Lease Option And The Due On Sale Clause
A friend of mine entered into a lease option agreement. He says that he had to sign a disclosure form thats stated if the lender decided to exersise the DOS clause he would have to buy the house and refinance or vacate. He said he had to sighn this form because it was explained to him that buy moving in it could trigger the DOS clause. Have any of you heard that this may be a risk in selling L/O?
question #2
He did not take title why did he have to go to a closing at a title company?
I have heard of the concern before. Hopefully, some who have had alot of L/O experience will suggest how to do the L/O with less risk. They may suggest recording a memorandum instead of the option itself.
The title company is probably acting as escrow for the transaction. They are probably receiving option consideration from your friend and recording documents. They may have also drawn up the title transfer documents so that your friend can exercise the option without participation of the optionor in case the optionor is incapacitated (or worse).
Hi WheelerDealer,
Some newer FHA loans do not allow you to rent the property for the first 5 years of the loan. If you do rent, and you are caught the DOS will be called. I just recently met a fellow in my area that this happend to. He is not an investor, he just wanted out his payments to move to another home and put a renter in his old one. This guy had to kick the tenant out and sell the property because the DOS was called.
My take on this is that if that they are tryin to protect the loans that are 95-103% financed from being rental properties. It is a lot more risky for the bank. And in other cases, they may just be useing people as examples . . . .hmmmm
BAMZ
But again, especially in a L/O, the title or insurance inst changed, the chances of the bank catching wind of this is SLIM! The only way that I know that they would find out is if you or the owner called the bank and raised red flags, or simply told them.
BAMZ
When you bought the house, do you not remember that you paid on behalf of your lender for a tax service? This paid for a report to be sent to the lender every year. If you read some of the SOP's of major lenders you will see there is a procedure for the loan service department to examine that report. If there is no change in title there is no Red Flag. That believe it or not is the extent of the normal lenders due diligence during the life of the loan. So long as the payments are made and the taxes paid.
As to FHA, HUD et al trying to intrude into property ownership to restrict the rental of property. They are over the line and I would think that your local Bar might like to sic a ProBono young attorney on that matter. It is a bit restrictive. For example, you lose your job, you are going down hill and to save the remains of your estate, you rent the house, which keeps the taxes paid, the mortgage paid and indeed is a plus to the community and the country in general. To restrict that ability, is and was not the intent of the legislature that created all these wonderous semi demi government sponsored institutions.
So there. I dun spoke me piece. Lucius
Im still confused.
the guy my friend rented his house from does this for a living.
from all the reading on this forum i thought it was odd that he had to sign the disclamer and that he had to go to a closing for a Lease??
maybe i need to read some more reading somewhere, there must be some steps missing in this process.
I mean, i own my house and if i were to decide to lease out my house with an option, isn't it just an agreement between the paries involved and thats it?
[addsig]
I wouldn't require my tenant buyers to do either...sign a DOS disclosure statement, nor sign at a title company. I agree that this seems to be a strange arrangement. If my underlying loans were called due, I would refinance with a low cost HELOC and be done with that loan.
Read your mortgage papers. I bet that it's not the renting that is a problem, unless the lease is over a certain time frame, like three years. It's the option that is in violation of the DOS. At least that is what I have seen on almost all of my mortgages.
Still, there isn't really an issue in my mind. I haven't had any problems from any of the lenders and I have LO'd several of the properties.
Sounded odd to me. but then again I dont have any experience in this realm. Thats why i wanted to ask. one day i hope to!!
[addsig]
"the guy my friend rented his house from does this for a living. "
I may be off base here, but it sounds like the "guy" executed a "sub-to," and had the deed assigned to him. The "guy" knows that this could trigger the DOS clause and in anticipation of such is attempting to cover his butt by having the leasee sign the papers. The guy is probably trying to avoid a potential lawsuit filed by the leasee, but I doubt that having these papers would prevent that. The fact that he says "IF" the mortgage company exercises the DOS clause, tells me that he is attempting to keep the mortgage company out of the loop.
Or am I missing something here?
AH HA!!!!!
You may be onto something,Makingaliving!
You dont think that having this paper signed by my friend, as part of the lease, would cover his but for a lawsuit??
[addsig]
Don't know the law and I have no legal expertise, but it just "feels" logical to me that if you do a bad thing, you cannot cover it up and expect to go unscathed once caught even though you tried to cover your act with layers of protection. But I'd bet that it would be the original owner who would be in the hotter water for assigning a deed that had a DOS clause. It all kinda reminds me of one of those hilarious court tv shows where a plaintiff wants to sue the defendent for stealing his cocaine. Everybody goes to jail. [ Edited by makingaliving on Date 12/21/2003 ]
are you implying that sub 2 is illegal?
