Epic Real Estate Investing - Creating Cash Flow with Little to No Money, Part 2 | Episode 80

Episode Date: December 16, 2013

Real estate reform is coming at the top of the New Year. Are you prepared? If you're not, the impact on your results next year could be less than desireable. However, within every crisis there lies an opportunity, and that opportunity for the real estate investor exists within the practice of creative financing... and there is one strategy in particular that will likely come into play more than any other. If you understand it and know how to execute it, the impact of this real estate reform should be minimal on your business. On this episode, Matt informs you about the coming reform and walks you through this specific creative financing strategy that could possibly lead you to the promise land. Well... it's not quite that dramatic, but it is a strategy that will allow you to close more deals and make more money next year (and far into the future) than your competition. Additionally, Matt will provide you with every tool and resource required to execute this specific creative financing strategy, at no charge. It's a longer than normal episode, there's a ton of information within, and invaluable resources to be had. Get your pen and paper ready, you may have to listen more than once. ------------------------ "In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists." -Eric Hoffer Subscribe to this podcast in iTunes by visiting EpicRealEstateInvesting.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Broadcasting from Terrio Studios in Glendale, California. It's time for Epic Real Estate Investing with Matt Terrio. Yes. Hello. Hello, and welcome to another episode of Epic Real Estate Investing. Got another great episode, great show for you today, and got a lot of information to get through. So we're going to dive in right away. This is part two of creating cash flow with little.

to know money. And if you missed part one, you can catch up on episode 70 of the epic real estate investing show. That is the episode where I aired part one. And from the looks of the stats, the download stats of the podcast, that was an episode of great interest to a great number of people. So I wanted to expound on it because there's more to actually talk about. And there's more reason to talk about it right now as well. You see, on that first episode, I covered the math that I use to formulate my three-option letter of intent. And if you stick around, I'll share with you how you can get a copy of that three-option letter of intent. And then I also share with you the math and the calculations. And if you stick around, I'll give you a copy of the custom calculator that I created

to streamline that process. As well, I'll also make available to you at no charge, all of the documents that I'm going to cover today. And I'm fairly certain that you are going to want them. Okay, so stick around. You know, many of you last week, you received an email from me referencing a sort of real estate reform that's coming in January, January 10th, specifically, a type of reform that could significantly change the way you conduct your business in the way that you acquire your investments and the way that you sell your investments from this point forward.

And this reform, it just happens to make today's episode and as well, episode 70, even more important to your business. Drastically important, actually. I mean, if cash flow is a goal of yours, today's episode is one you just don't want to miss. Okay, so let's get into it. To begin, I want to explain to you what's actually coming January 10th, why that date is significant. You see, January 10th is the date that the reformations of the Dodd-Frank Act go into effect.

And I can hear everybody right now, scratching your heads, wondering what is Dodd-Frank act? Well, glad that you asked. So let's go over it. Specifically, we're going to take a look at the eight factors that you're going to need to consider that are going to basically going to affect you. and I need you to be prepared for them, these factors that are going to be required to qualify for a loan once this reform goes into effect. Now, I'm not a mortgage professional, and I'm giving you a very loose interpretation,

loose description of these eight key factors. And because I'm not a mortgage professional, I'm going to, just to make sure I stay on track and I don't steer you wrong, I'm going to be reading very loosely from an article that I found on Yahoo. So basically, Dodd-Fran. rank is, it covers all finances. It's really the Wall Street and Consumer Protection Act, but mortgages fall under the Wall Street area. But we're just going to talk about mortgages specifically. So number one, this is what's going to happen in the reform. You will need enough income

or assets to cover your mortgage payments. It's probably pretty obvious why your income is something important for lenders to look at when determining how much you can afford to borrow. and it's something lenders that have been taking into consideration for a very, very long time. But they've been taking it into consideration. Well, now it's going to be a law as to what they can consider and what they can't consider. And if you go back to the beginning of mortgage lending, you know, we had what we call the four Cs of traditional lending. It's capacity, cash, credit, and collateral. Now, the Dodd-Frank Act is just very much a literal explanation of though.

So when talking about the borrower's ability to repay the obligation, it's all about the borrower's capacity. By capacity they're referring to the borrower's income or assets and whether it's sufficient enough to make the monthly mortgage payments. Okay. Seems very simple, very obvious, right? But now it's not up to anyone's discretion. It's a law. So there are guidelines that they must follow. Two, you'll have to prove your employment or income from self-employment.

You can have to prove that. One of the surest ways to guarantee income is to have a job, right? So this is another pretty obvious thing for responsible lenders to ask potential borrowers about. But now it's not their option. It's law. This is as important today as it has always been. I mean, do you have a position that will be here tomorrow is something that they're also going to consider? And nobody can really predict the future.

