While subject-to deals have risks for both buyer and seller, subject-to risks are easy to assess
A subject-to deal brings benefits to both buyer and seller, however both parties must put some skin in the game. Risk is a word that makes many people uncomfortable; it means different things to different people.
But risk is also the currency you gamble with when you want to improve your situation in life. You can’t just sit there, and you can’t go backwards. Most upward movements can’t occur without taking some sort of risk.
As an investor, every day I weigh the risk of spending money or signing a contract on a property I hope to make a profit from. This is how my business makes money. I look at a situation and make my best guess as to whether I can turn a profit given the time, money and resources I put in. These include repairs, bank fees I may absorb, closing costs at a title company, marketing, employees, commissions, etc.
As the seller, my risk includes the equity I already have in my house, my ability to make future house payments, my level of satisfaction with the neighborhood and the house itself, the trouble of relocating myself and my family to a new place, the cost of listing the house, and paying REALTOR® commissions, etc.
No matter the real estate transaction, there is risk involved
Because you rarely hear it spelled out directly, here’s a short explanation of the subject-to risks both the buyer and seller assume in a typical deal. Assuming the subject-to transaction is legal in your state (it is legal in Texas), here’s the break down of the worst case scenario for each party:
Seller’s subject-To Risk:
- You transfer the deed to your house, losing any equity you may have had.
- You may need to move out and into a different property. (Of course, this may be a good thing, too!)
- Your buyer neglects to make future payments to the lender. Since you are still ultimately liable for the loan, your credit could take a hit. (Note: Investors are usually the buyers of subject to properties, however; because they are not “average” buyers, they can often purchase home for the full amount outright.)
- The bank could decide to call the balance of the loan due. (This is highly unlikely, given that it is receiving regular payments!) If your buyer either can’t or won’t pay the full amount of the loan, again your credit is dinged.
Buyer’s subject-To Risk:
- You may have to catch up several months of payments to the lender at closing.
- The house may be underwater or the market may take a long time to recover (making your payments a long term expense).
- The lender decides to exercise the due on sale clause, forcing you to pay off the loan in full.
- You could lose all the equity you put into the home (not only payments, but any repairs and maintenance you provided, too.)
- Insurance costs may increase, as you change the policy to a landlord policy
- If you do not actually live in the house, the new renters (even the former owners) could destroy the property, leaving you with a mess.
All Subject-To Deals Are Not The Same
If you are a homeowner getting behind on your house payments or just looking for some alternatives to sell your house fast in San Antonio, it can be difficult to get the real story on creative financing alternatives (subject-to included) and the risks involved. Facing foreclosure, the homeowner may suspect that the truth about about creative financing deals looks a little too good to be true.
Armed with information, you can ask the right questions. Knowing the “worst-case” gives you the forethought to make certain that the buyer in your subject-to deal is in a position to deal honestly with you. Finally, you should feel comfortable that your credit stays intact and that your buyer would be able to purchase your home outright in the unlikely event that the bank calls in the loan on a subject-to deal.
I hope this post clarifies the subject-to risks. I’m happy to answer any questions you may have about subject-to deals to solve a financial crisis for you and your family. I’m happy to explain the process, describe a typical time frame for executing a deal, and discuss details and requirements of your situation.
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