What does subject to mean in real estate?
Buying subject to means the buyer takes ownership without paying off or formally assuming the seller’s mortgage. The deed transfers, but the debt doesn’t: the note still names the seller as borrower, and the lender usually hasn’t agreed to anything.
The buyer pays the seller’s equity, if any, in cash or with a note, and then makes the monthly mortgage payments. Investors like it because they get a low-rate loan without having to qualify for new financing. The seller gets out of the property, but not out of the debt.
Subject to vs loan assumption vs seller financing vs wraparound
The key difference is who is legally responsible for the existing loan and whether the lender agreed. In a loan assumption, the lender evaluates and approves the buyer, and responsibility for the debt shifts to the buyer. In a subject-to deal, the seller stays responsible and the lender isn’t asked. In seller financing, the seller acts as the bank for some or all of the price, usually after the old loan is paid off.
A wraparound mortgage blends two of these. The seller carries a new note for most of the price, the buyer pays the seller, and the seller keeps paying the original loan underneath it.
| Subject to | Loan assumption | Seller financing | Wraparound | |
|---|---|---|---|---|
| Existing loan | Stays in place, in seller’s name | Stays in place, transferred to buyer | Usually paid off at closing | Stays in place, in seller’s name |
| Lender approval | Not requested | Required | Only if a loan remains | Not requested |
| Who the lender can pursue | Seller | Buyer; seller only if not released | Seller’s own lender, if any | Seller |
| Due-on-sale risk | High | None once approved | Low if loan is paid off | High |
| Who the buyer pays | The lender, directly or through a servicer | The lender | The seller | The seller |
| Typical use | 1–4 unit homes | Agency and CMBS multifamily | Free-and-clear or low-debt buildings | 1–4 unit homes, some small commercial |
The due-on-sale clause and Garn-St Germain
A due-on-sale clause lets the lender demand full payment if the property is sold or transferred without its consent. Almost every modern mortgage and commercial loan has one, and a subject-to sale is exactly the kind of transfer it’s written for.
Federal law backs the lender up. The Garn-St Germain Act, 12 U.S.C. 1701j-3(b), lets lenders enforce due-on-sale clauses even where state law would restrict them. Section 1701j-3(d) then lists transfers a lender can’t use as a trigger, but only for loans secured by residential property with fewer than five dwelling units.
Those exceptions include a transfer to a spouse or children, a transfer after a borrower’s death, a divorce decree, a lease of three years or less with no purchase option, and a transfer into a living trust where the borrower stays a beneficiary and occupancy doesn’t change. A sale to an investor isn’t on the list. So even on a house, a subject-to sale leaves the lender free to call the loan, and the buyer is betting it won’t.
Why subject to is mostly a 1–4 unit tactic
Subject-to deals grew up around residential mortgages, where loans are smaller and lenders mostly care that the payments keep coming. That’s why most subject-to talk centers on single-family homes and small rentals.
Commercial apartment loans work differently. They usually require annual financial statements, rent rolls and insurance certificates from the named borrower, and the Garn-St Germain exceptions don’t apply to 5+ units at all. Many non-recourse commercial loans also list an unapproved transfer as a bad-boy carve-out, which can turn the debt into a personal liability for the seller or guarantor.
How Fannie Mae and Freddie Mac multifamily loans handle a sale
Agency multifamily loans are generally assumable, with lender approval. Fannie Mae’s multifamily term sheet says its loans are typically assumable, subject to review and approval of the new borrower’s financial capacity and experience.
Freddie Mac handles this in the Transfers of Ownership chapter of its Multifamily Seller/Servicer Guide. Transfers that need consent go through an application, and Freddie charges a nonrefundable transfer fee; its October 2025 update on transfers refers to a 1% transfer fee. CMBS loans also commonly allow an assumption by a qualified buyer, approved by the servicer under the loan documents.
In practice, the buyer applies, the servicer reviews the buyer’s net worth, liquidity and track record, and the existing loan stays in place. Ask early whether the original borrower and guarantor will be released from future liability once the assumption closes, and get that release in writing.
Risks for the seller in a subject-to deal
The biggest risk is that you keep the debt but give up control of the property. If the buyer stops paying, the late payments and any foreclosure land on your credit and your guaranty.
