Epic Real Estate Investing - Investing Subject-To and Conquering the Due on Sale Clause: Creative Real Estate Investing Continued... | Episode 205

Episode Date: May 16, 2016

Approximately two-thirds of houses in the United States have mortgages on them.  So sooner or later you are going to run into a motivated seller who has traditional financing in place.  Does this mean that there is no deal to be made?  Certainly not! Today Matt explains how to use subject-to investing to take ownership over a property with a mortgage on it.  He discusses the strategy, legality, and ethics of this type of investing and, of course, addresses the dreaded due on sale clause.  Enjoy! ------- The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? E.ducation P.roperties I.ncome C.oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

You know how some people want to invest in real estate but they don't know how? Oh, yeah. And you know how some people want to invest in real estate but they don't have the time? Oh, yeah. And you know how some people want to invest in real estate and they simply don't want to do all that work? Oh, yeah. Do you know someone like this? Mm-hmm.

Perhaps that someone is you? Uh, yeah. If so, subscribe to the Turnkey Real Estate Investing Podcast, the show for business. people who want to invest in real estate, but don't have the time or the desire to take on the heavy lifting. Turnkey real estate investing. Subscribe today. It's free. Yeah. Turnkey, real estate investing.

This is Terrio Media. I'm casting from Terrio Studios in Glendale, California. It's time for epic real estate investing with Matt Terrio. Yeah. What's up? Hello, and welcome to Epic Real Estate Investing, the place where I show people how to escape the rat race using real estate. You just got to shift your focus from making piles of money to making streams of money,

change that one thing, just one time, and you are on your way to financial freedom. Yes. Now, it's not the most exciting path, but it is the fastest. So that right there, that's exciting. And then once you get there, then life then really becomes exciting. And speaking of excitement, we're talking more. creative real estate investing today. Creative real estate investing, using more of your noodle than your, then your wallet. Okay. So when it comes to investing creatively in real estate,

specifically around the context of seller financing, it's inevitable that the question is going to come up. What if the seller has a mortgage on the property? What do you do that? Okay, so it's understandable, totally understandable. Approximately two-thirds of this country's houses do have mortgages on them. So this is going to be something you will eventually face if you want to take on creative real estate investing and you want to have the seller finance your deals for you. And a quick side note, though, if two-thirds of the country's houses have mortgages on them, that means one-third of them do not. So there's a ton of houses more than most people realize that are owned free and clear. And the opportunity for building your cash flow portfolio

via seller financing, absolutely tremendous. All right. So if that excites you, the way it excites me, then you definitely you're in the right place. So what about the properties, though, that do have the mortgages on them? How do you work around those mortgages? So super question. That's what we're going to talk about today. And what we're talking about is how to invest subject to, meaning purchasing a property subject to the existing financing.

And this part, it's actually very easy, meaning the seller sells you the property, leaving the mortgage in place. And you simply make the payments for the seller. You are on title. The seller is still on the debt. It's a very sweet deal, right? Totally. You know, most people when hearing about this for the first time

or even when hearing about it for the hundredth time, their immediate thought, though, is who in their right mind would sell a house and still be responsible for the debt? Who would just give that away and still have to make the payments, right? Or still be responsible for that. So remember, though, remember our negotiating position. And we've talked about this several times. Don't think for the seller.

Or better put, don't think on behalf of the seller. You don't want to be negotiating for the seller just because you think they're insane for doing what they're doing. And so you adjust your negotiating strategy because you think they'll never go for it because you would never go for it. Don't do that.

Just because you're not in a position where you would do that, that doesn't mean that the seller isn't. Okay? So just because you hold high regard for the value of real estate, that doesn't mean that the seller does. There's more important things

than in this world than real estate. It's just really important to us because that's, you know, that's how we make our living. That's how we're going to build our wealth. But for a subject to a subject to deal to typically go down, there indeed has to be some seller motivation. All right. You're right. Most people aren't going to just give their house away and stay responsible for the debt.

There still has to be some seller motivation involvement. It's typically the type of motivation that requires a fast solution. Something's going on in their life right now that they don't have time for anything that's going to take up any sort of time of the disposition of that, that property. So they got to move fast. So if we just got to leave the thing in place, then we got to leave the thing in place with regard to the debt. So a subject to deal is ideal when the deal has to happen fast. That's most places where it's going to fit. So that's it in a nutshell, right? It seems pretty simple, but not so fast, right? Here's where it gets a little tricky and depending on who you ask, perhaps even risky.