But if a lender finds out a borrower's job will expire prior to the loan closing, that might cause the lender to reconsider the borrower's profile. That's how important this is going to be. You know, without another job lined up, a lender could worry that you might not be able to pay the mortgage and they don't want to get in trouble. So they're going to have to consider everything. And where this gets a bit trickier is when it comes to self-employed borrowers. I mean, if you're an independent contractor, your jobs might. it only lasts a few weeks or a few months, and that could make it hard to convince lenders that you are a safe borrower, a safe customer.

So self-employed borrowers, they got to show a two-year track record of having been in the same business, along with two years of federal tax statements to show their income. And the thing that makes that very tricky for us is as us self-employed real estate investors, you know, we do everything we can to pay as little taxes as possible. That's one of the giant benefits of real estate is that you can really squish down if not virtually eliminate your tax liability. So we try hard to do that. But now we need to show income if we intend to use banks money to acquire property. So although we can squish down our tax liability, our tax obligations, but we might have to increase what we pay in taxes just so we can qualify for a loan if that plan is that's going to be a part of our strategy.

And if you're self-employed and thinking about applying for a mortgage and might benefit you to talk to a mortgage professional to find out what you'll need to prove, what you'll need to prove your income. Number three, you'll need to prove that you can afford property tax and homeowners insurance. In addition to principal and interest payments on your mortgage, you're going to have to prove that you can afford property tax and the homeowners insurance. You'll also have to pay possibly fees like homeowners association fees. all of that stuff is going to be coming together. Your principal, your interest payments, your property taxes, your homeowners insurance, HOA if it's applicable. The Dodd-Frank Act wants all of those taxes and fees to be clear to borrowers up front.

And what lenders need to do is they need to document every payment associated with the property and what it entails. It's important for the consumer to know what the total payments are for the property, right? but all of those payments are going to be factored into the qualification as well. So yes, it's consumer protection, but it's also really raising the bar of who can or can't qualify for a particular loan. Number four, you'll have to factor in the amount that you pay on any additional mortgages. This factor applies to homeowners who might take out more than one loan on their home,

like a second mortgage or a piggyback loan. And the Dodd-Frank Act simply requires lenders to include both payments. the first and second mortgage in this example, and when they're figuring out whether or not a borrow is qualified for a loan. All of this stuff. I mean, it's always been there. It's always been part of the practice. But believe it or not, you know, some lenders previously just weren't including the payment on the second mortgage in their calculations because they're pushing these loans through. I mean, even though it's money that the borrower will be expected to pay every month. They want to get the loans approved. That's going away. Okay. No more, uh,

lender discretion in that area. Number five, you'll need to provide full disclosure of any additional properties that you own. So do you own a second home somewhere or investment properties? If so, all mortgage-related costs for all of your properties should be included in a lender's calculations to determine if you qualify for a new mortgage under this new reform. This will pertain to any properties the borrower owns, investment properties, second homes, vacation homes, anything like that. The lender needs to have full disclosure to the total monthly obligations on all the borrowers other properties. Number six, if you pay child support, you'll have to calculate that in two.

And, you know, maybe you don't have a second property, but you do have to pay alimony or child support every month. That will also be taken into consideration, as lenders will be required by law to include things like alimony and child support in their calculations. Sometimes they conveniently ignored those types of things. Now it's law that they have to include it. And although the federal housing administration takes this factor into consideration already, it may not be common practice across for all lenders.

The borrower might qualify based on income and debts alone, but monthly alimony payments could have a major impact on their being able to pay. If the lender doesn't include these obligations, the lender could be helping the borrower get financing that he or she won't be able to continue paying down the road. That's how they put it. Right? And it is it.

I mean, on the surface, hey, it's a great thing, but I'm going to let you know how this is going to impact your business in just a minute. Number seven, you'll need a debt to income ratio that's lower than 38%. Doesn't sound like a big deal, but right now it's about 50%. That's going to be squished all the way down to 38%. One of the major tools that yen lenders use to determine whether a borrower qualifies for a new loan is the debt to income ratio or the DTI ratio. You might hear it express that way DTI. Debt to income.

The monthly debt to income ratio calculations, they've been in a lending industry for, I don't know, probably forever. And what we're seeing today in the industry is that the maximum DTI range is 38 to 41% or so of the borrower's gross monthly income. But it's really up to 50 right now. but that's going to need to change. It's going to be down reduced to 38%. And that's going to be the highest DTI lenders will be able to consider when determining whether or not

to qualify someone for a mortgage. So if you want to calculate your DTI as a percentage, which is how lenders typically consider DTI ratios, divide your monthly debt repayments, your monthly debt service, by your gross monthly income, your gross monthly income before taxes. and then you multiply that number by 100.

