The Truth Behind the Due-On-Sale Clause : Creative Real Estate Investing

Buying property subject-to the existing mortgage is a key concept and practice as far as creative real estate investing goes. Most agents, brokers, and other people associated with traditional real estate practices are not privy to this method of buying property. They would probably even tell you that taking over payments on someone’s loan is illegal and will refer you to the due-on-sale clause.

The due-on-sale clause “allows” a lender to call a loan immediately due and payable in full if the title to a property changes hands. They are not required to, they just have the option. Lenders are in the business of making money through interest payments from borrowers. As long as a lender is getting paid their monthly payments, they typically would have no reason to ever call a loan due. I’m not saying that it wouldn’t happen, but I am saying that it is unlikely.

There are some precautions that can be taken to lessen the chance of a loan being called due. One such strategy is to buy the property into a land trust. If a property is passed into trust for estate planning purposes, the due-on-sale clause is bypassed. After purchasing each property in trust, we send the lender a letter from the homeowner notifying them that there is new management. We give them the property’s new mailing address to insure that we get everything related to the property. Even if the lender did a title search at any point in time, it would show that the property was passed into trust.

Even if you buy a property subject-to in your own name or company’s name, just make each monthly payment on time and you are probably good to go. I suggest buying your properties in trust though.