So the big barrier in your way is what's called the do-on-sale clause. You probably heard that and you're going to have to overcome it. So let's start just right from the top. Okay, there are a lot of moving parts in the strategy. So let's just start from the beginning. Investing subject to is when a motivated seller signs over the deed to you while you continue to make payments on their existing financing. You have taken ownership of the property subject to the existing financing.

So you, the buyer, you own the property while the seller still owns the liability of the loan. Are we straight there? Cool. So how to invest subject to? Very simple strategy. But like every strategy, it's not going to be a good fit for every situation. So after this episode, you're going to be like, you might be all fired up on this subject

two strategy. And you're going to try and fit every single deal into it. And it's just not going to be a good fit for every strategy. You know what, whether it's seller financing, whether it's lease options, whether it's private money, hard money, whatever it may be, subject to is just another tool. in the toolbox, which enables you to use someone else's money to transact your real estate. Got it? So why would a seller agree to such an agreement?

So remember, at the center of every 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 preservation. of their credit score. That's what's in it for the seller. That's why they would agree to it. It's speed. It's a problem that they get rid of really quickly. They get some peace of mind and they get to move on and they get to preserve their credit score. That's why they would do it. Now, should the seller raise a concern around whether you are going to follow through and actually make the payments?

That's because that's a question. They're like, why would I do that? How do I know you're going to make my payments? That's a common objection with the strategy. Well, you just explained that the risk of losing your money in the deal and the equity in the property, that's enough to keep you from missing payments. So there's equity in this property. I'm going to take care of it. I've got some money in the deal and I certainly don't want to lose that. And if I miss your payments, that's a good way for me to lose my money. So I'm not going to do that. So we're in this together. All right. So that's how you answer to the question, how to invest subject to, it's not a complicated one, as long as you are clear with regard to what subject two is.

It's not as difficult as to execute as you may seem. 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 two strategy over and over and over with minimal risk, right? Risk only comes when you just, it's a lack of information. That's where the risk comes from. So we're going to download you with a bunch of information today. So the risk is much less for you. Now, as great as this strategy can be, there are.

some things of which to be aware. So that's what we're going to go over. And there are precautions that you should take to protect both you and the seller. So first, make sure that the seller knows everything that you know about this strategy. Full disclosure with the seller is going to keep you out of a lot of potential trouble. If you keep any secrets from them to because you want to get the deal through, you're trying to be sneaky, that you're adding extra risk and extra liability upon yourself. Okay. So full disclosure, best policy. And the last thing you want is to find yourself in court with the seller, accusing you of stealing their home, right? The investor, they almost never win with this argument unless, you know, you've covered every

single base. And even then, there could be some risk. So just be straight with people. Make sure everyone involved gets what they were promised and you're going to be okay. Second, don't take over a property just because the owner agreed to give it to you. Because I'm telling you, once you start having this conversation and a seller, agrees to it, it can be very exciting, especially if it's the first time. So when a seller signs over that deed to you, that can be very excited. Hey, I just got a house for free. They just gave it to me.

Nonetheless, it still has to be a good deal. It's great to have a seller sign over the property to you and give it to you and just let you take over the payments. It's awesome. But 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 still has to meet your criteria. Just because they're giving it to you, doesn't mean you got to take it. Third, and this is probably the biggest one. It's one of the most feared and misunderstood yet most fascinating subjects in real estate investing. The dreaded due-on-sale clause. As a simple as a subject to transaction can be, it's this specific clause found in most loan documents today that stops most investors dead in their tracks from moving forward on a subject

to deal. So once you understand the due on sale clause is history, the purpose of it and how to work with it, you're going to find that there's really nothing to fear, but fear itself. You're going to be like, oh, why did that stop me in the past? So let's talk about that, the do on sale clause. Also referred to as an acceleration clause. And it's, it's an authority clause in a loan document that gives the lender the right to call the loan due.

So if certain conditions happen, they can call that loan due. I mean, if you're only a year into the mortgage and something happened that violates that due on sale clause, they can say, hey, we can't wait in 30 more years. You got to pay now or are we taking the house back? Okay, that's what the due on sale clause is. And many people think that this clause, it applies only when title of the property is transferred away from the borrower's name. Not true. Okay, that's a big myth. There are a lot of things that can trigger the due on sale clause. I mean, it's painted with a very broad brush and just about any modification to title. any modification to the interest or the possession of the property can trigger the clause. Anything. Okay. So even with this broad spectrum of rights, lenders, though, they rarely exercise this right because it's typically not in their best interest to do so, but they still have the right to. Right.