So why is the DTI ratio so important to lenders? Well, it's just a quick way that validates that you've got a loan that meets the definitions of a quote unquote safe loan. All right, number eight, the last one. You'll need a clean credit history and a good credit score. Well, no doubt, right?

You probably know that your FICO credit score can be used for, you know, everything from determining what interest rate you'll pay on your credit cards to whether or not you qualify for refinancing on that new car loan, it should come as no surprise then that it's important to lenders to and mortgages. No doubt, right? Going back to those four Cs of traditional lending, credit has always been considered. I mean, it's tremendously important, and it is a great indicator of how likely the borrower is to repay the obligation.

So it might be worth getting a hold of your credit report and doing whatever you can to improve your score. I've got a service right now that's been working on mine for about a year, and it's it's itching up. It's inching up there. You've got to pay your bills on time every time. You've got to dispute any errors on your report. And a little effort now could pay dividends down the road when it's time to apply for your mortgage. That's how important your credit history is. Now, like I've been kind of saying is I've been going over these eight factors, a lot of this stuff sounds like plain and simple common sense, right?

Well, the difference now is that these parameters, and guidelines are no longer subject to a lender's discretion. It's not going to vary from one bank to the other. They are federal law on new loan originations. The Dodd-Frank Act actually reaches, like I mentioned before, far beyond the mortgage industry. It extends all the way to Wall Street and everything that they're into as well. Its purpose is to protect the consumer and prevent another financial collapse like we experienced in 2007.

It seems like a very good thing, and it probably is. But here's how it's going to affect you. You see, once the changes come into effect in January of 2014, it's going to be harder for most people to get a home loan. It's going to be much more difficult, and it's already kind of difficult. And if they do qualify, it's going to be for a far lesser amount

than what they would have previously qualified for than what they would qualify for today. I mean, we're just, we're like a month away from this thing, right? So buyers should expect to put more money down or buy a cheaper home. That's basically what boils down to in a nutshell. So if you plan on using bank loans to build your portfolio, it's going to be significantly more challenging than it is right now. But I don't plan on using bank loans, Matt.

I'm a wholesaler. I don't care about that. Ah, not too fast wholesalers. And for you, too, fix and flippers, You might not need a bank loan, but somewhere down the chain, somewhere down this chain of events of wholesaler to fix and flipper, to the person that will ultimately live in the property, that person will need to get a loan. Your exit strategy is going to be affected.

They're going to have some serious challenges qualifying. Everyone is going to be affected by this. And a lot of real estate professionals, agents and lenders, are very very very good. very concerned about their professions right now. I've talked to them. They're concerned about their careers. They're concerned about their livelihoods. This is an actual crisis for them.

They're looking at other things to do possibly. That's how serious it is. But within every crisis, there lies an opportunity. And that's why I love what I do. Because what we do, real estate investors, we can play outside of those lines. just, we're not playing inside this one small little box of conventional financing. No. The opportunity lies here within creative financing. And we covered a great deal of creative financing. You know, when it comes to homes owned free and clear, we covered that in detail on episode

70. So, you know, you want to go back and check that out. And although we did cover it for an entirely different reason. It's a really good thing that we did when we did it because now you've got two reasons to study up on your creative financing. And you can go back and listen to that first episode to get that episode 70 to get that first reason. And then the second reason is what I've just shared with you, this Dodd-Frank Act reform that's going into effect next month. So we've covered the creative financing on the homes owned free and clear, right? We did that, of which that probably represents one third of all homes. Most people don't realize. that one third of all homes do not have mortgages on them.

But that leads us with the other two thirds, right? The other two thirds that do have mortgages on them. Well, a strategy that you might want to become more familiar with or brush up on if you are familiar with it is subject to. Subject to investing. And depending on who you ask about this strategy, you're likely to get some very mixed opinions. It seems to be a very polarizing subject.

I've been visiting the way. website bigger pockets a little bit more frequently lately. Just checking in and see what people are talking about. And there's a couple posts there on subject too. And you've got people like say, yeah, just go for it. No big deal. And you've got other people like, don't even touch it. It's polarizing. Personally, I don't think it's any big deal. Well, let me clarify. Because I do understand the people that say don't touch it. I understand where they're coming from. There's definitely a time and a place to use the strategy. It's not one size fits all. And if you're not careful, if you don't know what you're doing, you could make some enemies or you could even find yourself

in court. But ain't that the truth with every strategy? It is. Of course it is. And like any other strategy, as long as you know what you're doing, there's not much to be concerned about. I mean, operate within the law, don't screw people over, and make sure everyone gets what they were promised.

