The Sometimes-Forgotten Strategy of Subject to Existing Financing

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Readers are always looking for the most profitable ways to acquire properties with little or NO money down! I become so wrapped up with lease options that I sometimes overlook how powerful the Subject to Existing Financing Strategy is. This is another way to have the Seller thank you in the process!

Subject To Deals (aka “Get the Deed”) and Lease Options are both proven and profitable ways to invest in real estate with little or NO money down.

When to Do a Subject To vs. Lease Option

This is all very simple. When you purchase a property subject to, you are buying the home subject to the existing financing (the current mortgage stays in place) — that’s all there is to it. You avoid most or all the traditional hassles involved with buying a property. No loan qualifications. No loan fees are involved. Your credit report does not need to be approved…. AND the seller is highly motivated for you to take the property off their hands!

Lease options and sandwich lease options are typically the preferred no money or little money down method when the seller is going to get their share of the money out of the deal. Subject to the existing financing is the tool that you use when the seller is behind in payments and has no expectation they will receive anything from the sale. There are times when you might pay them a little something but most of the time, the seller has no hope of ever catching up on missed payments.

Many of the same circumstances apply to the “subject to” situation as apply to a sandwich lease option. The difference is that a sandwich lease seller has more control of the situation because they are current with their payments. Both work in situations such as divorces when two mortgages must be paid. These also work for out-of-town owners with a vacant house. Or an illness, or any of many other reasons when a seller is struggling to stay current with the mortgage.

Lease options and subject to existing financing deals are typically about property owners struggling with the mortgage. What often makes the subject to deal different is that the seller has fallen behind on the payments.

Subject to Profitability Worksheet

Basically, there are 3 documents to be signed: the deed, the trust agreement, and an assignment of beneficial interest form. That’s how simple the subject to existing financing transaction can be and calculating your profit isn’t any more difficult.

To see what your profits can be, look below at the Profitability Worksheet. The worksheet shows a very realistic example of how these deals work. The worksheet that I provide in the Subject To course can automatically calculate your profits as soon as you type in the numbers for your deal.

By looking closely at the worksheet, you see that it includes a calculation for selling the house on a lease option. This isn’t a sandwich lease option because you now own the house. Owning the property means you can do whatever you want to with it. But a lease option is a good way to go.

Each deal has its own set of numbers, and

you can see that a subject to deal combined with a lease option can be more much more profitable than a straight sandwich lease option!

Help the Seller Understand the Numbers

Remember that the seller is already frustrated with their situation. Chances are they don’t even understand how bad their situation is or could become. Once you’ve made your calculations, you can present your offer to the seller. I wouldn’t share all your numbers with the seller. He or she will come out of this a winner but seeing how you’ll profit can cause them more frustration than they are already experiencing.

When presenting a subject to deal, keep in mind that the motivation for every seller will be unique. Whenever possible, you want your purchase offer to directly address the seller’s needs – how it will help them.

When you do make your subject to existing financing offer, it’s possible the seller’s first reaction will be, “This isn’t enough money.” Since you already know the numbers, you can help them understand why yours is a reasonable offer.

This isn’t enough money! Kindly pull out a sheet of paper and hand the seller a calculator. Ask him/her if you could do a cost analysis together. Show them the comps and ask what the average sales price is. Next, have them subtract out the anticipated commission amount (if they insist that they would sell by owner, remind them that their time is worth something when it comes to all the showings, paperwork, phone calls, etc.). They can then subtract any repairs, the holding costs while it is listed, closing costs, and other costs that would reduce the value. The holding costs until the house sells can be significant – more mortgage payments, utilities, taxes, insurance, etc. The holding costs can be multiplied by 2 months, 4 months, 6 months, or more.

Most people are surprised at how much it will cost to sell their house!

Due Diligence is Required with Subject to Existing Financing

Before you even make a firm offer, you need to know all the numbers and other information about the property – mortgage balance, monthly payments, taxes, etc. Just like you want to open the eyes of the seller to the expenses they are facing, you need to know your obligations with deals involving subject to existing financing.

Research Your State Laws. Laws do vary from state to state. You want to be sure you have all your ducks in a row.

Research the terms of the loan that come with the property. You’ll be looking for things such as whether the loan interest rate is fixed or adjustable. You’ll want to learn if the seller has had the loan modified. Another typical thing to understand is if the taxes and insurance are included in the monthly payment.

Know any other costs you might be taking over. If the seller is behind on the mortgage, the utilities probably aren’t current either. There could be delinquent HOA fees. If there are any liens on the property, the seller should disclose these, or these will show up on the title report.

There are other steps you need to take to correctly assume ownership of the property. An important step I cover in the course is changing the insurance policy to a non-owner occupied or “landlord” policy.

Subject to Existing Financing is a Win-Win-Win Strategy

When you have the subject to existing financing method in your toolbox, you have the unique ability to offer a creative solution that benefits everyone in the deal.

Wins for you as the investor:

  1. No mortgage qualifying is required.
  2. Fast closing – nearly instant ownership.
  3. More flexibility of what you can do with the property compared to a sandwich lease option.
  4. Low risk because any possible mortgage default remains in the name of the seller.
  5. You own all the equity and positive cash flow that the property generates.

Wins for the seller:

  1. A creative solution when the seller is out of conventional options.
  2. Offers an instant solution to their most urgent problem.
  3. Improves the seller’s credit rating when you start making the mortgage payments.
  4. Costs less for the seller by avoiding repairs, commissions, closing costs, etc.

Wins for the lender:

  1. The delinquent loan is brought current.
  2. A probable foreclosure is avoided.
  3. Reliable monthly payments resume.
  4. When the property is sold to an end-buyer, the full mortgage is paid off.

NO Credit Needed for You!

Not only does this improve your ability to acquire properties, but Subject to Deals also improves the profitability of your exit strategies in several ways.

Subject to existing financing is NOT the only one way for you to invest in real estate:

  1. Investing In Real Estate with Lease Options.
  2. Advanced strategies for Buying and Selling with Lease Options.
  3. Your Wealth Building Arsenal.
  4. Add Personalized Coaching.
  5. Cooperative Lease Options.
  6. Details of Get the Deed “Subject To.”
  7. Round it all out by Working with Realtors.

Happy Investing!

Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

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