You found a deal where the seller is willing to let you take over their mortgage payments. The price is below market, the existing loan has a 3.2% interest rate, and the numbers look incredible on paper. Before you get too excited, you need to understand exactly what you're taking on and whether this specific deal actually works.
Subject-to financing can be one of the most profitable strategies in real estate, but it can also blow up in your face if you don't analyze it correctly.
What Subject-To Actually Means
Subject-to financing means you're buying a property "subject to" the existing mortgage. You take title to the property, but the original loan stays in the seller's name. You make the payments, you collect the rent, you get the appreciation, but the loan itself doesn't transfer to you.
This is different from a loan assumption, where you actually take over the loan and it becomes your responsibility in the eyes of the lender. With subject-to, the lender doesn't know (or at least doesn't acknowledge) that ownership has changed.
The seller's credit is still on the line. If you stop making payments, their credit gets destroyed and they could face deficiency judgments. This is why seller motivation and trust matter so much in these deals.
Why Sellers Agree to Subject-To Deals
Sellers don't do this because they're naive. They do it because they're stuck.
Common situations:
The seller's motivation tells you a lot about the deal. A seller in pre-foreclosure has different priorities than someone relocating for work. Understanding their situation helps you structure an offer that works for both sides.
The Numbers You Need to Analyze
Before you run any calculations, you need these figures from the seller:
Loan Information
Property Information
Deal Structure
Running the Cash Flow Analysis
Subject-to deals live or die on cash flow. You're taking on a payment obligation that you can't refinance out of easily. The property needs to cash flow from day one.
> Monthly Cash Flow = Rent - PITI - Vacancy - Maintenance - CapEx - Property Management
Use realistic assumptions:
If the numbers don't work with these reserves, the deal doesn't work. Subject-to is not the strategy to use on marginal deals because you have limited exit options if things go wrong.
Calculating Your Equity Position
Your equity position determines your margin of safety.
> Day-One Equity = Market Value - Loan Balance - Repairs - Closing Costs - Cash to Seller
I want at least 10-15% equity on day one for a subject-to deal. Some investors require 20% or more. The reason? You need a cushion in case property values drop or you need to sell quickly.
If the market drops 10% and you have 15% equity, you can still sell conventionally and pay off the loan. If you bought at loan balance with zero equity, a market correction traps you in the deal.
A Worked Example
Let me walk through a real analysis.
The Situation: A seller bought in 2020 for $285,000. They got a 30-year fixed loan at 3.25%. Their current balance is $258,000. They're relocating for work and need to move in 45 days. The home is worth approximately $310,000 in current condition. It needs about $8,000 in updates (paint, carpet, minor repairs).
The Loan Details:
Market Rent: $2,100/month based on comparable rentals.
The Offer: Take over the loan subject-to, pay the seller $5,000 at closing, handle all closing costs (~$2,000).
Total Investment:
| Item | Amount |
|---|---|
| Cash to seller | $5,000 |
| Closing costs | $2,000 |
| Repairs | $8,000 |
| **Total out of pocket** | **$15,000** |
Equity Position:
Monthly Cash Flow:
| Income/Expense | Amount |
|---|---|
| Gross rent | $2,100 |
| Vacancy (8%) | -$168 |
| Effective rent | $1,932 |
| PITI | -$1,653 |
| Maintenance (5%) | -$105 |
| CapEx (5%) | -$105 |
| Management (8%) | -$168 |
| **Net cash flow** | **-$99** |
This deal doesn't cash flow using conservative numbers. It's essentially break-even or slightly negative.
The Decision: Despite the great interest rate and decent equity, I'd pass on this deal or renegotiate. The cash flow is too tight. If I had a vacancy or needed a repair, I'd be feeding this property every month.
I might counter with no cash to the seller and ask them to contribute toward repairs. That would bring my total investment down to $7,000 and improve my cash-on-cash return, but the monthly cash flow still barely works.
The Due-On-Sale Clause
Every conventional mortgage has a [due-on-sale clause](https://www.law.cornell.edu/uscode/text/12/1701j-3). This clause says the lender can call the loan due in full if ownership transfers without their approval.
Will they call it due? Usually not. Banks want performing loans. If payments are being made on time, most lenders don't go looking for technical violations. But "usually not" isn't the same as "never."
Things that can trigger lender attention:
Ways investors mitigate this risk:
I want to be clear: this is a real risk. If the loan gets called and you can't refinance, you either need to pay it off or lose the property. At today's rates, refinancing a 3% loan into a 7% loan destroys your cash flow. You need to understand this risk before you do a subject-to deal.
Red Flags That Kill Subject-To Deals
Through trial and error, here are the situations I avoid:
Adjustable Rate Mortgages
The whole point of subject-to is locking in favorable financing. An ARM can adjust to market rates, eliminating your advantage. The 2.75% rate that looked amazing becomes 7.5% after the adjustment period.
High Loan-to-Value
If the seller owes 95% of what the property is worth, you have no margin of safety. Market values fluctuate. Repairs cost more than estimated. You need room for things to go wrong.
Motivated Seller Who's Too Motivated
Someone in pre-foreclosure with three months of back payments, liens from contractors, and a property that needs $50,000 in work isn't a deal, it's a disaster. The math rarely works when you're curing significant arrears.
Non-Owner Occupant Sellers
If the seller is another investor, ask why they're selling subject-to instead of conventionally. They know the game. If they can't sell traditionally, there's probably a reason.
Liens or Title Issues
Always get a title search. Junior liens, mechanic's liens, IRS liens, or judgment liens complicate subject-to deals significantly. You're taking title subject to ALL encumbrances, not just the first mortgage.
When Subject-To Makes Sense
Subject-to works best when:
The best subject-to deals often come from sellers who bought or refinanced during 2020-2021 when rates were historically low. They locked in 3% money that you can't get anywhere else right now.
Documentation Matters
Subject-to deals require more legal documentation than traditional purchases:
Work with an attorney who understands creative financing. A standard real estate attorney might not know how to structure these properly.
Running Your Own Analysis
Subject-to deals require more diligence than traditional purchases because your financing is locked in. You can't refinance easily if the numbers don't work.
Start with the cash flow. If the property doesn't cover its own expenses with conservative reserves, walk away. That low interest rate doesn't matter if you're writing checks every month to cover shortfalls.
Then verify the equity. Pull comps yourself, don't rely on the seller's estimate. Get inspection quotes for needed repairs. Calculate your true day-one position.
Finally, understand the due-on-sale risk for your specific situation. Do you have reserves to refinance at current rates if needed? Can you handle the hit to cash flow?
The [single-family rental calculator](/tools/single-family) can help you model different scenarios, including analyzing deals with existing financing terms. Plug in the actual loan payment as your debt service and see if the numbers work before you commit.