And you're going to be fine. Subject to investing in that regard is no different. than any other investing strategy. So what I'm going to do is I'm going to walk you through how I do subject to deals and how I do them and still sleep at night because a lot of people are very nervous about conducting these deals and I don't think you need to be. So I'm going to walk you through it and how I do it and have peace of mind and can go on about my business and I sleep like a baby.

Okay. This is a strategy of where you can create really great amounts of cash flow for yourself with little to no money. and that's the primary subject of this episode. I just wanted to give you some background information, some that information first. So as to know why not only is this a good strategy for your business, good to know,

but also how to do it. Because you're probably going to be presented with more opportunities where this strategy is going to make sense. It's where if you don't know how to do it, you might have to pass on a deal. And that could potentially slow down the building of your cash flowing portfolio. So that's why we're covering it. So I want you to know what it is and why you might need it more. But I also want you know how to do it. So that's what I'm going to share with you.

And I'm anticipating that after we're all done here, you will have some questions, perhaps a bunch of questions. And I'm going to give you a resource to get all of your questions answers. So don't worry there. And also, please know that the answer to most of your questions right at front, most of your questions around subject to investing will almost always be the famous real estate answer. It depends. There are just too many variables and moving parts that have to do with this strategy and specifically the strategy. I would say this is one of the more advanced topics that I will probably cover on this podcast. But once you get it, once you understand it, once you've gone through it once, just like any other strategy, once you've gone through it once, it is rather simple.

It's not that big of a deal. But please keep in mind, this is one of those strategies where, you know, I kind of kind of explaining earlier, people try their hardest to poke holes in it with countless hypothetical scenarios. Yeah, but what if this or what if that or what if this? And, you know, so just ignore the hypothetical scenarios. Okay, we're going to play in the real world. And with like that, with that said, and like I already said, it's not a strategy that's ideal

for every situation. Okay? So if you have a hypothetical scenario that disqualifies it, okay, fine, you got one. Don't use it in that strategy. It's just another tool in your toolbox. It's another means to providing a solution for a motivated seller, a seller that's distressed, a seller that needs help. It's just another tool that could be a potential solution for them.

But it is a tool that might be getting more use than it has been in the past. Okay? So I'm going to begin by answering the most frequently asked questions. right up front because I guarantee you they will come up. So if I answer them now, you'll be able to give your undivided attention to this training instead of listening to the training with a bunch of questions floating around in your head and with your mind's all fogged up and you're not hearing what you're supposed to be hearing. So before I go on you further, I'm going to disclose and I have to do this because I am not an attorney. What I'm going to share with you right now is

not legal advice nor a recommendation of any actions that you should take. What I'm about to share with you is my personal experience executing the subject to strategy. Have you ever noticed whenever you hear disclosure? People give that disclosure because there's going to be something dangerous or scary coming up. The good stuff's about to come, but they don't want to be responsible or reliable for it. And so I guess that's very much the case here because everyone comes from different backgrounds, different resources, different experiences, and we've got to protect ourselves.

I'm just going to share with you how I do it. I have not executed the strategy in every state. I have not executed it under every possible scenario. And I actually haven't done them too many times. I haven't had to. But it's my gut feeling. I will be using this strategy more often in the very, very near future. Okay.

So I want you to know that my primary intent here is to give you the detailed inner workings of this subject to strategy and then arm you with enough information so that you can speak intelligently about it. You can speak intelligently on the subject of this type of investing, and you can ask the real estate professionals that are on your team the right questions. All right? So that's my intent. I just want to give you enough information so you can be intelligent when you talk about it

and you can ask the right questions. You know, since I've been training real estate investors, a ton of questions have revolved around how to invest subject too. I mean, it's fascinating to people that they all want to know how to do it because they just can't believe that someone would. would sign over their house to you and leave the loan in their name. And so I get a lot of questions about the strategy and specifically how to overcome this thing called the due on sale clause.

So let's simply define these two things really quickly to make sure everybody's on the same page. Investing subject to is when a motivated seller signs over the deed to you, the investor, while you do continue to make payments on their existing financing. You have taken ownership of the property subject to the existing financing. So you, you the buyer, you own the property, but the seller still owns the liability of the loan. Your name is on title. The seller's name is still on the loan. But you still have to make the payments, okay?

Don't get that twisted. All right, you still have to make the payments. Sounds very cool, right? I mean, you may be thinking, where can I get a bunch of these? Like I said, this is not a strategy that's going to fit every situation. Typically, your ideal situation for subject to investing is just about any situation where a quick takeover of the property is in order to solve the challenge at hand. If the motivated seller has to move quickly.