[addsig]
I honestly don't know enough about Sub-2 to say it's illegal. But it stands to reason that if the original owner's contract has a "due on sale" clause, and the "guy" was trying to get around it, that the bank might not be too pleased.
WheelerDealer,
I wonder if your friend is the end buyer in a sandwich lease agreement. Your friend may be "purchasing" from a master tenant, who is also in a lease option agreement himself with the owner-landlord-seller.
May help explain some of the unusual circumstances in play here.
sub 2 transactions are not illegal. the lender has the option to call the note due if it is found that a sub 2 transaction has been preformed. you then have a legal amount of time which varies from state to state to pay the balance of the loan or sell the property. it is not a illegal transaction.<IMG SRC="images/forum/smilies/icon_cool.gif"> [ Edited by kenmax on Date 12/23/2003 ]
Agreed. Sub to's are not illegal. As a matter of fact, I believe Bronchick cites cases to support this.
As for the L/O triggering the DOS, I believe the answer was already provided by thomasgsweat.
That is, from my admittedly layman's reading of the Garn-St Germain Depository Institutions Act of 1982 12 U.S.C. Code 1701 (j), it sounds like the option triggers the DOS. This act allows you to lease a house for up to three years at a time as long as there is no option to purchase.
Thinking back to my real estate class in college, I seem to remember that an option gives equitable interest in a property to the optionee. This may be why the Act was written this way.
As for how the bank ever found out about the option, that's a whole different puzzle.
[ Edited by Rogue on Date 12/23/2003 ]
thanks for the backup rogue. sincerely kenmax
good answers all. thank you.
now that we are talking about sub2 some
now im going to switch it up a bit and change the thread to liability:
do you think that it is bad advice to promote sub 2 to newbies or even new investors who have bad credit. since the chance is out there that the note gets called due?
[addsig]
you are going to be new at any transaction until you do it. the only way around it is to make a trans. i have found that as long as there are people making money on the trans. they {bank, realestate agent, ect.} will help educate you as you go about things you don't know and if it is illegal the trans. will not fly but they usually have another method that will. if its a great deal and sub. 2 is the wise choice "just doit." don't worry about credit all they can do is turn you down they can't eat you. i have been turned down many times. when they do i look at them ans smile and say " thanks now i can find someone that will offer me better....." you get the idea. and a better deal usually comes along. you have to learn to love the whole process. from buying all the way to selling and vise/verusa. good luck kenmax
no no no,
what i mean is the "gurus" all promote doing it. just because one does it, doesnt mean it is a good deal. Say a newbie with no credit and no money gets a sub2 deal hopes to L/O it and bam! the lender accelerates the note. I dont hear anybody warning these people who are starting out to have a back up plan
[addsig]
Wheeler, someone in this forum had a scenario like what you describe and found themselves up a creek. They had a sub-to arrangement, the DOS was exercised because the attorney notified the bank, and the investor did not have access to funds to purchase. Oh and the seller had moved out and the new buyers had moved in. He was in a quandary and afraid of potential lawsuits.
Again, I am not up on Sub-to. Never did one. I have read on several sites where it is not illegal, but it still seems to have a considerable liability. I would think an investor choosing this method would be wise to have a backup plan.
Thanx makingaliving
Im one of those who liks to know the real liability's. Not to sound negative or to over "analyze to paralize"
I am thiking it is wise to be approved for funding or have the cash. if it turns out that you dont have to use it then it is a bonus!
[addsig]
It is important to know there are potential risks in any kind of investing.
It has been my experience that many gurus discuss the DOS at length.
It has also been my experience that the gurus say the probability of having a perfoming loan called due is small. which is probably the case--that is until interests rates rise substantially.
I personally believe that everyone should have multiple exit strategies planned before getting into any deal and while some gurus do mention this approach, this probably could be emphasized more.
However, I also believe that everyone is responsible for their own actions and for thinking every deal through. It should be clear from the gurus discussions about the DOS (not to mention the very nature of the DOS) that it can be exercised. If you do not have a plan for this, then the fault is yours.
Not to take away from the intent of this discussion, but rather than discussing whether or not gurus should better outline the risks in their teachings, perhaps, it may be more productive to start a thread discussing all the risks and ways to mitigate and/or cope with those risks.