Lease Option vs Subject To – Which Is the Best Way to Buy?

In the summer of 2014, I went to look at a property in a nice neighborhood outside Raleigh, NC. It was a 3-bedroom, 2-bath ranch on a cul-de-sac conveniently located near shopping and highway access.

abandoned house

A complete rehab would cost around $30,000.


Unfortunately, this house had been allowed to deteriorate over time. The roof was leaking, and there was wood rot along the siding. All carpet and flooring needed to be replaced.
There was mold in the ceiling in the main bath. All the closet doors were off the tracks, and there had been no landscaping done in several years.
The seller told me he needed to sell the house fast. I had to disillusion him about the home’s marketability.

Let’s Take a Look At the Numbers…

The After Repair Value (ARV) was about $180,000 with a loan balance of $120,000. It needed $30,000 in repairs for a full rehab. The monthly payment was about $600 per month and market rent was around $1,000.
$180,000 (ARV) x .70 = $126,000 – $30,000 (repairs) = $96,000 Maximum Allowable Offer (MAO). Unless the seller is ready, willing, and able to come to closing table with $24,000, there’s no deal to be had.

But Is a Cash Offer the Only Way?

confused real estate investor

Time to get creative…


What if I could make those mortgage payments every month and turn it into a nice rental? I felt that owner financing was the best way to go because the house would be “rent ready” with only $20,000 in repairs instead of $30,000 for a complete rehab.
The question is: Should I lease the property with an option to buy or take it subject to the existing mortgage?

Lease with Option to Buy

I could lease the property for the amount equal to the monthly mortgage payment and get an option to buy the property at a given price (strike price) for a given amount of time.
The catch here is that under North Carolina law, the owner is responsible for maintaining a habitable residence. This means the owner would be responsible for maintenance and repairs. [Do research in your home state for applicable landlord/tenant law.]
I always use a clause in the lease stating that I will be responsible for the first $250 in repairs, but the owner of the property will be responsible for major repairs such as roof, HVAC, and so forth.
Would the seller be willing to carry this burden? Does he have the financial means to pay for such repairs? This could lead to problems down the road.
Also, with a lease option there’s a question of whether or not the investor will make payments directly to the seller or directly to the bank. If the owner fails to make the mortgage payment, I fall into a precarious position of losing my $20,000 initial investment. This represents significant risk on my part.

Subject to the Existing Financing

When buying a house “subject to” the existing mortgage, I would be taking title to the property subject to the terms and conditions of the existing mortgage (never do this without getting a copy of the promissory note).
The benefit to the seller with a subject to transaction is that they have no liability for maintenance, repairs, or any injury that occurred on the property.
They do remain liable for the performance of the mortgage. This is why it’s in the seller’s best interest to do business with an honest and reputable investor.
The benefit I get with a subject to transaction is a greater interest in the property because I have title. This is appropriate for properties that require several thousands of dollars’ worth of repair.
In the above example, the investor needs to put up at least $20,000 to make the property “rent ready,” which is a substantial financial commitment. Having title to the property further protects that interest.

What’s the Goal?

When buying houses without bank or hard money financing ask yourself: What do I want to accomplish here? In the above example, buying the house subject to was necessary to protect the $20,000 initial investment and whatever maintenance and problems occurred later.
There are other instances where a lease with option will work better. You always have to take into consideration the problem you’re solving by buying the house.
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