So I repeat, it's not a good fit for every situation, but it is a viable solution when the seller needs a speedy solution. A quick escape from a property that is encumbered by a mortgage. That's when you'll find the greatest percentage of success with this strategy. Although you're not limited there. You can use it in many other scenarios, but that's primarily the place where it's going to work the best. Now, the first question that I undoubtedly get when I teach this is, why would any seller agree to such an arrangement? Right?

Why would a seller sign over their property to you while they are still liable for the loan? Who in their right mind would do that? Well, remember, we've said this countless times on this show, at the center of every real deal is the seller's motivation to sell. So first, you do need a motivated seller for this strategy to be applicable. And when you do find the right situation and take over a motivated seller's payments, the seller benefits by getting peace of mind and they get to move on and they get preservation of their credit score.

That's why they would do it. Because they got some sort of issue that that fits, that solution fits. They got to move quickly. And they don't want to damage their credit score, so they're willing to exchange that equity for peace of mind and preservation of their credit score. That's why they would agree to this arrangement.

And remember, just because you wouldn't do it doesn't mean somebody else wouldn't. I mean, maybe you would reconsider the strategy if the shoe was actually on the other foot, if you were actually in their situation. You don't really know what you would do if life should throw you a similar curveball. And besides, it's not your job to insert your opinions of what the seller should do or shouldn't do. Focus on your side of the deal and let the seller focus on theirs. Okay?

Don't make up their mind. Don't negotiate on their behalf. Don't, you know, don't shy away from asking for something because you don't think they would do it. Okay, that's not your job. Your job is to focus on your side of the deal. Let the seller focus on theirs. The second question undoubtedly will always be, what if the seller asks,

well, what's to stop you from not making payments and just walking away, right? That's another big fear people have. What do you say to that? Well, should the seller raise a concern around whether you're going to follow through and actually make the payments, you can explain that the risk of losing your money in the deal

and the equity in the property is enough to keep you from missing their payments. You know, although the loan isn't in your name, you've still got a lot of money and time vested in the property. You'd be shooting yourself in the foot just as much you would be the seller. And if they're not satisfied with that answer, the strategy, it's not a good fit. Okay? It's not a good fit for that situation.

And that's no big deal. The sale of their property, it's their problem, not yours. Don't make it yours. Your job is just to share possible solutions. If they don't like that solution, offer them another one. and that's where the three-option letter of intent comes into play that we covered, and more on that a little bit later. Now, having said that, getting a motivated seller to go along with this type of transaction,

it's not as difficult as you might think it could be. As long as you are clear with regard to what subject to is, it's actually rather easy. I mean, if you know how to explain it to the seller and what steps to take to protect you in the seller, you can use the subject to strategy over and over and over with very minimal risk. Okay. Now, having said that, as great as this strategy can be in your real estate investing, there are some things of which to be aware that aren't present in other strategies. There are specific precautions that you should take to protect both you and a seller.

So first, make sure that the seller knows everything that you know about how to invest subject to. This is why it's very important for you to understand. understand it because you've got to fully disclose to the seller what this strategy is all about and how it's going to work. That's going to keep you out of a lot of potential trouble is by full disclosure. The last thing you want to do is find yourself in court with the seller and that seller is accusing you of stealing their home because that's kind of what it could look like to the uneducated eye from someone outside looking in.

And because that's kind of what it looks like from the outside looking in for someone that doesn't know any better, the investor almost never wins that argument unless you've covered every base. So full disclosure, that's very important. And even then, your chances in court are probably 50-50. So just be straight with people. Make sure everyone involved gets what they were promised and there should be very little to worry about. Second, don't take over a property just because the owner agreed to give it to you. I mean, it can be very exciting, especially if it's your first time And when a seller signs over the deed to you, they just sign it over and they say here. It still has to be a good deal.

Keep that in mind. Don't lose sight of that. It still has to be a good deal. It still must be a property that meets your criteria and moves you towards your goals, meeting your minimum deal standards. It's still got to be a good deal. Just because they're going to give it to you doesn't mean you got to take it. All right?

