a lot of their equity when they do this. Otherwise, the buyer would not be interested. Now sometimes a crafty buyer might think there is some upside potential outside of instant equity. Like they can get a positive cash flow on a rental. Or maybe some simple improvements are going to make the home worth more. Another benefit for the buyer is they can sometimes jump in a few years into the payments and skip some interest heavy payments that are in the beginning of a loan.
In my opinion, there is virtually no time to sell like this. If you have the equity sell it legit. If you don’t want to use a real estate agent, don’t. It may save you some commissions. It may cost you on your price a little or it may not. But at least you are not signing over a house to someone while you are still on the hook.
What’s an alternative?
Carry a note. If you are in a good equity position, have the buyer get their own loan and you carry a note. A second mortgage gives you some legal teeth. And you’re not on the hook for a mortgage that someone else is supposed to pay.
You might be asking, “well, what if they can’t qualify for a loan”. Here’s a perfect reason to not sell them a home using your credit.
If after all this, you still want to do it, consider these things:
- Use an attorney to protect yourself.
- Get a credit report.
- Get an appraisal or a CMA (market analysis) to verify value.
- Have a conversation with a real estate professional.
The moral of the story is don’t be in a hurry to sell, so much so that you don’t do some of the simple things to protect yourself.
If you are thinking of selling on this kind of a deal, give me a call. I will go over it with you 100% free of charge. We will look at the details and see if there is a viable deal to be had, or we will see if the deal is solely in favor of the buyer. Learn more about benefits of today’s Market (For Buyers)
Again, I will review your options for you totally free. See if there is a benefit to you and to the buyer to make it a win-win situation. This could help you avoid getting taken advantage of.
Redwood Real Estate offers all consultation regarding the reals estate market. Call now for free discussion.