Due On Sale Clause For Lease Option
I just bought a property as an investment. I wanted to do a Lease Option on it. Will this trigger the Due On Sale clause?
Thank you for the comments in advance.
I just bought a property as an investment. I wanted to do a Lease Option on it. Will this trigger the Due On Sale clause?
Thank you for the comments in advance.
coolstuff41005,
Glad to meet you.
No, since you are the owner or whether you are not the owner just doing a L/O yourself of the property a Lease/Option will not neccessarily trigger the DOS.
However, you would need to check into if there is a certain period of time before it is considered a sale in the eyes of the lender.
Another way to look at it is if you do not record anything and I don't know why you would record anything, then no problem whatsoever. It could be your family secret.
John $Cash$ Locke
Thanks JohnLocke. That is the most encouraging I've heard so far.
I just purchased your Subject To manual last month. I will be communicating directly with you soon, once I straighten out this property that I have. Then on to Subject To.
By the way, the comment that you just made, is this also true if I do an owner financing instead of Lease/Option?
coolstuff41005,
Yes look at the Contract for Sale in the manual. Selling this way will get you a higher down payment that L/O.
Your buyer will feel like an owner so I find they actually improve the property. Here again you are not recording anything so you are not concerned with the DOS clause.
Go for it, the DOS is a figment of your imagnation anyway. As long as the payments are made on time and you smile when making them then you will be just fine.
John $Cash$ Locke
John is right. I work for a bank in the mortgage division and as long as the money is green and the checks don't bounce, we generally don't go around looking to see if there has been a transfer of ownership in the property or not. Now, when the payments are late ... then we start snooping around more and if we discover the unauthorized transfer of ownership, we may only at that time invoke the due on sale clause. Good luck.
letsgomario,
Glad to meet you.
Thank you for the backup, green is the color of the day at all the banks as long as it is there on time.
Welcome on board this board, if I need to borrow $10K don't loan me but $5K I don't know if I can pay back $10K, OK.
John $Cash$ Locke
If I do the owner finance, then later on the buyer files for bancruptcy, how will this affect my investment? Am I going to be able to get back my property?
An option could give the bank reason to call the loan do. The same as a sub to. Now I doubt it would happen. How would the bank even find out. But technically they could call the loan due when you give someone and option.
Tom
What about this. Haven't done it, only read about it.
1. Establish a land trust. You are the trustee, and the current owner is the beneficiary.
2. The current owner drafts a letter and sends it to the bank instructing the bank to address all corespondence regarding the property to the trustee, a.k.a. you. Now, when the bank receives a mortgage payment or phone call from you, all is well.
3. Record the trust deed (some states require you to record the trust agreement, check this out). This recordation will not force the DOS since the current (title)owner is the beneficiary of the trust.
4. Complete an "assignment of beneficial interest", giving you full control of the property from the trustee. This document is not recorded, and can be completed seconds after the trust deed is recorded. For all intensive purposes, you now own the property.
5. Purchase a separate insurance policy. Leave the current policy in place (current owner with the lender as an additional insured). Your policy will not list the bank as an additional insured.
Again, never done it, and if I grossly overstated the simplicity of this, please let us all know.
- Darin
tbelknap is right. The L/O and the CFD are triggers for the DOS. But, as was said further up in this thread, green rules and as long as the payments are made on time then you shouldn't have to worry. However, just know that the possibility does exist and you should have a solution ready.
Sky, a lawyer told me that even transferring the property to a trust could trigger the DOS since the lender is obviously looking for a reason to call the loan due anyway...lenders don't waste time looking up deeds, they do it for a reason and a trust is not going to stop them from finding out who really owns the property
Hi ajw,
Why does your lawer feel the bank is looking to call a perfroming loan? If they call it they have to be prepared to foreclose on a performing loan?
AJW
As is often the case, your attorney doesn't know what he's talking about.
One of the exemption from triggering a "Due on Sale Clause"" is putting the
property into a Trust. There are tons of property owners who use a trust for estate planning purposes and to avoid probabe.
Look in any newspaper and there are always lawyers offering trust preparation, trust seminars, probate avoidance seminars.
BUT, the transfering of any beneficiary interest does trigger the Due on Sale Clause. Its just that an assignment of beneficiary interest is not public informantion. The only way that it see the light of day is via court order.
Ok , here's how my lawyer explained it... Mortgage company's aren't looking to call performing loans due...BUT if for whatever reason( Late payments, no payment,etc...) the mortgage company decides they want to investigate in order to call the loan due they will not let the trust stop them. In fact, he told me that the mortgage company could argue tranferring the property to a trust in itself is really a violation that could trigger the clause since the clause states the property cannot be transferred. He stressed that it would be a battle of wills... meaning how bad the mortgage company "didn't like you". He also said that sometimes mortgage company's check the deed when they sell the loan.
AJW:
Nice to meet you!
Your Atty is half-right or maybe HALF-WRONG...
Ask the legal beale to go back into the law library to check for updates to LQQK UP:
The GARN-ST. GERMAIN Act
and the case law regarding which makes this Atty WRONG:
Wellenkamp vs. Bank of America (8/25/78)
“The Bank Lost wellenkamp Won!”
(50 USLW 4916) 73 L.Ed.2d 664, 10 S.Ct. 3014 (1982)
Fidelity FSB vs. de la Cuesta (6/28/82)
“Again the Bank lost De La Cuesta Won!”
Regulations Act of 1982 -(FDIRA) (10/15/82) 12 USCA sec. 1701-j-3
There are No recent challenges by lenders whose borrowers placed titles within Trusts...However this is not to say they CAN'T...Certainly the above shows that they HAVE but for some reason THEY LOSE!!!
Nobody wants to be a LOSER no matter How Bad they DON'T LIKE the Fact You Have a property they mortgaged within a Trust!!!
AJW-
No harm done but I'd like to have your ATTY defend him/herself on this one and offer a CHALLENGE to either:
1- Change their mind over use of Title-Holding Land Trusts
or
2- Change their Mind over a CAREER in Law vs. A CAREER in REI!
lol
I hope this Helps!
Derrick
AJW
Your attorney is right only about not making waves. Pay your mortgage on time and the servicing dept has a golden mortgagor. That's the way it's suppose to be any way isn't it ?? It sure helps your FICO score.
The Garns-St Germaiin Federal Act of 1982 which Derrick Ali makes reference to SPECIFICALLY exempts placing property into a trust from triggering the due-on-sale clause. What you do once the property is placed within the trust COULD/CAN trigger the due on sale clause. Since it's not public information its hard for your lender to discover that (once the property is in the trust) you have violated the due on sale clause.
If someone "rats you out" then they can call the loan. Not to worry. If they find out, they will give you 30-60 to rectify the situation. If its practical you simple undo the trust and you're back to square one. If you in fact do violate the due on sale clause (example: transfer any beneficiary interest) then you have time to sell or refinance. The term "due and immediately payable" mean that if you don't rectify the situation they have the legal right to foreclose. Unfortunately, your state, Tejas has a short 21 day foreclosure period. So, if you plan to violated the due-on-sale you should be ready to act. Don't get caught like a deer in their headlights. (I guess it would be more appropriate to say like a "jack rabbit caught in their headlights"