Or it doesn't mean that you should take it. Still got to be a good deal. Third. And this is the biggest one. And it's one of the most, I would say, the most feared and misunderstood, yet very fascinating, the subjects in real estate investing. The dreaded due-on-sale clause. Now, as simple as a subject-to transaction can be, and as simple as I've laid it out there,

it's this specific clause found in most loan documents, I guess all loan documents today, that stops most investors dead in their tracks from moving forward on a subject-to deal. it's the part of the strategy that really polarizes people. This is where the big giant disagreements and the two, I guess, opposing factions come into play on the strategy. Meaning you'll find experienced investors that just have absolutely no fear of the clause, and you'll find experienced investors that stay away from it at all costs. In my book, Fear? Fear is merely the absence of education.

and your level of fear of the due on sale clause will be in direct proportion to your education on the subject. The better part of disappearing that fear is to understand the due on sale clause's history, its purpose, and how to work with it. And then I'm confident that you'll find that there's really nothing to fear here, but fear itself. The due on sale clause also referred to as an acceleration clause. What it is, it's an authority clause in a loan document. that gives the lender the right to call the loan due. And many people think the due on sale clause applies only when title of the property is transferred away from the borrower's name.

Not true. Not true at all. Most due on sale clauses paint with a very broad brush, a very broad stroke, and just about any modification to title, interest, or possession can trigger the clause. Just about anything. I mean, even with this broad spectrum of rights, though, lenders, they rarely exercise this right because it's typically not in their best interest to do so. I've seen some clauses in some documents that say they can pull the trigger on the do-on-sale

clause even if you just think about selling your home. So just, you've probably already violated it already, okay? So it's, but they don't, they rarely exercise their rights under this. this clause because it's just not in their best interest to do so. So if it's not in their best interest to do so, why is the clause there? All right. So lenders, they began including this due on sale clauses back in the 70s during a time where interest rates were rapidly increasing.

So instead of taking out new loans, every regular Tom, Dick, and Mary homebuyer were assuming the existing loans on homes because the interest rates of those loans were so much lower than the new loans that they would have to apply for. So lenders, they started to insert this due-on-sale clause to protect themselves from themselves, citing that they needed this clause to protect their collateral by staying abreast of who was actually living in the properties. That's what they said. B.S., but that's what they said.

lenders really, they really only wanted to generate new loans at the higher market interest rates. And as time passes, the lender's actions or the lack there of their actions prove that to be so. They don't care who's living in the dang property. They just want to get the most bang for their buck. They want the highest interest loan that they can possibly get. That's what they want. That's why they very rarely pull the trigger on this. clause in the last, I don't know, 20, 30 years is because it wouldn't have been in their best

interest to do so. Lenders, they haven't regularly enforced the due-on-sale clause since the early 80s. Why? Because, like I just said, interest rates have been on a fairly steady decline since then, and they lose money if they wrote new loans at those lower rates. Got it? Now, oh, by the way, this do-on-sale clause, it sounds really scary. I want you to know you are not going to jail.

you're not going to jail for violating the due on sale clause. I mean, even if the banks exercise their rights under this clause and decide to call the loan due, you have not broken any laws. Did you hear that, realtors? It is not illegal. In order for something to be illegal, there must be a violation of an actual law. There is no federal or law. or state law stating it's a crime to violate the due-on-sale clause.

The very worst thing that could happen to you is that the lender exercises their rights under the due-on-sale clause and takes the property back. That's the worst thing that could happen. And even then, they can't do it inside of 30 days. Okay, hint, hint, for my wholesalers that are listening, they couldn't do it inside of 30 days, even if they wanted to. So you've got time, right?

you've got time to exercise or execute your exit strategy. And even after the 30 days, if the property is occupied, the lender will have to abide by normal foreclosure proceedings of which should be enough time for most fix and flippers to execute their strategy. Hint, hint, for the fix and flippers listening to this. So for the quick strategies, it's not even something free to really consider because the banks couldn't move quick enough on it anyway. So what about the list?

long-term investors. We're talking about cash flow here today, right? We're talking about how to generate cash flow with using little to no money, using a bank's loan that's already in place. That's kind of what I'm specifically talking about. So what about the long-term investors? Are you willing to take over a property subject to with the risk of the lender busting you? Not the law, not the police, okay? The lender busting you. If you're willing to take the risk, you have two real viable options on how to approach it. You can either sneak in the the back door or you can go in the front door. You can go on the front door, fully exposed, hiding absolutely nothing. Honey, I'm home, come and get me. Right? So the front door,

it's the sale of a property that's conducted in essentially the same way any sale is conducted. After an exchange of funds from the buyer to the seller, title is transferred to the buyer. The buyer then would simply make the payments on the loan that's left behind. That's the front door. and all of that is perfectly legal. It happens every day. And in most states, on the state purchase agreement used by that state's association of realtors, there's even a checkbox on their normal standard purchase agreement that's used by that state's realtors.

There's a checkbox there to indicate if the property is being purchased subject to the existing financing or not. I mean, if this were an illegal or even an unethical strategy, why have so many states made a provision for in their home state contracts. Right? Exactly. And I cover this because I'm so tired of it. And people tell me that it's illegal. It's not.

