Real Estate 036: "Subject to" creative financing

In most of my previous blog posts, I have discussed traditional ways of purchasing real estate whether it be through the MLS, buyers agents, wholesalers, turnkey providers, and for sale by owners (FSBO). I wanted to discuss a new creative financing strategy that I have recently discussed with an investor friend of mine called "Subject To". They are lessor known to newer investors, but nevertheless are powerful strategies to scale your portfolio and maximize returns.

"Subject To" is a shortened form of the phrase "subject to the existing finance" of a property. At first, this may seem too good to be true. Many times than not, this strategy allows you to buy real estate without cash or credit, and also take advantage of good terms (lower interest rate through owner occupant sellers). You may be asking yourself, "why would a seller allow someone to take title (deed transfer) of a property and still leave the original financing in place?"

This is where investors need to realize the difference between sellers who "want" to sell vs those who "need" to sell. Those who "need" to sell already have the motivation, whether it be financial distress, health issues, a death in the family, divorce, or a myriad of other reasons that is not our business. However, by working with a seller who is in distress, investors are able to apply these creative strategies for effectively (Refer to my post on negotiating real estate/seller financing for more tips on talking with a motivated seller).

There are two key concepts we must remember when applying this strategy:

  1. Full transparency: We need to disclose to the seller what we are trying to do (e.g. purchase the property through seller financing, rehab the property and sell it retail/or hold long term for cash flow, refinance with another lender, etc.)

  2. Due on sale clause: Most loan documents (if not all) have a clause that specifically states that the lender is able to accelerate the due date of the loan if there is transfer of title. Regardless of whether or not the lender decides to call the loan due, it is important to understand the risk involved. 

I recently attended a 3-day seminar hosted by Protect Wealth Academy, where Clint Coons and Anderson Advisors spoke about a loophole to bypass the "due on sale clause" for asset protection, which also happen to be applicable to this strategy.

Clint mentioned that the Garn-St. Germain Act of 1982 allows anyone to put real estate in their own "trust" without triggering the "due on sale clause". This appeared to be intended for the wealthy to be able to transfer their real estate assets down to future generations, however, savvy real estate investors quickly started using this for creative financing strategies.

In a nutshell, a land trust is simply an agreement where the trustee holds ownership of the belongings of the trust for the benefit of a third party (beneficiary). In this case, an investor wishing to use the Subject To strategy would create a trust whereby the buyer is the trustee and the seller is the beneficiary. The seller would transfer title to the buyer/trustee and further assign their beneficial interest to you. The assignment of interest is not publicly recorded and now you have control of the trust and its benefits. As long as you continue to make payments, the lender should not have issues with receiving payments from a newly formed trust.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!