Due-On-Sale Clause
Hello All,
My wife and I were very interested in making some "Subject To" purchases, and then we read John T Reed's article "The truth about getting around the due-on-sale clauses".
If you search for this title on Google, his article will be first in the list.
We do not want to break any laws or do anything unethical. What are your thoughts, experiences, comments about his article?
Thanks!
ATL investors,
There is no law that says you can't violate this clause. As another put it "There's no Due On Sale" Jail.
At most you would be in breach of the note that was originally made for whomever you toke the property Subject to.
There are many ways listed here to help alleviate the note being called, but many of these notes do not get called if payments are kept.
good luck,
Beau
The DOS is a paper Tiger, as long as the note is performing(payments are on time) you don't have anything to worry about. Now if your sellers should tell the lender of the transfer of title, they will make threats of enforcing the DOS and foreclosing but with all the fees associated with that its just not feasiable for a lender to do it!
While I personally haven't had a DOS triggered, it can happen and it has happened with a vengence in the past to many others..
The good advice is, "Don't to make waves". No lates, no NSF, taxes and insurance current (if not paid with the PI). This would be a very profitable, no maintenace type of loan.
Why would the lender want to DOS this loan? Answer: Rates have jumped significantly so calling the low yielding loans to lend at higher rates is good financial management. Will it happen again? I think so, albeit not in the immediated future. Make hay while the sun shines.
ATLinvestors,
Glad to meet you.
I have done my fair share of Subject To deals, high interest rates, low interest rates and everywhere in between.
This is what I know I have never had a DOS clause envoked, don't know anyone that has had, here rumors about it happening. But then I hear that all creative investors should be sent to Iceland and buy and sell igloos to each other.
It is not illegal, it is a great creative investing method that has worked for many investors.
If you keep reading John T's site you will roll up into a little ball and fade into the sunset never to be heard from again.
If it bothers you a lot don't do Subject To deals, would be my advice. Besides more deals for the rest of us who do.
John $Cash$ Locke
Thanks for all of your responses.
If the market changes and lenders start calling the loans due on your Subject To and Lease Option deals, what are our options (other than getting new financing for each property)?
Do most of you have backup plans, just in case?
I just found an interesting article about the Due On Sale clause, written by William Bronchick. If you're interested, search Google for
"There's no due on sale jail"
By the way, every experienced investor at my local investment club, GaREIA, that I spoke to this week agrees that DOS is not a problem. In fact, a 28 year veteran told me that if a bank called a loan due, he would say,
"So you're telling me that you don't want me to make any more payments, is that right?"
...and then...
"I can't guarantee the condition of the property if you foreclose"
He said this is just a statement of fact, not a threat, but they'll know what he means.
ATL I wouldn't worry about the DOS. If it happens, you'll have more than enough to to act. Just sell the property and be done with it.
"Don't sweat the small stuff"
And just how are all of these lenders going to suddenly find out that properties are being sold???
When you do it right they never know, never care.
Good question. I'm new to creative financing. In fact we just started learning about Subject To and Lease Options a couple of weeks ago.
How can lenders find out about properties being sold? What should an investor avoid and how does one "do it right"?
Since I'm in the insurance business, one way the lender will know that the name has changed is when the insurance companies send out copies of new endorsement naming a different insured that is other than the person who borrowed the money in the first place.
I've seen insurance policies placed in a trust, so one way to overcome the lender's DOS "detectors" is to create a land trust and change the name showing the trust (i.e. 123 main st trust) on the insurance policy.
Or just keep it in the sellers name, keep paying out of the escrow account, and have the T/B purchase a contents policy (sometimes called renters insurance).
I'm sure that the lender doesn't really keep an eye on the loan account that's current.
One way to avoid the DOS clause is to have a blank lease agreement signed by the seller. Don't date it. If the bank has a problem and they try to call the note, you can show them the lease agreement that you have with the seller and it should be fine. It is my understanding that a person can rent their home for up to 30-35 months before a lender can inforce the DOS. I would check into that, but it's good to have the rental agreement just in case.
Land trust is a great way to go, especially when it comes to the homeowners insurance.
Hoped that helped~
Land Trusts are good yes, on the topic on insurance there is an more exepensive alternative which I have done and still do..
I maintain the old owners insurance policy, so that no new notices or changes are sent to the lender.
I pay old policy PLUS my new policy in MY name which names me ONLY as the beneficiary. I have an agent that is great in issuing me my policys with a nationwide (one of the top 5) insurance companys.. Mind you, this will double your expense.. Some ways to minimize insurance cost is to take out a 5k deductible..
As well, in this scenario, the old policy would NOT pay out as the owners (old owners) whose name that policy is in, have NO interest in the home.. It is solely YOUR policy that would be paying out on any loss and that is covering the property because it is YOU with the interest in the property as well as the lender..
Your insurance policy does NOT have to name the lender nor notify the lender, VERY NICE (If you have an understanding and cooperative agent, EXPLAIN IN DETAIL WHAT YOU DO AND THE STRUCTURE OF YOUR SUB-2 DEAL). But the lender WILL require insurance on the property and proof of such policy, so if you take out a new policy they will have to notify your lender OR your lender will charge for the insurance costs and initiate a policy on their own assuming the old owners (existing) policy is cancelled or not paid.
Hope that helps,
Chris