How To Do A Subject To Real Estate Deal (Step-By-Step Guide)
When you buy a property "subject to" the existing mortgage, you take ownership of the home while the seller's loan remains in place with the same interest rate, payment schedule, and terms. This is especially valuable in 2026, as interest rates have roughly doubled since 2021, allowing both buyer and seller to benefit from the original loan's favorable terms. A subject to deal involves key stages including initial seller qualification, property and loan verification, exit strategy selection, offer structuring, contract preparation with legal documentation, closing through a title company or attorney, and post-closing tasks like insurance transitions and payment setups. Each step builds on the previous to manage risks and ensure a successful transaction for both parties.
Subject To Real Estate Basics: How the Structure Actually Works
In a traditional real estate transaction, the closing pays off the seller's existing mortgage with the buyer's new loan, replacing the old loan with full lender awareness. In contrast, a subject to real estate deal transfers the deed to the buyer, who becomes the legal owner while the seller's mortgage remains in place and payments continue to the lender, often without their knowledge. The buyer and seller have a separate agreement where the buyer commits to making the mortgage payments, but this is only between them, not the lender. Unlike a formal mortgage assumption requiring lender approval, subject to deals bypass this, allowing the buyer to take over payments while the loan stays in the seller's name. Subject to deals differ from seller financing or wraparound mortgages, which involve new loans or modified terms; subject to simply means taking over existing payments without changing the loan. For example, if a seller owes $210,000 at 3.25% interest on a property worth $260,000 with a $1,150 monthly payment, a new mortgage at ~7% would cost about $1,650 monthly. By taking the property subject to, the buyer saves $500 monthly and gains $50,000 in equity. The key legal issue is the due on sale clause, which requires full loan repayment upon ownership transfer; though triggered by deed transfer, lenders rarely enforce it if payments are timely, as their main concern is receiving payments.
Step 1: Perform Initial Due Diligence on the Seller and Property
Start by gathering facts about the seller's situation, loan details, and property condition within 24-72 hours of first contact, often via phone or video call before visiting. Collect key information such as loan type (FHA, VA, conventional), principal balance, interest rate, monthly payment, arrears, and escrow details, while noting if the seller is behind on payments or facing foreclosure. Assess property details—beds, baths, square footage, year built, upgrades, and issues—to estimate valuation and repair costs, using MLS data or tools like Redfin and Zillow for comparable sales. Approach distressed sellers as a problem solver, listening for distress signals like divorce, job loss, relocation, illness, or inheritance, as motivated sellers need solutions and your role is to determine if you can provide one. To learn more about working with different types of motivated sellers, see 10 Proven Strategies to Find Motivated Sellers in Real Estate.
Get the Facts From the Seller Before You Visit
Qualify the opportunity with a structured seller interview by phone. Ask about purchase date and price, current loan balance and monthly payment, payment status (current, 30/60 days late), foreclosure notices, interest rate type, and any liens or judgments. Collect written proof later—mortgage statements, default notices, tax bills—to verify seller claims.
Determine the After Repair Value (ARV) and Exit Potential
ARV, or After Repair Value, is the projected sales price of a property after repairs and is crucial for determining your offer, justifying repair costs, and shaping your exit strategy. To calculate ARV, analyze three comparable sales within 0.5 to 1 mile of the property, sold within the last 90 to 180 days, with similar size and features. For example, if comparable properties sold for $285k, $295k, and $305k, the ARV would be around $295k after adjusting for differences. In subject to deals, it's important to ensure there is sufficient profit margin after accounting for repair and transaction costs; for instance, a $295k ARV minus a $220k loan balance and $25k in repairs leaves a gross margin of $50k before other expenses.
Get Your Initial Authorization Documents Signed
Before contacting the lender, have the seller sign a Third-Party Authorization (TPA) form to access loan details. This confirms principal balance, interest rate, payment status, late fees, and foreclosure milestones. Use electronic signing tools to speed this process, important when foreclosure deadlines loom.
Visit the Property and Evaluate Condition
Conduct a quick investor walkthrough to estimate repairs and identify major issues, focusing on exterior (roof, foundation, siding, windows) and interior systems (HVAC, electrical, plumbing). Document photos and videos for repair estimates and future reference.
Determine the Necessary Repairs and Costs
Categorize repairs as must-fix (code violations, safety hazards) and value-add (cosmetic updates). Create a repair scope with realistic 2026 market pricing, such as roof replacement costing $7,000-$10,000, kitchen refresh $15,000-$20,000, and flooring $3-$5 per square foot. Use contractor bids or online cost guides to avoid underestimating repair expenses.
Verify Seller Information and Identify Hidden Costs
Cross-check seller data to avoid surprises. Verify delinquent property taxes, HOA dues, utility liens, code enforcement fines, municipal liens, and judgments. Order a preliminary title search ($150-$300) to identify liens or encumbrances.
