DEAR BERNICE: I hope you might be able to help (or at least point me in the right direction). I am in communication with an investor who is liquidating seven single-family residences. We were about to use seller financing until one of his friends told us how he: 1) sold his property "subject to"; 2) the bank exercised the "due on sale" clause; and 3) called the note due.

Long story short, I would like to buy and hold these properties. They have already been rehabbed; they cash-flow well; and they have Section 8 tenants. I need to find approximately $500,000 of long-term financing. –David C.

DEAR DAVID: This is an interesting scenario because it points out the challenges sellers/buyers can encounter when they are either unfamiliar with the terms of their loan or try to circumvent those terms.

Many years ago, a seller could legally sell her property "subject to" the existing note. This meant that the seller would not have to pay off the loan even though she had conveyed the property to another party. The most common vehicles for these types of sales were an all-inclusive trust deed (AITD) or a land sale contract.

For example, if I had a first mortgage of $80,000 at 5.5 percent, a second of $50,000 at 6 percent, and my property was worth $300,000, I might "wrap" those two existing loans into an AITD of $250,000 at 8 percent. For each year that I kept the loan and the new buyer kept up the payments, I would earn 2.5 percent (8 percent minus 5.5 percent) in interest on the $80,000 first, 2 percent (8 percent minus 6 percent) on the second of $50,000, and 8 percent on the remaining balance of $120,000. The blended rate on the three loans was 5.04 percent.

In an AITD, the title transferred to the new buyer. The lenders normally couldn’t call the note due on sale. The buyer paid the monthly payments into a trust account. The trust account paid the underlying loans and the balance was sent to the seller. If the buyer fell behind on payments, the seller could step in and foreclose on the property. The seller was still responsible for the payments, even if the buyer didn’t pay.

In the cases where the lender did have a due-on-sale provision in the note (i.e., the note has to be paid in full if the seller conveys the property), you could circumvent that provision by using a land contract (land sale contract). This instrument does not convey title to the buyer. Instead, the title remains in the seller’s name.

The buyer (at least in California) holds "equitable title." Title would pass to the buyer when the buyer refinanced or paid the loan in full. This could create issues for the buyer because the buyer cannot refinance or place additional loans on the property while the property is still in the seller’s name.

This activity was common when mortgage rates were 16 to 21 percent. We were writing "subject to," AITD and land sale contracts at 10 to 12 percent. The lenders wised up to this practice and had the federal government make changes that allowed federally chartered banks to enforce due-on-sale provisions. …CONTINUED

With all of the different types of digital tracking, it’s pretty easy for a lender to spot when there has been a shift in ownership. The lender can demand a copy of the utility bills or the insurance policy to see who is named as the owner.

In terms of buying this property, there are several major issues. Has the lender filed a foreclosure notice on the property? If so, how long does it take a lender to complete the foreclosure? How far are they into the process? As long as the current seller is on title, all offers will have to flow through him. The lender is prohibited from discussing "what could happen if we foreclose."

Your letter suggests that you would like to obtain $500,000 in financing. Are you thinking about taking title as an LLC, corporation, or as an individual? Will you be financing each property separately or were you thinking of placing a single loan secured with seven pieces of property? The answer to this question determines the type of financing that you will be able to obtain.

The best rates are available to owners who are purchasing a primary residence. Lenders are particularly skittish about dealing with investors at this time. It would be worthwhile to see what type of financing is available locally for Section 8 housing. Oftentimes there are grants and other special programs available.

You could also explore financing for this project through a local business bank or savings and loan, entities that may be more willing to finance this type of property, or through online mortgage-shopping sites.

The one good piece of news about this scenario is that the lender caught this before you took title. Had you closed this transaction with seller financing, you could have incurred thousands of dollars in attorney fees to straighten up this mess.

Bernice Ross, CEO of, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at and find her on Twitter: @bross.


What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Inman Connect is LIVE next week! Join us and thousands of your peers from wherever you are.Register Today×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription