How to Do a Subject-To Real Estate Deal
A subject-to real estate deal means you purchase a property while leaving the seller's existing mortgage in place. You take ownership via deed transfer, make the existing mortgage payments, and benefit from the seller's loan terms (often at lower interest rates than currently available). This guide walks through the complete process.
When subject-to makes sense
- Seller has a low-interest mortgage (3-5% from 2019-2022) worth preserving
- Seller has little or no equity (cannot sell conventionally after commissions)
- Seller is behind on payments but not yet in foreclosure
- You plan to hold the property as a rental (cash flow improves with below-market rates)
Step-by-step process
Step 1: Find a subject-to candidate
Target sellers with low-rate mortgages who are motivated by situation (not price). See our guide on finding subject-to properties for specific sourcing strategies.
Step 2: Verify the mortgage details
Get the seller's mortgage statement or authorization to contact the lender. You need: current balance, monthly payment (PITI), interest rate, loan type, and remaining term. Verify there are no second mortgages, liens, or judgments.
Step 3: Structure the deal
Common structures include:
- Full subject-to: You take over all payments, seller walks away. Works when seller has zero or negative equity.
- Subject-to with seller carry-back: You assume the existing mortgage and the seller carries a second note for their equity. Combines two creative financing strategies.
- Subject-to with cash to seller: You bring some cash to closing for the seller's equity (smaller amount than a conventional purchase).
Step 4: Execute the paperwork
- Purchase agreement: Standard contract with subject-to addendum specifying the existing loan stays in place
- Warranty deed: Transfers ownership from seller to you (or your entity)
- Authorization to release information: Lets you communicate with the seller's lender
- Power of attorney (limited): Optional, allows you to communicate with lender on seller's behalf
Step 5: Set up loan servicing
Use a third-party loan servicing company to collect your rental income and make the mortgage payments. This protects both you and the seller — the seller can verify payments are being made, and you have documented proof.
Step 6: Obtain insurance
Get a new landlord insurance policy in your name (or your entity's name). The existing policy is in the seller's name and will not cover you. Work with an insurance agent experienced in investor policies.
The due-on-sale clause
Most mortgages include a due-on-sale clause that technically allows the lender to call the full balance due if ownership transfers. In practice, lenders rarely exercise this clause as long as payments are current — they prefer receiving monthly payments over the cost and risk of calling the loan. However, this is a real risk you must accept.
Protecting yourself and the seller
- Third-party servicing: Documented proof that payments are being made on time
- Seller protections clause: Include provisions for what happens if you cannot make payments
- Entity protection: Hold the property in an LLC to separate from personal assets
- Exit strategy: Plan to refinance into your own loan within 2-5 years
Legal disclaimer: Subject-to deals involve complex legal and financial considerations. Work with a real estate attorney experienced in creative financing transactions in your state. This guide is educational, not legal advice.