But it's not in their best interest. So if it's not in their best interest, then why is the clause there? All right. So let's talk about that. Lenders, they began including the due-on-sale clauses in their, loans back in the 70s, 1970s, during a time where interest rates were rapidly increasing. And instead of taking out new loans, just regular Tom, Dick, and Mary homebuyer out there that what they were doing is when they were purchased a home, they would just assume the existing

loans because they didn't want to go get a new loan with a higher interest rate. Okay? So lenders then started to insert this due on sale clause because they see this as, well, if we're not issuing new loans at the higher rates, we're losing money. So the lender started to insert this 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 it was for. B.S. right? Lenders only wanted to generate new loans at the higher market interest rates, but they said they had to protect themselves because they needed to know who was actually living in the properties. A bunch of bologna. They just want to make more money. So as time passes, the lender's actions or lack their of, it's totally proven this to be so.

So lenders, they regularly enforced the due-on-sale clauses. They haven't really enforced those since the 80s. And why is that? Well, because interest rates have been on a fairly steady decline since then, and they'd lose money if they wrote new loans at the lower rates. See, all the evidence is right there. By the way, you're not going to jail for violating the due-on-sale clause. did you hear that you got it especially you realtors especially you it's not illegal in order for

something to be illegal there must be a violation of an actual law that's the definition of illegal so get that word out of your vocabulary you guys use it too liberally use it way too much and you don't have any civil code or anything to back it up okay so when it comes to subject too i'm talking about specifically though it's not illegal to violate that due on sale clause there's no federal or state law stating it's a crime to violate the due on sale clause. The worst thing that could happen, the worst thing that happened to do is that the lender exercises their rights under the do on sale clause and just takes the property back. And even then, and even then, if they did that, they can't do it inside of 30 days.

Hint, hint for the wholesalers listening to this strategy. And even after the 30 days, if the property is occupied, the lender's going to have to abide by normal eviction and foreclosure proceedings, which should be enough time for most fix and flippers to execute their strategy. You got that, fixing flippers? Listen into this, hint, hint. So even if they did exercise that due on sale clause,

if you think you can go ahead and wholesale that property inside of 30 days, who cares, right? And the fix and flippers, you need two, three months, and you just need somebody living in there and they're going to have to go through the normal eviction and foreclosure process. And if you feel like you can go ahead and fix and flip that property inside of that,

60, 90-day period, then go ahead. Who cares about the due on sale clause? All right. So what about the long-term investors, though? Are you willing to take over a property subject to with the risk of the lender busting you? You know, because if it's long-term, now we've got an issue. All right? So if you're willing to take the risk, you have two real viable options on how to approach it.

And I say risk, quote, unquote, risk. You can either sneak in the back door and do it covertly. Or you can go in the front door just saying, hey, I'm home. I'm here to take over this house and I'm taking over the payments too. All right. So let's discuss the back door entry first, the covert operation. It's the old trust assignment trick. You see, there's a loophole that many investors they like to exploit.

It's a loophole, and it is there for all that want to participate. You see, there are Reagan administration back in 1982 and enacted the Garne-St. Germain Depository Institutions Act, which was intended. to revitalize the housing industry by ensuring the availability of home loans. So it's there for a totally different reason than what it's being used for. So within that 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. Okay.

So within that act, there's a benefit to the consumer that they could go ahead and place their own real estate holdings inside of a trust and that would not trigger the due on sale clause. And it's really primarily for estate planning reasons. Basically, the wealthy were, they put a little clause in there to protect themselves so they could protect their estate. But real estate investors recognized a very different opportunity for using this land trust. And so what's a land trust?

Well, a land trust, it's an agreement of which one party, the trustee holds ownership of a piece of real estate, real property, for the benefit of another, the beneficiary. So the real estate investor opportunity here is that the transfer of real estate using a land trust is exempt per the Garnes Saint-Germain Act. Get it? So you can put this in the trust and now all of a sudden you're exempt and it does not trigger the due on sale clause. Got it? That's what the what the Garnsaint-Germain Act says. Now I'll break that down to you in a few simple steps. imagine you come across a great deal. You have successfully found a property that meets your criteria and you found a seller that's

going to meet your terms and your terms being you want the property subject to the existing financing. So you're good to go, right? All right. So step one. Your motivated seller signs a land trust naming you as the trustee. The seller is the beneficiary. Got it?