Okay? It's in the state's contract. Check the box if you're doing it. Okay. So that's the front door. The risk here is the bank that owns the existing loan on the property will find out that a transfer has taken place. That's where the risk is.

And they just kind of have to wonder, roll the dice on whether they're going to pull the trigger or not on that due on sale clause. they will have the option to execute the due-on-sale clause or not. It's their choice. And, you know, as I mentioned before, it hasn't been a customary practice in some time for them to do so. But they do do it from time to time. And should they, you basically have 30 days to pay the loan's balance or the bank will foreclose on the property.

And you will lose whatever time and money that you've put into the property. And the seller will have a default on their credit. Again, it has not been a normal practice for banks to exercise their rights under this clause, but the reason I'm going over this is that it very well might become a normal practice as interest rates are expected to rise. So I don't know when they will. I don't have a crystal ball, but they certainly can't get much lower, right? So expect for them to rise at some point.

And when they do, it then will be in the bank's best interest. to enforce the due-on-sale clause so that they can take the property back and rewrite the loan to a new buyer under the higher interest rate. So the front door, it's worked for a lot of investors for quite some time. They've had a good run, but now, considering the imminent future, that run will likely come to an end. So now what to do? Right?

Glad you asked. Well, let's discuss the backdoor approach. It's the old trust assignment trick, the land trust assignment. You see, there's a loophole that many investors like to exploit. And I'll give you a little history on this. The Reagan administration back in 1982 enacted the Garnes-St. Germain Depository Institution Act, of which was intended to revitalize the housing industry by ensuring the availability of home loans. And within the act, there was a significant consumer benefit,

included that allowed anyone to place real estate in their own trust without triggering the due-on-sale clause. They could place their home or any of their real estate into their trust, their family trust, without triggering the due-on-sale clause. And it's used primarily for real estate planning reasons. It's kind of a way for, it was a loophole basically. okay, this is a little bit of my conspiracy theory for the rich to be able to pass on their assets to their errors and avoid inheritance tax.

It's really kind of why I think it was there. And if you do the research, that's what a lot of people believe as well. So it was done primarily for estate planning reasons. And real estate investors, they recognized an opportunity here or a loophole, if you will, like I said, using a land trust. A land trust is an agreement of which one. party, the trustee, holds ownership of a piece of real estate, real property, for the benefit of another party, the beneficiary.

Okay? That's what a land trust is. The real estate investor opportunity being that this transfer of real estate using a land trust is exempt per the Garnes St. Germain Act. Get it? So you can transfer ownership of that property without triggering the due on sale clause. Now I'll break it down to you in three simple steps.

I'm going to go over the concept, generally speaking, and I'm going to share with you how you can get free access. I'm not charging any money for this. Get free access to the step-by-step execution of this strategy. So I'm basically going to go with what you do, and then I'll share with you how you can get the how to do it. All right. So imagine you come across a great deal.

You have successfully found a proper. that meets your criteria and a seller that will meet your terms and your terms being that you want the property subject to the existing financing. It's got a good rate, good payment. There's some equity in the building. You can rent it out and you can rent it out and take care of the debt service and still create some cash flow for yourself. Okay.

Everything is there. It's perfect. You're good to go. So step one, your motivated seller executes a land trust naming you as the trustee. That means really nothing more than just filling out the land trust document, and that's a document of which I'm going to give you at the end of this episode. And in this document, the seller is named as the beneficiary.

Okay? Just a piece of paper. You fill it out, and you write in the property address. You are the trustee. The seller is the beneficiary. Step two. You're a motivated seller, then transfers title to you, the trustee. Thank you, Garned St. Germain Act.

They transfer that title to you, and per this action, there is no violation of the due-on-sale clause. The transfer to a trust is exempt. You're the trustee. They've just transferred title to the trust. Transfer is exempt. Excited yet? I'm excited. Step three.

The motivated seller now assigns, okay? because in the land trust, you are the trustee, the seller is still the beneficiary. So step three, that motivated seller now assigns their interest, their beneficial interest in that trust. They assign it to you. You get the beneficial interest as well as being the trustee. Got it? Now, this assignment, it's not recorded, meaning that there's no public record of it.

It was recorded when title was transferred to the trust, but it's not recorded when that seller assigns their beneficial interest to you. Not recorded. There's no public record of it. The motivated seller, then they move out and they go on about their business, and then you, or maybe your tenant, move in. Got it? Tadda! You are now the beneficiary of the trust, the beneficiary of the trust that owns the property. Now, the trustee, also you, makes the existing loan payments, and you live happily ever after, right?

