HOW TO INVEST ‘SUBJECT TO’ AND OVERCOME THE ‘DUE ON SALE’ CLAUSE MATT THERIAULT
interest rates were rapidly increasing. Instead of
taking out new loans… regular Tom, Dick and
Due on
Sale
Mary “home buyer” were assuming the existing
loans on homes because the interest rates of
those loans were so much lower than new loans.
Lenders then started to insert the “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. B.S.! Lenders only wanted
to generate new loans at the higher market
interest rates. As time passes, the lender’s
actions (or lack thereof) prove this to be so.
Lenders haven’t regularly enforced “due on sale”
So, what about the long term investors? Are you
clauses since the early ’80’s. Why? Because
willing to take over a property ‘subject to’ with the
interest rates have been on a fairly steady decline
risk of the lender busting you? If you’re willing to
since then and they’d lose money if they wrote
take the “risk,” you have two real viable options on
new loans at the lower rates.
how to approach it. You can either sneak in the
back door, or you can go in the front door
By the way, you’re not going to jail for violating the
screamin‘ “Honey, I’m home!”
“due on sale” clause. Did you hear that
Realtors??? It’s not illegal. In order for something
Let’s discuss the back door first! It’s ye’ ol’ trust
to be “illegal,” there must be a violation of an
assignment trick.
actual law. There is no federal or state law stating
it’s a crime to violate the “due on sale” clause.
You see, there’s a loophole that many investors
The worst thing that could happen to you is that
like to exploit. The Reagan Administration back in
the lender exercises their rights under the due-on-
1982 enacted the Garn-St. Germain Depository
sale clause and takes the property back, and
Institutions Act of which was intended to revitalize
even then… they can’t do it inside of 30 days
the housing industry by ensuring the availability of
(hint!, hint! for the wholesalers reading this), and
home loans. Within the act there was a significant
even after the 30 days if the property is occupied,
consumer benefit included that allowed anyone to
the
to abide by normal
place real estate in their own trust without
foreclosure proceedings of which should be
triggering the “due on sale” clause. Primarily for
enough time for most fix and flippers to execute
estate planning reasons, real estate investors
their strategy (hint! hint! for the fix and flippers
recognized an ancillary opportunity using a land
reading this).
trust.
lender will
have