What Does Subject to Financing Really Mean?By
subject to financing?
Many small or beginning investors have started their portfolios with “subject to financing” clauses. These clauses allow the investor to theoretically step into the shoes of the original buyer of the property and assume the payments of the existing loan(s) on the property while remaining bound by the terms and conditions of the existing loans. The investor also then gains title to the property.
Is it too good to be true?
Can you really be a ghost to a transaction? Can you really jump in as someone else, take their payments, take their property and not worry about the financing negotiations?
Yes, and no. You need to make sure the original financing agreement does not have a Due On Sale Clause. A Due on Sale clause means that the lender or financial institution can require that the entire balance of the loan will be paid in full when the title to the property is transferred. Many mortgage loans have a clause like this.
Make sure to do your homework! Even though it seems like you are just making regular payments in someone else’s place, really you are nullifying contract terms. This can open a host of legal problems depending on your state of residence, the lender and the parties to the transaction. Investments should focus on earning you top dollar, not creating legal quagmires that will cost time and money to deal with.
A little extra work can net high yields when you set up a land trust.
When you set up a land trust, you set up a third party trustee that acts as agent for the property. This means that the trustee holds the title to the property and the investor’s information does not appear on public record.
According to Gary Mialocq, Ph.D., a real estate investment expert:
“A land trust is the solution for holding title to real estate. It is a revocable living trust, which is used to title ownership of the real estate. The Title to the property is held in the name of a trustee. This trustee is forbidden to reveal the beneficial owner. The beneficiary can be an individual, a corporation or any other entity for further protection.”
Mialocq cites another benefit of land trusts in that it allows the investor to assume the loan without recourse. This means that liability does not extend to the investor, which is different than traditional subject to arrangements.
How do I set up a land trust?
Most lawyers can help you protect yourself with a land trust. It is a simple process that can save you significant money as well as protect you in the future. If you have any questions about investing with land trusts or subject to clauses, please contact any of the principals at Grassland Investments or TheRealWealthBlog.com.