Well, it's not that cut and dry. You must know that when the motivated seller assigned to you their interest in the trust, that that indeed triggered the due-on-sale clause. But who's going to tell the lender? This part of the transaction is not recorded. How will the lender ever know? Okay. Good question. This is where you really cover yourself.

Typically, there are only three real ways of which the lender will get wise to the transfer. They'll get wise to the transfer because the change of the name on the deed or a different name on the check received for payment. when you're making the debt service payments, and or change of the hazard insurance beneficiary. That's where a lot of people, they forget that one. They forget the old insurance. Now, if you can dodge these three potential landmines, there's only one thing left for you to do.

Make the payments. Do not miss a payment. Don't be late on a payment. You put in all that work. You've got a smoking deal, and you stand to make a great profit, and you're generating a lot of great cash flow with very minimal money out of your pocket.

Don't mess it up by missing or being late with the payment. Don't give the lender any reason to call you. I mean, if you did everything else right, that's your strongest line of defense against the due-on-sale clause and protecting your asset. Make the payments. So that's what there is to do to pull off a subject to deal with minimal, if any risk, really.

I mean, there's always risk, but there's no more risk conducting the deal in this manner then there isn't any other strategy. It's just real estate. It's just another way to do it. So that's what to do. Now, how do you do it specifically? Okay, so I'm going to share with you. If you go to the show notes of this episode, episode 80,

so you go to epic real estate.com forward slash episode 80. Okay, very simple. Epicrealestate.com forward slash episode 80. There will be instructions on how to get access of the how-to instructions of this strategy what I just went through. And I'm going to ask a favor of you, but it doesn't require any money, just 30 to 60 seconds of your time, and I'll give you the step-by-step instructions, as well as all the documents

required, including the land trust agreement that we just talked about. I believe there are seven or eight documents that you're going to need to execute the strategy, and they are all included. I'm going to give you all that stuff for free. and additionally I'll give you my three-option letter of intent, and I'll give you the custom calculator that I used to come up with my three options. And you can get all of that by merely going to Epicrealestate.com forward slash episode 80 and just follow the instructions.

Like I said, there's no request for money. I don't even request your email or your information. This is totally free. It'll just take 30 to 60 seconds of your time. Pretty simple. So go to Epicrealestate.com forward slash episode 80, and everything is all yours there for free. Now, another question that I'll typically get when I conduct this training,

I just want to make sure that this part is clear, I'll get something to the effect that, okay, Matt, I get it, you're not breaking any laws, okay, it's totally legal. But isn't this unethical? Could it be immoral? If you're out there and you're thinking that, I'm glad you were thinking that, because I want to put your mind at rest. If it were unethical or if it were fraudulent, then why would so many different states in their standard state Realtor Association purchase agreements and paperwork include subject to as a financing option in the contract?

California has it, Utah has, and New York has it, to name a few, and many others. Further, the state bar associations of Alaska, Illinois, and Virginia, among some other states, in case, case after case have had absolutely no problem with lawyers aiding their clients and concealing these types of property transfers using the land trust example that I just gave you. Case after case after case. If you want to call me, I'll go ahead and I'll give you the case numbers. I just don't want to bore you to death. In fact, I think I gave you those case numbers back in, I don't know, episode 20-ish, 30-ish,

20-ish, 30-ish back then. I gave you the case numbers. I don't want to go through that again. So if it's not illegal, unethical, or fraudulent for an attorney or a broker to sneak in this proverbial backdoor, it isn't for you. You're not going to jail. And you won't have to even go to confession either. Okay.

So that was a lot of information. And you may have to go back and listen to this again. and if you go in and you download all of the free training that that I shared with you on how to get that, a lot of your questions are going to be answered there. There's a lot of visuals involved. You be able to see exactly how I do it, exactly how to fill out the paperwork. And I'm sharing all this with you, one, because it's a good strategy to have. It can be very powerful tool where you can help a seller out of their situation where nobody else can

because, you know, very few people don't know how to do it. And if they do know how to do it, they're afraid to do it. and I want you to know how to do it and not to be afraid of it. That's where education comes in. Education removes the fear. And also the landscape of our mortgage industry, the landscape of our real estate investing is about to change drastically. It's not going to affect every single person,

but I guarantee over the next year, you're going to come up against a situation here and there more frequently than you ever have where all of a sudden, that mortgage reform is going to impact your results. and the more tools that you have at the ready, the less impact that those reformations that that reform is going to have on your business. And that's why I'm sharing this with you. I'm looking out for you. I'm going to do it.

I'm prepared. I want you to be prepared too. Okay? So that's it for today. Until next time to your success. I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education.

If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening. We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.