What About Due On Sale Clause
I'm a Realtor interested in writing lease/options.
As a Realtor I have ethic and legal standards to maintain or else I can lose my real estate license. I have to have full disclosure.
Which leads me to ask, "What about the "Due on Sale Clause" in lease/options?
There are thousands of homes listed in varius MLS nationwide. Therefore, brokers are doing lease/options.
What are the brokers doing about the due on sale clause?
I have asked the National ***ociation of Realtors their official position on lease/options. I have yet to hear from them.
Are there any licensed brokers who can help me?
Thanks
Are there any brokers in the forum who can help me?
I am ***uming you mean a due-on-sale clause (also known as an acceleration clause) on a mortgage that secured against a property that is subject to a lease option rather than a lease option contract with a due-on-sale clause since I have never seen such a clause in a lease option contract. Besides, it would be meaningly in a lease option contract.
Anyway, this is an issue mainly of contract law. Many mortgages or trust deeds indicate that if the property is subject to an option or a lease with a term greater than 3 years, the lender has the right to accelerate the loan and declare it due and payable. Ethically, if you are listing the property for sale, I think you would have to advise the owner of the property of this concern and suggest that he/she get legal advice on the issue. If you are advising them on the legal enforceability of such clause, in most states you would be considered to be practicing law without a license (which could get you in trouble with the state bar ***ociate, civil or misdemeanor criminal penalties, and possible loss of your broker's license depending on your state and its state statute on the scope of a real estate broker's practice). Absent that, I don't think you have any legal obligation to inform the seller of that fact. However, you should check to see if there is an ethical opinion issued by the regulatory agency that governs licensing in your state or see if the realtors ***ociation has an opinion on the matter.
Taxjunkie
tinman,
Glad to meet you.
This little story may answer your question.
When I first started doing Subject To investing the Real Estate Agents would call me off my ads in the paper figuring I was a FSBO. When I explained what I was doing they would say " You are going to DOS prison for what you are doing." I am being polite on this forum as to what they really called me.
Well after a few years I saw the same Realtors who had their agents calling me telling me what a bad person I was, now doing Subject To deals.
The reason you did not get an answer to your question is because they know Realtor's throughout the United States are doing Subject To and Lease Option deals, so they just kind of look the other way.
If you make a full disclosure of what is going on with your sellers and buyers, then you have met your ethical requirements.
I can show you many deals that go through the title company's office where the Realtor used the Subject To method to buy and sell the house for their clients.
William Bronchick Esq. wrote an article about the DOS clause which I believe is right on target.
http://www.legalwiz.com/dueonsale.htm
Check it out.
John $Cash$ Locke
[ Edited by JohnLocke on Date 03/11/2003 ]
Thanks for the replies.
I was referring to the DOS clause in the original loan documents.
I live in Arizona. Arizon is the only state of the Union that does NOT require an attorney in real estate transactions. As a licensed real estate agent I can write contracts (without charge) involving real estate.
I have read William Bronchick's article. Along with all the other writers on the subject. And I have Jeff Beauben's "The Underground Lease Purchase Handbook".
What I see is that in most cases investor's doing lease/options are ignoring the DOS clause. I realize there is no DOS jail.
But the fact is, Landlord/Optionors and Tenant/Optionees would both be in trouble if the loan holder calls the loan and gives the owner 30 days to pay off the loan.
And, as a licensed real estate agent I would be sued for not disclosing the fact the loan company has the legal right to do thta.
The only thing I can think of is fully informing both parties. However, if I do that tenant/optionee would have second thoughts about do the lease/option.
So...it's a Catch 22 position.
Yet..I know there are real estate firms doing lease options. How are they protecting themselves in case of a law suit?
thanks
tinman,
Taxjunkie is correct there is not a DOS clause in Lease Options until a specific period of time has lapsed.
However there are other problems involved, such as any liens or incumbrances the seller has placed on him during the lease period which will attach to the property.
