In a conventional sale, most contracts require that all of the existing liens and indebtedness filed against the seller are satisfied and released at closing. A “subject-to”, commonly referred to as “sub-to”, transaction differs from a conventional sale as instead of satisfying and paying all the existing liens and indebtedness filed against the seller at closing, the buyer contracts and agrees to purchase the real property subject-to existing financing, i.e., leaving some, or all the existing liens and indebtedness in place.

The first type of sub-to transaction is commonly referred to as a Straight Sub-To. In a straight sub-to, there are no additional liens being originated at closing, i.e., a wraparound loan, and there is nothing executed or recorded to secure the buyer’s obligation to make payments on the existing liens and indebtedness, i.e., an assumption.

The second type of sub-to transaction is commonly referred to as a Wraparound. In a wraparound transaction, the seller is originating a subordinate lien secured by the property which will “wrap” around the existing liens and indebtedness. A wraparound transaction is often attractive to sellers as they not only pass off their existing payments to the buyer, if the payment due under the wrap is higher than the payment due under the existing liens and indebtedness, they are also able to generate a profit each month.

The third type of sub-to transaction is commonly referred to as an Assumption. In an assumption, the buyer agrees to “assume” the obligations and liability of the seller under the existing liens and indebtedness.

Informal: In an informal assumption, the underlying lienholder does not consent to the buyer assuming the seller’s liability. As a means of protecting the seller, the seller will often require the buyer grant the seller a deed of trust to secure assumption which allows the seller to foreclose and recoup the property in the event the buyer defaults on their payments under the existing liens and indebtedness.

Formal: In a formal assumption, the underlying lienholder agrees to allow the buyer to assume the seller’s liability and is usually memorialized through an assumption agreement which is executed by the seller, buyer, and lender and recorded in the real property records.