Common Mistakes Investors Make with Subject-To Contracts In Dallas

Subject-To real estate deals can be a lucrative investment strategy for savvy investors looking to acquire properties without obtaining traditional financing. In a subject-to transaction, an investor takes over the mortgage payments on an existing property, assuming ownership while leaving the mortgage in the original owner's name. However, despite the potential benefits, there are common mistakes that investors must be cautious of to ensure a successful and profitable subject-to contract. In this article, we will explore some of the top mistakes investors make when executing subject-to deals and provide examples and statistics to illustrate these errors.

Lack of Due Diligence

One of the most significant mistakes investors make is insufficient due diligence before entering into a subject-to contract. Failing to thoroughly research the property and its financial aspects can lead to unforeseen issues down the road. For instance, the investor might not be aware of existing liens, back taxes, or other encumbrances that could seriously affect the property's value.

Lets say an investor purchases a property subject-to the existing mortgage, only to discover later that the property has a tax lien from the municipality, adding a substantial amount to the total cost of ownership.

According to a study by the National Association of Realtors, around 25% of real estate transactions encounter issues related to property title defects and liens, highlighting the importance of conducting thorough due diligence.

Overestimating Cash Flow

Another common mistake is overestimating the cash flow potential of the subject-to property. Investors may miscalculate the expenses involved in maintaining the property or underestimate the likelihood of mortgage rate adjustments, resulting in negative cash flow.

An investor takes over a subject-to property with the expectation of positive monthly cash flow. However, they fail to account for unexpected repairs and vacancies, leading to negative cash flow and financial strain.

A study conducted by RealtyTrac reveals that around 24% of single-family rental properties in the U.S. have negative cash flow, emphasizing the importance of realistic financial projections.

Ignoring the "Due on Sale" Clause

The "Due on Sale" clause is a standard feature in most mortgages, allowing the lender to demand full repayment if the property ownership changes. Ignoring or mishandling this clause can lead to significant problems for the investor.

An investor acquires a property subject-to without informing the mortgage lender, violating the "Due on Sale" clause. The lender discovers the change of ownership and demands immediate full repayment, putting the investor at risk of foreclosure.

According to the Mortgage Bankers Association, nearly 90% of residential mortgages contain a "Due on Sale" clause, underscoring its prevalence and importance in subject-to deals.

Lack of Contingency Plans

Investors often fail to create contingency plans to mitigate potential risks associated with subject-to contracts. Unexpected circumstances, such as economic downturns, tenant issues, or rising interest rates, can negatively impact the investment.

An investor acquires a property subject-to with plans to renovate and resell it within a year. However, the housing market experiences a downturn, leaving the investor unable to find a buyer, resulting in prolonged holding costs.

A survey by the National Association of Real Estate Investors indicates that only 37% of real estate investors have contingency plans in place, leaving a majority vulnerable to unexpected challenges.

Subject-to contracts offer investors an attractive opportunity to acquire properties without conventional financing. However, to avoid costly mistakes and maximize returns, investors must conduct thorough due diligence, accurately project cash flow, adhere to lender clauses, and create contingency plans. By understanding and learning from these common errors, investors can ensure a successful and profitable subject-to investment journey. If you would like to learn more about how to avoid the pitfalls of doing subject-to contracts reach out to us by contacting Grant Trevithick at the ownerfinanceacademy.com