Subject-to deal calculator: entry cost, cash flow & equity

What this measures

Subject-to is short for buying subject to the existing financing. The deed moves to you. The seller's loan does not. The seller is still the borrower, and the lender has not agreed to anything. You make the payments because the house is now yours, and if they stop, the lender forecloses on the house and the missed payments land on the seller's credit.

Investors use it because the old loan can carry a rate far below today's rates, and because the cash to get in can be small: the seller's equity payment, any past-due payments to bring the loan current, closing costs, and repairs. Sellers agree to it most often when they are behind on payments or have little equity and need to move.

The calculator answers four questions. How much cash does it take to get in? Does the rent cover the full payment with taxes and insurance (PITI) and the other costs? How much equity do you start with? And if you sell after a few years, what is left after selling costs and the loan payoff? It also shows what the seller would net by listing the house instead, so you can see whether the offer is fair to them.

Formula

Debt today = loan balance + arrears. Cash to seller = purchase price − debt today. Seller equity = market value − debt today. Cash to get in = cash to seller + arrears + closing costs + repairs.

PITI = existing P&I + monthly tax + monthly insurance. Monthly cash flow = rent × (1 − vacancy) − PITI − other monthly costs. Cash-on-cash = monthly cash flow × 12 ÷ cash to get in. Equity capture = market value − purchase price.

Rate edge = the P&I on the same balance at today's rate over 30 years − the existing P&I. Exit profit = value after the hold − selling costs − loan balance then + all the monthly cash flow − cash to get in. No income tax is included.

Example

Example

The sample deal: a house worth $300,000 bought for $250,000. The seller owes $230,000 at 3.25% with 25 years left, plus $6,000 of missed payments. You pay the seller $14,000, bring the loan current, and spend $4,000 to close and $6,000 on repairs. The existing P&I is $1,120.83, so with $250 of tax and $150 of insurance the PITI is $1,520.83. Rent is $2,400 with 5% vacancy and $300 a month of other costs. A new 30-year loan at 7% on the same balance would be $1,530.20, or $409.37 a month more. Cash to get in is $30,000. Monthly cash flow is $459. Cash-on-cash is 18.4%.

Illustrative example. The value, loan, rent, and costs are sample inputs so the math is visible. They are not a property, a seller, or a deal RE Underwrite Lab did. The full walk-through with the same numbers is in the guide to how subject-to deals work.

Risks to read before you run a subject-to deal

Due-on-sale. Most mortgages let the lender demand the whole balance when the house is sold or transferred. The federal Garn-St Germain Act (12 U.S.C. 1701j-3) generally lets lenders enforce that clause. Its exceptions, such as transfers to a spouse or child or into certain living trusts, do not cover a sale to an investor. If the lender calls the loan, you need to pay it off, refinance, or sell, possibly fast.

The seller's credit. The loan stays in the seller's name. Every late payment shows up on their credit report, and the debt can make it harder for them to qualify for their next home. Use a licensed loan servicer or escrow company so every payment is tracked, and put what happens if a payment is missed in writing.

Insurance and escrow. The seller's homeowner policy usually stops fitting once they move out. You need your own policy, typically a landlord policy in your name, with the lender as mortgagee and the seller added as an additional insured, if your attorney and insurer agree. Be truthful with the lender and the insurer about who owns and lives in the house. The seller's escrow balance and any escrow shortage need to be settled at closing.

State law. Some states regulate or restrict subject-to purchases, especially from owners who are behind on payments. California's Home Equity Sales Contracts Act and the Colorado Foreclosure Protection Act are two examples of equity purchaser and foreclosure rescue laws with required contract terms, cancellation rights, and penalties. Rules change and vary by state, so have a real estate attorney in the property's state draft the deal and a title company close it. If the seller carries a note or the deal is a wrap, federal loan originator and ability-to-repay rules (Dodd-Frank, the SAFE Act) and state licensing laws can apply too.

Protect the seller. Before the seller signs, give them a written comparison of what they would net by listing vs. what this offer pays them. Tell them they can list instead, and recommend they have their own real estate attorney review the deal. Do not pressure a seller who is behind on payments.

Example

Second example

Illustrative example. A seller owes $180,000 with a $1,100 P&I payment and $350 a month of tax and insurance, so PITI is $1,450. Rent is $1,900. After 5% vacancy that is $1,805, and after the PITI and $200 of other costs the house cash flows $155 a month, or $1,860 a year. If it took $10,000 to the seller and $5,000 of closing costs to get in, cash-on-cash is 12.4%. These figures are made up. They are not the sample in the form above.

When this ratio misleads

A strong cash-on-cash number can hide a deal that falls apart if the lender calls the loan. Then the cheap rate is gone and you need a new loan at today's rate or a quick sale. Run the numbers again at today's rate to see whether the house still works, and keep cash in reserve for that day. The exit profit also leans on the appreciation you type and includes no income tax.

Common pitfalls

Treating the old loan like your own. It is the seller's loan. You are not the borrower, the lender did not approve you, and the seller's credit takes the hit if a payment is late.

Using the P&I alone. Taxes and insurance often run through the loan's escrow and can rise every year. Underwrite the full PITI, plus vacancy, repairs, and management.

Skipping the attorney and title company. A subject-to deal needs a clean title search, a proper deed, a written agreement with the seller, and paperwork that follows your state's rules. Getting any of it wrong can undo the deal or cost far more than the closing fees.

Questions