How To Use Seller Financing To Buy A Minneapolis Duplex Without Triggering the Due On Sale Clause

As mortgage interest rates rise, long-term investment property owners weigh the tax consequesnces of a sale. The topic of selling or buying on a contract-for-deed is coming up more often in conversations.

Contract-for-deed and ‘subject to’ purchases are popular. They let buyers acquire multifamily property without new financing. However, the seller’s existing mortgage almost always contains a due-on-sale clause.

A due-on-sale clause is standard language in nearly every residential mortgage. A transfer of the property or an interest in it, without consent, can trigger full loan repayment. . When you buy on a contract for deed or take title “subject to” a seller’s existing mortgage, you are, by definition, acquiring an interest in a property that still has someone else’s loan on it.

Buyers and sellers use these structures anyway, usually to preserve a low interest rate, avoid new-loan qualification, or close faster than a traditional purchase allows. The trade-off is that the underlying loan remains technically callable for as long as it’s in place.

The Garn-St Germain Depository Institutions Act of 1982 is the federal law that lets lenders enforce due-on-sale clauses. The good news is it also carves out a short list of transfers a lender cannot call the loan over; an inheritance, divorce transfers, and, notably, a transfer into a trust in which the borrower remains a beneficiary and retains occupancy rights.

That trust exemption is what’s underneath the strategy most commonly used in “subject to” investing: the land trust.

In this strategy, the seller deeds the property into a land trust, naming themselves as the initial beneficiary and a trustee (often a title company or attorney) to hold legal title. Because the seller remains the beneficiary at this stage, it is generally treated as falling within the Garn-St Germain trust exemption.

Then the seller assigns their beneficial interest in the trust to the buyer through a separate, unrecorded assignment agreement. That way, legal title stays with the trustee, so the county record doesn’t change.

The buyer takes over payments (directly or through the seller) and the contract-for-deed or wraparound terms govern the rest of the deal.

Because most loan servicers monitor recorded deed changes and tax-roll ownership updates, this structure reduces the odds the transfer gets flagged.

It’s important to point out that a land trust reduces detection risk. It does not eliminate it. If the lender finds out through a refinance, an insurance claim, a probate matter, or a title search, the due-on-sale clause is still fully enforceable.

This isn’t settled law. The trust exemption was written with estate planning in mind. Whether assigning beneficial interest to an unrelated buyer still qualifies is a gray area.

An insurance claim can bring the whole arrangement tumbling down. So, insurance and title coverage need to be structured correctly to avoid a coverage gap and/or expose the transfer.

An LLC is not a solution. The exemption only protects the original borrower moving the property into their own majority-owned LLC with occupancy unchanged. It does not protect a new buyer acquiring an interest from someone else.

If you’re considering a deal like this, it’s important to have a real estate attorney with actual creative-finance experience review the structure before you sign anything.