Contracts for Deeds and Subject-To purchases are two creative ways that an investor can buy and sell real estate. We assist investors and homeowners close these types of transactions in a way that is honest, safe, and protects all of the parties to the transaction.
Contracts for Deeds
There are many reasons to avoid a contract for deed. One of the biggest reasons — which is often overlooked — is that the “seller” under a contract for deed remains the owner of the property. This means that the “seller” is responsible for ensuring the habitability of the property and may be liable for accidents that occur on the property. Moreover, in Missouri, a property can be foreclosed on in less than a month. As such, the purported benefits of a contract for deed are minimal.
With that being said, there are some instances where a contract for deed may be advisable for an investor, but it should be done the right way to protect both the buyer and seller. In order to do it right, the deed should be delivered and held in trust by an escrow agent, attorney or title company to be delivered once all of the payments have been made. Moreover, if there is an existing mortgage on the property, the payments should be made to a third party so as to ensure that the mortgage payments are being made and that the buyer is not at risk of losing the home and its interest in a foreclosure.
A subject-to transaction is when a buyer (usually an investor) purchases a property “subject to the existing financing.” These means that the mortgage loan will not be paid off at the closing. The buyer may pay the seller something over and above the amount of the debt, or the acceptance of the property with the lien may be the consideration.
Subject-to transactions are often misunderstood by non-investors and seen as predatory tactics. This is because there is a risk to the seller in that if the buyer doesn’t make a loan payment it will affect the seller’s credit. Moreover, the seller may be unable to obtain a loan for another property because the lien is still present.
These risks do not mean, however, that a subject-to has to be predatory. If the seller is fully informed of the terms of the transaction and is in a difficult situation — such as facing a foreclosure action — a subject to sale may make sense to the seller. Moreover, it particularly makes sense if the buyer is going to rehab and sell the property in a short time period. The use of the subject-to allows the buyer to pay a little bit more because he or she does not need to obtain other financing. This is a win-win for both the buyer and seller.
As noted above, the key to a subject to transaction is transparency and ensuring the seller understands the transaction. By working with a title company that works with investors and has experience with subject to transactions, you can feel comfortable that the terms of the closing will be fully explained to the seller — lowering the risks of later disputes over the terms of the transaction.