Subject-to is an astoundingly powerful tool in the arsenal of smart real estate investors. This strategy gives real estate investors the ability to finance the acquisition of a property's legal title by picking up the payments on an existing mortgage. This technique completely eradicates any property buying limits imposed by the investor's own credit.



But even though Subject-To real estate investing is absolutely legal in most of the United States, you certainly should be aware of some legal problems investors can face when not behaving with sufficient care. I've observed that there are 7 primary legal problems you'll face as a subject-to real estate investor - unless you're careful:

1. Misrepresentation of Mortgage Terms & Other Liens. Reserve the right to terminate the agreement in the event that the owner fails to disclose all encumbrances against the property along with the terms of those encumbrances. (Remember, all liens become your problem after you accept title to the property.)

2. Errors In The Loan Amount And Outstanding Balance. It's very common for home owners to give inaccurate information when it comes to their home loan balances. Usually it's accidental, but the effect can be disastrous if the home owner owes significantly more against the property than you expect.

3. Never "Assume" The Debt. The loan you're taking over in the subject-to transaction almost certainly isn't even "assumable", but you should never put language in your contract to suggest that you are assuming it anyway. In fact, you should specifically state that you are NOT assuming the debt from the seller.

4. Due-On-Sale Notice. Always remember that you must tell the seller that their mortgage contract probably "prohibits" subject-to transactions, and that as a result the property could end up in foreclosure even if you make all payments 100% on time. We all know this is almost certain not to happen, but if it does, this notice can save you a lot of trouble.

5. Specifically Address The Pay-Off Date. Include language that indicates when you will satisfy (pay off) the existing mortgage(s) and lien(s) against the property. If you have no intention of limiting your time to satisfy the mortgages and liens, include precise language to that effect so that no confusion exists at a later time.

6. When Do You Begin Payments? Include in your agreement the date when you become responsible for making payments. Generally that will be on the day of closing, but it could be before or after.

7. Legal Review Is Required. Don't even think about doing a subject-to real estate investing deal without having your attorney review it. Similarly, require the seller to have his or her attorney to review the agreement before closing.

Only a fool would deny that Subject-To transactions can be among the most advantageous forms of creative real estate investing. Just be sure to comply with these pointers to keep yourself out of trouble!