- Your credit and liability stay on the loan: the lender can pursue you, and a default shows up on your credit report.
- Due-on-sale call: the lender can accelerate the balance, and the buyer may not be able to refinance in time.
- Insurance gaps: your old policy usually ends when you no longer own the property, and the buyer’s policy may not name the lender correctly.
- Escrow and taxes: if taxes or insurance aren’t paid from escrow, a lapse can create a default even when payments are current.
- Bad-boy carve-outs: on commercial loans, an unapproved transfer can make a non-recourse loan recourse.
- Tax: the IRS counts the mortgage the buyer takes the property subject to as part of your selling price, so you can owe tax on a gain without receiving cash.
How to structure a subject-to or assumption deal more safely
The safest version is the one the lender has approved. If you still go ahead with a subject-to or wraparound structure on a small property, get your protections in writing before you deed the property.
- Hire a real estate attorney in the property’s state to draft and review every document.
- Use a licensed third-party loan servicer so payments go to the lender on time and you see proof each month.
- Require insurance that names the lender as mortgagee and you as an additional insured, with notice of cancellation.
- Record a performance deed of trust or mortgage that lets you take the property back if the buyer stops paying the underlying loan.
- Set a deadline for the buyer to refinance or assume the loan, with a balloon date you can live with.
- Have your CPA run the installment sale math, since debt over your basis can be taxed as a payment in the year of sale.
Worked example: a 12-unit building with a low-rate agency loan
Say a seller agrees to sell a 12-unit building for $2,600,000. It has a $1,800,000 agency loan at 3.75% with 25 years left on the amortization, so the payment is $9,254.36 a month. A new $1,800,000 loan at 6.25% over 30 years would cost the buyer $11,082.91 a month. That’s $1,828.55 more, or about $21,943 a year.
Assumption with seller carry: the buyer assumes the $1,800,000 loan with lender approval and pays a 1% assumption fee of $18,000. The seller carries a $300,000 second note at 6%, interest only for five years, which pays the seller $18,000 a year, and the buyer brings $500,000 in cash. Check first whether the loan documents allow subordinate financing, since many require lender consent.
Taxes: if the seller’s adjusted basis is $1,400,000, the gross profit is $1,200,000. The assumed mortgage is $400,000 more than basis, so under the installment sale rules that excess counts as a payment in the year of sale. The seller reports $900,000 of gain that year (the $500,000 down payment plus the $400,000 excess) and the last $300,000 as the note is paid.
Subject-to version: the price and cash look the same, but the seller stays the borrower on $1,800,000 with no lender approval, risks a due-on-sale call and may trip a carve-out. The buyer saves the $18,000 fee, and the seller takes on all the risk.
| Item | Assumption with seller carry | Subject to |
|---|---|---|
| Price | $2,600,000 | $2,600,000 |
| Existing loan | $1,800,000 assumed with approval | $1,800,000 left in seller’s name |
| Seller carry | $300,000 at 6%, $18,000 a year | $300,000 at 6%, $18,000 a year |
| Buyer cash at closing | $500,000 plus $18,000 fee | $500,000 |
| Buyer’s payment savings vs new loan | $1,828.55 a month | $1,828.55 a month |
| Seller still liable on $1,800,000 | Only if not released | Yes |
| Due-on-sale risk | None | Lender can call the loan |
How this works for a 5+ unit apartment building
For a 5+ unit building, a below-market loan is a selling point, not a reason to skip the lender. A buyer who can assume your low rate can pay more, because the debt costs less. A formal assumption can raise your price and take your name off the loan.
If the buyer can’t cover your full equity in cash, a seller carry on the gap, set up as an installment sale, can bridge it. If the loan isn’t assumable or its rate is no better than today’s, a sale with seller financing on a free-and-clear building, or a straight sale with a 1031 exchange, may fit better. Your NOI and DSCR will drive what any lender approves.
Talking to Skyline about an assumption or seller-carry sale
Skyline Capital Investments buys apartment buildings with 5+ units nationwide as a direct buyer. We don’t ask sellers to leave a loan in their name. If your building has assumable debt, we can talk through a lender-approved assumption, and we can offer seller-carry terms on the equity, with timelines that work with a 1031 exchange.
Send your address, unit count and current loan details through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