Please do not say that the seller is obligated to take care of these problems, the chances are great he will not have the money to do this.
I do not know where you got your information about Arizona is the only State that does not require an Attorney to be involved in a real estate transaction, there are many States that do not require an Attorney be involved, Nevada is certainly one of them.
I would have to say if other Brokers and agents are doing Lease/Options then they are opening themselves up for the same law suits that you might be if you did Lease/Options.
I would check with some title companies in your area to see what they are using for paperwork, to CYA everyone involved.
John $Cash$ Locke[ Edited by JohnLocke on Date 03/11/2003 ]
[quote]
On 2003-03-11 23:33, tinman wrote:
Thanks for the replies.
I was referring to the DOS clause in the original loan documents.
I live in Arizona. Arizon is the only state of the Union that does NOT require an attorney in real estate transactions. As a licensed real estate agent I can write contracts (without charge) involving real estate.
As John points out, there is almost no state that requires an attorney to be involved in a real estate transaction. A few states (e.g., Ohio) permit only attorneys to draft deeds, but still do not require the buyer or seller to be represented by an attorney.
But you are mistaken saying that you can write real estate contracts as a licensed real estate agent. If you mean that you can fill in the blanks of a already drafted contract, that most states do allow a real estate agent to do that on behalf of another person for a fee. However, if you are implying that you can draft the contract (from scratch or by referring to language in other contracts) for another person for a fee, you are mistaken. That is the practice of law in nearly every state in the U.S. for which the drafter needs to have be a licensed attorney. If not, you can be found criminally liable for the unauthorized practice of law (yes, it is a criminal violation in almost every state, but usually only a misdemeanor). If think you merely mean filling in blanks of a pre-drafted form, but I thought I would clarify the issue for other readers that may be reading this post.
I have read William Bronchick's article. Along with all the other writers on the subject. And I have Jeff Beauben's "The Underground Lease Purchase Handbook".
What I see is that in most cases investor's doing lease/options are ignoring the DOS clause. I realize there is no DOS jail.
The violation of a DOS clause is merely a breach of contract and not a criminal violation. If the DOS clause is violated, the lender has the right, but not the obligation to accelerate the loan. Ignoring the DOS clause is primarly a risk to the seller, although if the buyer has some money in the deal, that could be at risk unless the buyer is savy enough to put a indemnification provision in his or her contract.
But the fact is, Landlord/Optionors and Tenant/Optionees would both be in trouble if the loan holder calls the loan and gives the owner 30 days to pay off the loan.
And, as a licensed real estate agent I would be sued for not disclosing the fact the loan company has the legal right to do thta.
That is not really true. You are ***uming you have a legal obligation to advise the client of the the interpretation of the DOS clause and whether it is enforceable. Notice I said "legal obligation" and not ethical obligation. A violation of an ethical duty under your realtor's ethical rules is not a malpractice action. A malpractice action would only exist if you have a duty to disclose that fact to your client, you breach that duty, your client was harmed, and your breach was the promixate cause of the harm. If you don't represent the buyer, you have no duty to that person whether or not the DOS clause should have been disclosed. With respect to the seller, do you think you have a legal obligation to interpret the language of a DOS clause? I don't think so because that is the practice of law and unless you have a law license or you have made such disclosure to the seller and the seller relied on your advice, it would be difficult to see how you owe a duty to the seller. Moreover, the I would find it hard to believe that most courts would hold you liable since I ***ume you advise your clients that you cannot give them any legal advice and recommend that they have the contract or the mortgage documents reviewed by their attorney. In most cases then, the seller will have the risk of the lender accelerating the loan under the DOS clause. If the lender does accelerate the loan, the optionor (buyer) would probably be able to recover damages from the seller for breach of the lease option contract. (Remember, under that contract the seller must lease the premises during the term of the contract and deliver the property if and when the buyer exercises the option)
The only thing I can think of is fully informing both parties. However, if I do that tenant/optionee would have second thoughts about do the lease/option.
