I'm breaking down sub-to offers and how they could put your mortgage at risk.
Real estate in Northwest Ohio is always changing, bringing new opportunities and challenges for buyers and sellers. One strategy that’s been getting attention lately is the use of sub-to offers. At first glance, it might seem like a smart way to make a deal, but it comes with hidden risks. Understanding how sub-to offers really work can help protect your interests and make sure you’re making the right choice. Here’s everything you need to know:
What is a sub-to offer? At its core, an offer is a written contract where a buyer proposes to purchase a home from a seller. Buyers traditionally secure financing or pay in cash to complete the transaction. However, in the sub-to world, things operate quite differently.
“A sub-to offer could leave you paying for a home you no longer own.”
A sub-to offer means the buyer does not obtain a new loan or pay in full at closing. Instead, they propose to take over the seller’s existing mortgage. This approach raises serious concerns because these buyers often lack the funds to close, do not secure financing, and attempt to use the seller’s existing loan to acquire the home. In many cases, this is dishonest and even illegal, depending on the state.
Why sub-to deals are risky for sellers
1. Banks can call the loan due. One major issue with sub-to transactions is that the buyer must hide the deal from the bank. If the lender discovers the mortgage has been transferred without proper authorization, it has the legal right to accelerate the loan, requiring full repayment immediately. This could put the seller in financial jeopardy. Unfortunately, sub-to buyers rarely disclose this risk to sellers.
2. Novation clauses: A hidden danger. Somewhere in the stack of paperwork, sellers may unknowingly sign an agreement with a novation clause. This legal term means the original contract can be substituted or modified later, allowing the buyer to change the terms of the sale without the seller’s full awareness. This could result in the home being resold for different terms and prices, potentially putting the seller and their lender at risk.
3. Lack of transparency in contracts. Sub-to contracts are often structured in a way that obscures key details. The terms may not be entirely truthful, and buyers rarely explain the full extent of the risks involved. Sellers are often left in the dark about:
• What happens if the deal is discovered by the bank
• Their legal and financial liability
• The potential impact if the IRS gets involved.
4. Financial and legal consequences. When sellers enter a sub-to deal, they may unknowingly remain responsible for the mortgage. If the buyer fails to make payments, the original lender will still hold the seller accountable. The seller could also face serious financial repercussions if legal or tax issues arise from the transaction.
Real estate transactions should be built on trust, transparency, and legal integrity. Sub-to deals often fail to meet these standards, leaving sellers vulnerable to legal complications, financial loss, and mortgage default risks.
For anyone considering selling a home, it is crucial to work with trusted professionals who prioritize ethical practices. If you have questions or need guidance, please reach out. You can call me at (419) 874-1188 or send an email to jon@modene.com. I look forward to hearing from you.
