The Two Biggest Lies About Subject To Investing

Everyone in creative real estate has heard of the due-on-sales clause. Unfortunately, it's also one of the most misunderstood topics in the industry. Half the internet will tell you it's nothing to worry about and that lenders never enforce it. The other half will tell you that if you buy a property subject to, the bank is guaranteed to call the loan due And you'll lose everything. The truth is, neither of those extremes is accurate. Today, I want to explain to you what a due-on-sales clause actually says and what it doesn't say and what really happens in the real world, how experienced investors manage the risk. And before we get started, I want to be very clear on this video is educational purposes only. Every state is different. Laws. Every lender is different. And before you complete a subject-to transaction, you should always consult with a qualified real estate attorney in your state. I'll say that more than once because it's important. So what's a due-on-sales clause? Simply put, it's a provision found in virtually every conventional mortgage that gives a lender the right to demand full repayment of the loan If ownership of the property transfers, I want to emphasize one word because it's a word that creates the most confusion: right. The lender has the right to accelerate the loan. That does not mean that they are required to do it. Does not mean that the loan automatically is called due the moment the deed is recorded. It doesn't mean that you've committed fraud or done something illegal. Simply because the ownership transferred. It means that the lender has a contractual option that they may choose to exercise. That's a very important distinction because too many people either ignore the clause completely or misunderstand what it actually says. Let's talk about the 2 biggest misconceptions. The first one is that transferring title subject to is somehow illegal. Look, I'm not an attorney, but it isn't. Buying property subject to is not a criminal act, and transferring ownership of real estate isn't against the law. What you're dealing with is a contractual agreement between the borrower and the lender. The mortgage gives the lender certain rights if the ownership changes. That's completely different from saying the transaction itself is illegal. Unfortunately, a lot of people use the word like illegal because it sounds dramatic and dramatic gets clicks on YouTube, but it's simply not an accurate description of what's actually happening. The second misconception is the one that concerns me even more because it's the one that gets investors into trouble. You'll hear people say, don't worry about the due-on-sales clause, banks never call loans. I don't think that that's an honest way to teach this business. Historically, lenders have rarely accelerated performing loans simply because the ownership transfer. Most lenders and loan servicers are in the business of collecting monthly payments, not foreclosing on performing loans. If a loan is being paid every single month, there's generally very little incentive to interrupt that income stream. But saying it never happens is simply not the The truth: the risk isn't zero, and anyone who tells you otherwise is giving you bad information. It's also important to understand that the lending environment changes over time. Think back to when mortgage rates were around three percent. If a lender was holding a performing three percent loan, there wasn't much financial incentive to accelerate that loan simply because ownership transfer. But what happened when the market interest rates are six? 7 or 8, suddenly the low-interest loan becomes much less attractive to lender. And if they accelerate that balance, then they'll be repaid in full and have the opportunity to lend the money again at a much higher interest rate. Does that mean that they're going to call every loan? Absolutely not. But it does mean that there are economic incentives that aren't exactly what they were a couple of years ago. That's why I believe it's important to have honest conversations about risks instead of pretending it doesn't exist. See, another question that I get all the time is how would a lender even know ownership has changed? The reality is that there are a number of things that can increase visibility. Insurance changes can raise questions. Escrow adjustments can create additional documentation. Mail forwarding requests, tax records, or communication changes can all make ownership changes more visible. And perhaps the fastest way to attract attention is by missing payments. Late payments create scrutiny. Performing loans generally receive far less attention than loans that fall behind. That's one of the reasons we teach our students to use third-party servicing. You can also do it yourself as well, but professional servicing creates accountability, documents payments, and helps ensure payments are made accurately and on time. Best way to avoid unnecessary attention is to simply make every payment exactly when it's due. Now, you may have heard people talk about certain exceptions to the due-on-sales clause. And it's true, the federal law does provide some specific protections for certain transfers. There are situations involving transfers to a spouse, transfers upon death, transfers resulting from divorce, transfers into a living trust where the borrower remains the beneficiary and occupancy doesn't change. Those protections absolutely do exist. But here's the Part that often gets skipped. Those exceptions were written primarily for family estate planning and personal ownership situations, not for real estate investing. So whether a particular investment structure falls within those exceptions is not something that you should determine based upon YouTube. See, we do utilize a trust in how we purchase because the Garn-St. Germain Act of 1982, our attorneys suggest, that we can transfer ownership without getting a due-on-sales clause being called because of estate planning purposes. And if it's done correctly, it does limit the likelihood that a due-on-sales clause will be called. Again, it's not perfect. That's how we were always taught. So here's what I suggest. I suggest that you always ensure that you know exactly how to perform a subject-to deal. With oversight of your attorneys and your team. And ask yourself this question: If the lender does accelerate the loan tomorrow, what's the plan? Do you have access to financing? Do you have private capital? Could you refinance? Could you sell this property? Do you have cash reserves as a backup plan? Like this isn't being pessimistic; it's being professional. Always know what's. Next, every investment carries risk, right? Good investors don't pretend that risk doesn't exist. The second way experienced investors manage risk is by having a defined exit strategy before they buy the property. Maybe they plan to refinance in 12 to 24 months. Maybe they're going to sell the property. Maybe they're going to sell on a lease purchase, which is what we specialize in. So we know exactly when this buyer is going to go out there and get financing. Because then we know they're going to cash everybody out within a relatively short period of time. As long as we know that it's defined, then we have an exit. Hope is never a strategy, right? Every subject-to should begin with a clear understanding of how it will eventually end. The 3rd strategy is simple but incredibly important. Never miss a payment. The best performing subject-to investors are disciplined because they understand that consistency matters. Third-party loan servicing could be a good solution for you, especially if you're just beginning. And making every payment on time creates that confidence with the seller and reduces risk of attention from the lender. So the systems build trust, not promises. So the fourth piece to complete this is disclosures with the seller. This is one of the values we emphasize the most at Smart Real Estate Coach. Sellers deserve to understand exactly how the transaction works. They need to know that the loan remains in their name. They need to understand that there's a due-on-sales clause. They need to understand what that actually means to them and what will happen if it's enforced. Historically, historically, it's uncommon, but the possibility exists. These conversations should happen in writing. Disclosures should be signed, especially before closing. Should be in plain English, and the seller should have every opportunity to review those documents and more than likely will be represented by their own attorney.

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So if you can't comfortably explain every aspect of this transaction, then you probably shouldn't be asking someone to sign it. Finally, every serious creative investor should build a relationship with a qualified real estate attorney. Should always be asking them for advice, especially when doing these subject-to deals. We understand they're becoming extremely popular, so it's really important that you're operating with integrity. So having experienced legal counsel available before a problem arises is the smartest investment you'll ever make. Like every state has different practices. Every transaction deserves that professional guidance. So as we wrap, I want to remind you of one simple truth. The due-on-sales clause is real. It's not a myth and it's not something to ignore, but it's also not an automatic disaster waiting to happen. The risk exists. It's manageable and it should be respected. Anyone telling you that there's absolutely no risk is selling you something. And anyone telling you to invest subject to investing can never be done safely is usually selling you something as well. The truth lives in the middle. Creative financing is about understanding both the opportunity and the responsibility that comes with these types of transactions. So before you complete your first subject-to deal, make sure you know your reserve number, make sure you have a clear exit strategy, and most importantly, make sure that you have a qualified real estate attorney in your state who can guide you through this process. If you'd like to learn more about how to structure these subject-to deals, manage risk, and help sellers the right way, go ahead and schedule your strategy call with our Smart Real Estate Coach team. We'd love to help you get to your first transaction.