So...it's a Catch 22 position.
Yet..I know there are real estate firms doing lease options. How are they protecting themselves in case of a law suit?
thanks
One other bit of advice, John mentions that the lease optionor has the risk that the seller may have a lien placed on the property before the option is exercised. While, as John correctly points out, the seller would be obligated to remove that lien or be liable for breach of contract, the safer method is for the lease optionor to record a "memorandum of option" with the county recorder or where the real estate records are recorded where the real estate is located. I always advise my clients doing lease options to ALWAYS, ALWAYS, ALWAYS record a memorandum of option. In that case, most state recording statutes would give priority to the optionor so that if the optionor exercises the option, any junior liens are "bumped off" the property at the time property is purchased. This will be a little more complicated, but most title insurance companies will issue a title insurance policy in that case. However, you should check with your real estate attorney to determine whether your state will give priority to a recorded memorandum of option. However, here again, if you represent only the seller, you probably do not have any duty to advise the buyer to record a memorandum of option.
Hope that helps,
Taxjunkie
taxjunkie,
I have used a "Memorandum of Contract of Sale" on several occasions, so I am familiar with this method in recording.
You are giving some very valuable advice here at TCI, much appreaciated by us layman.
One question if the IRS places a lien on the seller of a property even though you have filed a 'Memorandum' under the Lease/Option method what position would this leave the buyer in?
I am ***uming that the seller could not satisfy the lien.
Just a curiosity question.
John $Cash$ Locke
Quote:
One question if the IRS places a lien on the seller of a property even though you have filed a 'Memorandum' under the Lease/Option method what position would this leave the buyer in?
Great question! That is one of those "exceptions to the rule" on priority liens. It depends on when the IRS lien was filed and whether the IRS notified the optionor (i.e., buyer). I can't recall the specific time off the top of my head and would have to consult my tax code, but my recollection is that if the IRS does not notify the optionor within 90 days, the IRS lien will be junior to the optionor. Of course, if the IRS lien (or any lien for that matter) is against the optionor, the lien attaches the the optionor's interest and automatically "transfers" to the property on purchase making it difficult to get a lender to finance the property without paying off the lien. But the question above was a lien on the seller/optionee, so his or her IRS lien may or may not be senior to the optionor's memorandum of option, depending on teh time when the IRS ***essed the tax, whether and when the IRS gave notice of the ***essment to the seller/optionee and whether the IRS recorded such lien within the statutory time frame.
The big problem which the memorandum of option does not protect against is the optionee filing bankruptcy. In that case, the optionor is treated the same as any other secured creditor and may have some risk of getting nothing in the deal if the optionor does not get the property released from bankruptcy or the bankruptcy court "crams down" the liens.
Taxjunkie
This is how I've heard of people doing it:
Write up an offer for the property subject to assumable financing.
#1. Have the seller (John Doe) put the property into a land trust called John Doe Land Trust (with your trustee and him being the benefitiary and the grantor)
#2. Immediatly have him change it so that YOU are the benefactor of the land trust.
#3. Have seller sign a disclosure that he KNOWS about and understands the DOS clause and knows that there is a chance that the loan will be called due.
#4. Buy the property
You and the seller know that the property has been sold. As a realtor your obligation is to dislose all information to those envolved in the transaction. The lender isn't actually involved. The DOS gives them the RIGHT to call it due. It does not mandate that the seller tells the lender when the property is sold.
If they notice that it's been sold they can call it due (although they'll often allow you to take over the payments, especially if you've been doing so for the last year or so anyways). The property is still in the "john doe land trust".
The only way to find out who the benefitiary is is by subpoena the trustee (shouldn't be you) to court. Also good for discouraging litigation and encouraging privacy.
I'm not a realtor, but this is my understanding of how it works. The DOS clause is feared too much in my opinion.