Risks Of Selling Your House "Subject To"

Monday, October 8, 2018 - by Michael Rogers

Are you considering selling your house to an investor buyer?  If you are thinking about it; a warning for you.  Do not sell it “subject to” you keeping the mortgage in your name.

So, what is selling your house “subject to” and who does this?  “Subject to" is when you sell a house subject to the existing loan staying in place. The buyer does not formally assume the loan and the loan remains in the seller’s name, but the property transfers to the buyer.  The buyer agrees to make the monthly payments on the seller’s loan going forward until the loan is paid off.

Why is this a risk for the seller?
The risk to the seller is that they transfer the property deed to the buyer, but they do not pay off the loan and clear the deed of trust.  The loan remains in the seller’s name and the seller no longer has legal ownership of the house.  That means the loan is still on the seller’s credit report and they are legally responsible for making sure it gets paid.  If the buyer doesn’t make payments on the loan, it will hurt the seller’s credit.  

Are you fully confident the investor buyer will make all payments timely and protect your credit?  I would not be.  Real estate investing has gotten popular in recent years and there are lots of “wanna-be” investors that are currently buying properties that are not experienced and will not be around in a few years.  If they purchase your house for cash, there is nothing to worry about.  If they are buying it “subject to” you keeping the mortgage in your name, your financial future is tied to the investor buyer’s future behavior.

Another issue is when the seller goes to apply for other loans in the future, the loan will show up on their credit report.  The payment on the loan (that the seller is no longer paying) will be included as a monthly expense when creditors decide if that seller can afford a loan for a car or new house.  That can have a negative impact on the ability to get future loans.

Who would sell their house “subject to”?
Given the risks, who would ever consider selling their house “subject to”?  The typical seller is someone who has a mortgage and is very motivated to sell their house.  They may be near foreclosure, going thru divorce, moving, or just needing to get rid of their house.  This is option is offered by a small percentage of investor home buyers.  

Most real estate sales are cash transactions.  This means the buyer brings cash to the closing (either their own cash or cash from a new mortgage on the property) and pays off the seller’s loan on the property.  In short, the seller sells their house, pays off their mortgage and are totally done with the house and mortgage.  In a “subject to” sale, the investor buyer is not having to bring cash to closing or get their own loan.  The investor can save money on financing costs and will typically offer a higher price if they can buy the house “subject to”.  The higher offer price is often appealing to a motivated seller that is looking for a quick sale and doesn’t have much cash if they are upside-down on their mortgage.

Conclusion
Selling a house “subject to” is not always bad option for every situation.  For a seller that is facing foreclosure, that has a very credible buyer (perhaps a family member), this option may make sense to provide temporary financing for the buyer until they can get their own loan on the house.  However, in almost all cases it is best to sell your house for cash and pay off the mortgage so that liability is no longer attached to your name.    

For more information on the pros and cons of selling a house to a home investor, view articles at www.sellmichaelyourhouse.com/blog



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