So step one, your seller signs a land trust and you are named in that trust. as the trustee, the seller is named as the beneficiary. So step two, your motivated seller transfers title to you, the trustee. Okay, so it's the name of the trust. That's how it goes into the trust. So thank you, Garn, St. Germain Act. Now, as per this action, there is no violation of the due on sale clause. Okay?

The transfer to a trust is exempt. Excited? Yeah. Step three, the motivated seller now assigns their. interest in the trust to you. That assignment there, when the seller signs their interest to you, the trustee, that the assignment is not recorded, meaning that there's no public record of it. The motivated seller then moves out and goes on about their business and you or your tenant move in. Ta-da. Got it. So you are now the beneficiary of the trust, the beneficiary of the trust that

owns the property, and you are also the trustee. Now, the trustee makes the existing loan payments and you live happily ever after, right? Well, it's not that cut and dry, right? 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. So it wasn't by making you the trustee that triggered the due on sale clause. It was when the seller signed their beneficial interest over to you as well. That's what triggered the do on sale clause.

but it's not recorded. It's not public record. Who's going to tell the lender, right? How are they ever going to know? Well, typically, there are only three real ways of which the lender will get wise to this transfer. One, change of the name on the deed, and that's not likely, since lenders don't readily have the spies at the clerks and recorder's office, and the thing wasn't recorded anyway. The second way would be a different name on the check that's received for payment. So when you start making those payments and they notice that those checks are coming from somebody different than who they've been normally coming from,

that could make the lender wise to what's going on. But not likely since the bank officers are very far removed from the clerical workers who actually process the payments. So you're pretty cool with those two scenarios. Three, the change of hazard insurance for the beneficiary. This is the most common way a lender will discover a transfer. of interest of that property. So if you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also named beneficiary, receives a copy of that change.

So it has to do with when you go ahead and you do that transfer of insurance. So that's how they're going to get hip to it. However, if you transfer title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. Got it? So the lender will probably not object since they're going to assume that the seller has just gone ahead and implemented some sort of estate planning strategy or some estate planning device. Got it? So if the beneficiary of the trust is assigned, the lender will not be notified since the insurance benefits. beneficiary, the trustee, has not changed.

So that's how to invest subject to sneaking in the back door. And I know that that was a lot to follow, right? There's a lot that it took me a second to get my head around the beneficiary, the trustee, the insurance, who's the check supposed to come from? But stick around to the end and I'll tell you where to go to get a step-by-step video tutorial. Probably much easier to follow along visually. Stay around and I'll tell you where to go to get that along with all of the trust documents that you need to execute the strategy.

All right. So now, what does it look like going through the front door? Well, I'm going to show you right after this. You've got the knowledge. Now, get the funding. It's simple. It's easy. Go to epicfastfunding.com.

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Now, let's take down a subject to deal busting in the front door. Imagine the same scenario with our motivated seller and our previous example. As soon as you get an agreement from the seller allowing you to take over the property subject to the existing financing, turn the entire file just over to a third-party servicing company and just let them do the rest. Let them do everything. And just go to Google and type in third-party servicing company or note servicing company and you get a bunch of options. Okay.

But turn it over to them. Let them do it. Let them communicate with the seller. Let them communicate with the lender. Completely remove yourself from all parts of that conversation. It's really similar to how, you know, when attorneys talk. to other attorneys. You know, if you're in a lawsuit with somebody, you know, whether it's a business associate

or even a family member or a friend or just somebody who, you know, violated you in some way, then, you know, you have this personal thing and you're upset with each other. And then the lawyers, when they went, so they got a lawyer, you got a lawyer, and then what the lawyers get to talk, talking, and there's no emotion there. They're just trying to work out a deal. It's no big deal. And that's exactly how this works. It's very similar to, like, an attorney talks.

to another attorney. They speak the same language. They respect each other's position. They just pass paperwork back and forth like it's an everyday thing. Because it is. And when note servicing companies are speaking to other note servicing companies, it's just like that. It's just passing paperwork back and forth.

So once the note servicing companies have completed their duties, all there is to do is to make the payments. Actually, in both scenarios, you want to make the payments. Do not miss a payment. We've talked about this as a strategy to where it can build your wealth and where you can grab onto some equity and you can grab onto some cash flow, but you still have to do your part. Okay. So do not miss a payment. You put in all the work.