Step 2: Choose Your Exit Strategy and Reverse-Engineer Your Offer
Your exit strategy drives offer price, holding timeline, and cash flow. Common exits include quick resale or wholesale, where you assign or sell quickly to another investor for a fee; wholetail, involving minor cleanup and listing on MLS for retail buyers; fix-and-flip, which entails full renovation followed by selling for maximum profit; long-term rental, holding the property to generate steady cash flow and equity build; and lease option, combining rental income with a future sale opportunity. For example, with an ARV of $300k, repairs costing $30k, a loan balance of $220k at 3.25% interest, a monthly payment of $1,550, and rental comps at $2,100 per month, a flip might yield a thin profit after costs, whereas renting could provide positive monthly cash flow. To learn more about which exit strategy is best for your situation, read The Best Exit Strategies in Real Estate for Successful Investments.
Step 3: Structure and Present Your Subject To Offer
Your offer must clarify the purchase price (often near the loan balance), how arrears will be handled (amount to reinstate the loan), any cash to the seller, responsibility for closing costs, and ongoing obligations such as payments, taxes, and insurance. For example, if a property is worth $250k and the seller owes $225k with $4k in arrears, the offer might include paying the arrears, giving $5k cash to the seller, taking title, and maintaining $1,300 monthly payments. It is important to explain to the seller that the loan remains in their name and to clearly disclose the associated risks.
Disclosures and Explaining the Risks to the Seller
The seller must understand that a due on sale clause exists and could be enforced, meaning they remain legally liable for the loan even though the buyer takes ownership. The buyer intends to rent, resell, or profit from the property, and the seller's legal recourse is limited if the buyer defaults on the mortgage payments. It is essential to use a real estate attorney to draft a disclosure and acknowledgment form for the seller's signature to ensure they are fully informed of these risks. Additionally, considering third-party loan servicing can provide payment transparency and help protect both parties throughout the transaction.
Step 4: Prepare Your Paperwork and Work With Professionals
Subject to deals require specialized documents, including a purchase and sale agreement tailored for subject to transactions, a subject to addendum explaining the existing mortgage and payment duties, a limited power of attorney (LPOA) for lender communication and insurance management, disclosure forms about due on sale risks, and a deed transferring ownership. It is essential to hire a real estate attorney experienced in creative finance and work with title companies familiar with subject to closings, while avoiding informal "kitchen table" closings to reduce risks of errors and disputes.
Step 5: Finalize the Transaction and Close Subject To
At closing, the seller signs the deed, disclosures, and limited power of attorney, while the buyer signs the purchase agreement and any promissory notes. The closing agent issues a settlement statement detailing the flow of funds. The existing loan remains in place, with the mortgage lender continuing to receive payments as before. The deed is publicly recorded to establish the buyer's ownership, and payment systems such as automatic drafts or escrow accounts should be set up immediately to ensure smooth payment management.
Step 6: Critical Post-Closing Tasks to Protect Your Investment
Post-closing tasks are essential to secure your investment and include collecting keys, garage openers, and alarm codes, as well as re-keying all locks promptly. It's important to transition insurance from the seller to the buyer's landlord or homeowner policy, ensuring the mortgage lender is listed as mortgagee. Updating the lender's mailing address to the buyer's address and setting up reliable payment systems with proof of payments help maintain smooth ongoing management.
Key Risks in Subject To Deals (And How to Manage Them)
Due on sale clause enforcement: keep payments current; have backup financing
Seller's credit damage if buyer defaults: use payment servicing; provide payment verification; consider performance deed of trust
Insurance coverage failures: coordinate with insurance agents and attorneys
Regulatory compliance issues: work with local real estate attorney knowledgeable in creative finance
How to Find Good Subject To Real Estate Deals
Best suited for sellers with:
Pre-foreclosure status, behind on payments
Landlords wanting out of problematic rentals
Owners with little equity needing fast sales
Out-of-state heirs avoiding property management
Lead generation methods:
Pre-foreclosure lists from county data
Expired or withdrawn MLS listings
Direct mail or SMS campaigns to absentee owners
Is a Subject To Real Estate Deal Right For You?
Subject to investing suits those who can manage long-term payment responsibility, have limited access to traditional financing but strong cash flow skills, commit to education, legal guidance, and professional relationships, and maintain organized documentation and property management. Starting with well-vetted single-family properties in familiar markets is advisable, along with consulting local real estate attorneys and tax professionals before implementing strategies. Subject to investing rewards preparation, professionalism, and ethical practice; when done correctly, it allows acquisition without traditional financing, benefits from favorable loan terms, and creates value for distressed sellers, but done poorly, it risks legal liability and financial loss. To learn more details about how to successfully handle a sub-to deal, read Proven Strategies for Successful "Sub To" Real Estate Deals.