Avoiding the Due on Sale Clause

The dreaded “Due on Sale Clause” - the subject-to and seller/owner-finance investors worst nightmare!

In response to one of our previous videos on the TREC seller financing paperwork, I received this question:

“Howdy, great video as always. I have a couple subject-to deals coming up, my first one's ever, and your video really helped. In the scenario you described in your video, will the deed transfer from the seller to the buyer? Is this a way to avoid the due on sale clause being triggered? I have been told to use a master lease stacked with a lease option agreement. Any advice will help.”

First and foremost, I don't know every single way to do an owner finance, subject-to, or a wrap transaction and I’m not a real estate attorney. I do know what has worked for me using the TREC contracts (which are available for free on the TREC website) to owner-finance and subject-to several properties here in Houston, TX.

In my transactions the title company would issue a wraparound deed, warranty deed and note around the current financing. Once the wraparound note is satisfied (and the original note/mortgage) the buyer (or person you are financing the property to) will receive the title to the property. The buyer gets the deed to the property at closing but not the title. The buyer will get the title once the original and wraparound note have both been satisfied. The original note/mortgage will stay in the seller's name while the deed has transferred. Therefore the seller is not protected from the due on sale clause.

You might be able to use lease options, lease agreement sandwiches, whatever you want to call them to avoid the due on sale clause, but I have not done it. I feel more comfortable going through title and using the standard TREC forms, instead of using a random lease option.

The truth about the due on sale clause is that you're not going to avoid it. But the good news is the odds of the note actually getting called are slim to none. I have had wraps for several years and not had any issues - that doesn't mean I won't have an issue, but the odds are low. Go to a local meetup and ask the other investors how many loans they have had called due by the banks. I bet you the number is close to zero.

The theory is as long as you're paying the first note/mortgage on time, you won’t have any issues.

There is risk in doing wraparound financing - just as there is inherent risk in everything you do. Take a minute to ask yourself if you can sleep at night knowing your loan could be called due. If you can’t rest easy then don’t engage in subject-to’s and wraps - there are plenty of other real estate deals.

If instead you want to look into lease options, although I’m less confident in the legitimacy of lease-options, find a local attorney that will be willing to help out. Don’t start writing up your own lease-option paperwork as that's a recipe for disaster.

In short, I’m familiar with and have used the TREC forms successfully multiple times. They are litigated and issued by the Texas Real Estate Commission - essentially giving Texas investors the tools/paperwork to complete an owner/seller financing or subject-to transaction in the state of Texas.

Don’t try to reinvent the wheel!