⚠️“Subject To” Closings: What Doesn’t Get Discussed

“Subject to” transactions often show up as creative solutions - one party sells, another takes over payments. But this structure creates layers of risk that aren’t always obvious at the outset. Let's break down where issues tend to arise and how agents can navigate these conversations carefully and professionally.

In a “subject to” transaction:

• Title transfers

• The loan stays in the Seller’s name

• The lender was not part of the decision

The investors making these offers often tell the owner there is no downside. If they are asked about specific risks for the Seller, they assure the Seller that they won't really happen. There are risks. It is a bad idea for the owner and a horrible idea for a real estate professional to tell their Seller client that this is a good idea.

What Could Possibly Go Wrong for the Seller?

This is a Default of the Mortgage

The lender may:

• Demand full payoff of the loan

• Refuse to accept ongoing payments under the new structure

• Initiate foreclosure if the loan is not satisfied

These transactions violate the Due on Sale clause in standard lender security instruments (Security Deed, Mortgage, Deed of Trust) that are recorded in connection with all residential mortgages with institutional lenders.

Even with FHA and VA loans, which are assumable by a Buyer, the lender must be notified and must approve the Buyer which does not happen in "subject to" transactions.

The Seller’s Ongoing Liability Doesn’t Go Away

The Seller is no longer on title—but is still fully responsible for the loan.

If the Buyer:

• Misses payments

• Pays late

• Stops paying entirely

The lender looks to the original borrower—not the new owner. Late or missed payments will be reported on the Seller's credit report.

If foreclosure occurs and the property does not cover the debt, the lender may pursue a deficiency judgment. They can enforce their judgment through:

• Wage garnishment

• Bank account levies

• Tax refund offsets

• Asset seizure

This creates a long-term financial exposure for the Seller tied to a property they no longer own or control.

What should an Agent say and do when a Seller gets a "subject to" offer and is seriously considering taking it?

🔹 Explaining What “Subject To” Means

“In a ‘subject to’ transaction, you would transfer ownership of the property, but your existing mortgage would stay in your name. That means the loan doesn’t get paid off at closing.”

🔹 Highlighting Ongoing Liability

“One thing to be aware of is that even after the sale, the lender still looks to you as the borrower. If anything happens with payments, it would still be tied back to you.”

🔹 Addressing Payment Risk

“If payments are late or stop, the lender would still contact you, since the loan remains in your name. Late payments will be reported under your name to the credit reporting agencies.”

🔹 Introducing Due-on-Sale

“Most mortgages include something called a due-on-sale clause, which allows the lender to call the loan due if ownership transfers. That doesn’t always happen right away, but it is something to factor into the decision.”

🔹 Setting Expectation Around Control

“After closing, you wouldn’t control the property anymore, but your name would still be tied to the loan. That’s where a lot of the long-term considerations come in.”

🔹 Staying in Lane & Encouraging Professional Guidance

“This type of transaction goes beyond a standard real estate structure, so it’s important to have a real estate attorney review everything and explain how it applies to your situation specifically.”

🔹 Reframing as a Decision Not a Recommendation

“There may be situations where this structure makes sense for someone, but it really depends on your goals and your comfort with the risks involved.”

🔹 Slowing Down the Process

“This isn’t something you need to decide on quickly. Taking a little extra time now to fully understand it can help avoid surprises later.”

🧭 WHEN A SELLER IS LEANING TOWARD YES

🔹 Clarifying Next Steps

“If you’re considering moving forward, the next step would be to have an attorney review the full structure and make sure everything is clearly documented.”

🔹 Documentation Emphasis

“These types of agreements rely heavily on how everything is written, so making sure the terms are clear and complete is really important.”

🔹 Broker Involvement

“I’d also like to loop in my broker so we can make sure we’re handling this the right way from a process standpoint.”

There are downsides for the Buyer too

Seller Bankruptcy

Many investors learn about this creative way to get started building their real estate empire from watching YouTube videos and listening to podcasts. I have yet to hear any of these tutorials explain to the investor what would happen if the Seller later files for a bankruptcy.

• The mortgage will be listed as a debt.

• The lender is listed as a creditor.

• The property is considered an asset, a secured asset

• The court can give the lender Leave to Foreclose even if the payments are being made because the borrower defaulted on the loan by violating the Due on Sale clause, often an incurable default.

• The bankruptcy trustee may assert control over the property to sell to satisfy not just the mortgage debt, but other debts of the bankruptcy

The Buyer will receive no title insurance coverage for the "subject to" issues

Title insurance policies are designed to protect against certain risks - but not all risks.

In “subject to” transactions, policies often include specific exceptions for:

• Due-on-sale enforcement

• Creditor rights enforcement

• Bankruptcy-related claims

• Wrap or similar financing structures

Issues for both Buyer and Seller

Insurance and Loss Payee Issues

The lender will require an insurance policy in their borrower's name with the lender listed as a loss payee.

The Buyer will not be listed on this policy.

• Who will pay for the insurance policy the lender requires?

• Who will the insurance company issue a check to if there is a claim?

• Will the insurance company pay anyone when they realize their insured (the Seller) no longer owns the property?

• What will the lender do when they are not paid for their losses?

Mortgage Fraud?

Transferring property in violation of loan terms can raise serious legal questions.

This is particularly true where:

• There is intentional concealment

• Documents are structured to avoid lender awareness

This is potentially mortgage fraud, a felony at the state and federal level.

For agents, this is a clear boundary line:

• Recognizing when a deal moves beyond standard real estate practice

• Acknowledging the Seller should consult with an attorney before entering into a "subject to" transaction and it is unlikely that an attorney representing the Seller would advise that they proceed

⚠️ REALsmart Reminder

Creative deal structures can create real opportunities—but they also come with real risk.

Make sure the structure is fully understood, properly documented, and reviewed by the right professionals before moving forward.

I would personally NEVER advise a client that this type of transaction is worth the risks. I have received calls over the years from Sellers who are trying to get the property back because payments are not being made and their credit is getting trashed. They often describe what was "supposed to happen." I tell them that they will need to contact a litigation attorney. They gave away the asset, maintained the debt, and trusted a stranger with their credit.

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If this topic matters to your business, you’ll want to listen to a closing attorney and REALTOR® break it down.

Cheryl Conner King

Founder & Instructor

REALsmart Real Estate School

Attorney | REALTOR® | CE Instructor

📍 Based in Georgia | Teaching Statewide