“Subject to” financing, also known as “subject-to-the-existing-loan” or “subject-to-the-underlying-financing,” is a creative real estate financing strategy where a buyer purchases a property subject to the existing mortgage on the property. In Colorado, as in other places, this method can be used, but it’s essential to understand the legal and financial aspects involved.
Here are the steps to “subject to” financing in Colorado
Education and Understanding
Before proceeding with a “subject to” deal in Colorado, you should thoroughly understand the concept, its legal implications, and the risks involved. Consult with a real estate attorney to ensure you’re compliant with Colorado real estate laws.
Find a Motivated Seller
Look for sellers who are motivated to sell their property quickly and are open to this type of creative financing. Common situations where “subject to” financing might be appealing to sellers include facing foreclosure, needing to relocate urgently, or experiencing financial distress.
Negotiate a Purchase Agreement
Negotiate a purchase agreement with the seller, making sure that it specifies the property will be acquired “subject to” the existing mortgage. It’s crucial to clearly outline the terms, including the purchase price, the transfer of ownership, and the existing loan details.
Due Diligence
Conduct due diligence to ensure the existing mortgage is in good standing and that there are no issues, such as outstanding liens or judgments against the property. An experienced real estate attorney and title company can help with this.
Create a Land Trust or LLC
Some investors use a land trust or LLC to hold the property title, which can provide some level of anonymity and protection. Consult with an attorney to determine the best legal structure for your situation.
Inform the Lender
Notify the lender that you’ve acquired the property subject to the existing loan. While it’s not legally required, it’s considered a best practice to keep the lender informed. Be prepared for the lender to potentially call the loan due if they discover the change in ownership.
Make Payments
As the new owner, you’ll be responsible for making payments on the existing mortgage. Ensure these payments are made on time to prevent any issues with the lender.
Manage the Property
Take over the management and maintenance of the property. You may choose to rent it out or resell it.
Exit Strategy
Have a clear exit strategy in mind. This might involve refinancing the property in your name, selling it, or paying off the existing loan.
Consult with Professionals
It’s strongly advisable to work with experienced professionals, including real estate attorneys, real estate agents, and mortgage brokers who are well-versed in creative financing strategies. These professionals can help you navigate the process and ensure you remain compliant with Colorado’s laws.
Remember that “subject to” financing can be a complex and legally sensitive strategy. It’s essential to be well-informed and to work with experts to mitigate potential risks and ensure a smooth transaction.