You got a smoking deal and you stand to make a great profit. Don't mess it all up by missing or being late with a payment. Don't give the lender any reason to call you. That's probably your best line of defense. That's one of your strongest lines of defense against that duel on sale clause. is why. In today's economy, after the collapse of 2007, banks are ecstatic just to have good standing loans.

They are so excited just to have good quality paper. And they really don't have the manpower or even the interest to police their own accounts that are in good standing. They've got enough challenges right now with the ones that are in bad standing. So they're going to leave them good standing ones alone. So that's how to invest subject to. And it's all fine and dandy, right? But what about ethics?

Right? My realtor said it was illegal. The guy in my Rea Club said it's loan fraud. Another wholesaler investor said it was unethical. All right. So let's talk about the ethics here. Let's talk about the legalities because we went through a covert way of doing it. And we have to keep, you've got to keep quiet.

You can't reveal all of this to the lenders because they might get wise. and they're going to take back the property because they can and blah, blah, blah. So why do I got to keep it a secret? That sounds kind of shady, right? Okay, so let's talk about that. If it were unethical, if it were fraudulent, first of all, it's not illegal. Okay, so it's not illegal. We've got that out of the way.

There's no federal or state laws of saying this is illegal. But it doesn't have to be illegal to still be wrong, maybe. So if it were unethical or fraudulent or just morally wrong, then why would, if that were the case, Why would so many different states in their standard state realtor association purchase agreement, realtor association purchase agreement, the same people that like to say everything is illegal, it's in your contract. It's in your paperwork that includes a subject to as a financing option on the contract. California has it, Utah has it, New York has it, just to name a few.

Why is it even in your contract if it's unethical and if it's fraudulent? right further the the state bar associations of alaska illinois and virginia in case after case after case have had absolutely zero problem with lawyers aiding their clients and concealing these types of property transfers using the land trust example i gave you today no problem at all case after case after case. So if it's not illegal, if it's not unethical, and it's not fraudulent for an attorney or broker to sneak in the back door, it isn't for you either. The most you've got to lose is the time you've invested and the money that you put into the deal, of which brings me to the best practices when investing subject to. It's a great strategy for short-term investing, such as wholesaling and fixing

and flipping. Okay. So if you got a short-term strategy and you don't plan on holding onto the property very long, go for it. Now, if you're subject to investment is going to be a long-term hold type play, I'd recommend not investing any more money in the deal than you're willing to lose. Okay. Don't invest any more in the deal than you're willing to lose. And here's why. If you give a motivated seller $50,000 down to take over his property subject to the existing financing and say two years down the road, the interest rates make a jump, they jump up. It's very possible that lenders might start investigating their lower interest rates.

It's not likely, but it's possible. And in the event that they do, they could accelerate the loan per the due on sale clause and take the property back of which you'd have to say goodbye to your $50,000. Either you'd have to sell it really, really quickly. to try and recoup whatever you could. In most cases, you're probably going to have purchased that property with some equity in it anyway. But if that comes up and you don't have a solution, you could say goodbye to your $50,000. That's what would be at risk.

So if it's a short-term strategy, go for it. If it's a long-term strategy, just be careful of how much you actually put into the deal up front. So today, what did you notice here? What did you learn? The wheels kind of turn a little bit? And are you thinking like, well, that fraud thing, the illegal thing, why can't I tell anybody? And the realtor still insists on it's illegal. Like, get out of your own way.

Just get out of your own way. Well, what, I mean, how is this now going to impact your business forward? You know, knowing how to invest subject to and overcome the due on sale clause, it's an awesome strategy to have in your tool belt. But it does you know good unless you actually use it. You don't have to. another tool that's available to you. And I'm assuming you are now armed with enough information about subject to and the

due on sale clause that you can make an educated decision for yourself, whether this is a strategy for you or not. Okay. So if you're good to go or even if you're a little uncertain, you want to learn some more, go to epic real estate.com and go back and search for episode 80. Go search for episode 80 because in the show notes of episode 80, there are instructions on how to access that step-by-step video tutorial that I mentioned earlier. And additionally, all of the trust documents you're going to find there as well.

So go to epic real estate.com, search episode 80, and that training and all of the documents are yours for free. I'm not even going to ask you for your email address either. I'm going to ask maybe for a small little favor, but I'm not going to put you on another email list of stuff you don't want. Cool? All right. I'll see you next week.

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-desweet Radio. dot com.