I've got a REAL problem with this "due on sale" garbage! - Posted by Kyle

Posted by Daniel Lubell on April 08, 1999 at 08:44:23:

Tim,

If the bank does not know what I am up to, than I must be doing it pretty well. The point is, if I am doing something that would harm the bank’s interest (not paying the amount that was agreed to, destroying the collateral), then the bank should take a closer look at the property. Perhaps they could be looking around for ways to get rid of me. Perhaps subpoena the seller to find out if any documents were signed that transfered an equitable interest.

As Bill Gatten said in a post above, the banks will look around when it is in their interest to do so. Chances are they won’t ever think to look my way, though, because I am depriving them of nothing they had not already agreed to. After all, they were willing to hang in there with the first payor for 30 years in some cases. I will give them the same deal that the first payor would have given them.

Incidently, one of my aquaintances is a bank president.
He has no “moral problem” with this concept. Why should anyone else?

Daniel Lubell

I’ve got a REAL problem with this “due on sale” garbage! - Posted by Kyle

Posted by Kyle on April 07, 1999 at 01:00:38:

Ok…

Just finished listening to some of LeGrande’s material, where he is talking about seller financing (either they deed you the prop, or you buy from them…loan stays in their name). They started discussing the DOS clause, and many questions were brought up by the crowd. In LeGrande’s arrogant way, he managed to plow over the top of them, not really answering any of the concerns, but stating continuously that, “at that point it’s the buyer’s problem”.

I have a problem with this. BIG TIME. It sounds to me like building a house of cards, really. What happens when something in the market turns and for some reason banks start calling some of these loans due, that they may be ignoring today. I know that is far fetched, but there IS risk here. And I’m talking about the kind of risk that puts you and your name in the toilet.

I also don’t understand WHY THE HECK someone would put down SEVERAL thousand dollars on something, when you tell them up front that they are taking a property that could be yanked out from under them at any given moment. Not cool. I really don’t see HOW you can justify doing this to someone, no matter how many people have “done it and nothing has ever happened”!

I am not an overly cautious person, nor am I playing Mr. Ethical here. I believe this is very risky, and I REALLY don’t see how you can get much money on the front end when you are giving this kind of a disclaimer.

If you ask me, it’s setting yourself up for a BIG disaster!

THE DEFINITIVE DUE ON SALE CLAUSE ANSWER - Posted by Bill Gatten

Posted by Bill Gatten on April 09, 1999 at 19:30:36:

Everyone thinks they have this DOS thing down to the nit, and are all making excellent points in their denial here, and have the definitive answers (me included); however, here’s the real deal:

I agree. There is nothing wrong with “violating” the Due on Sale Clause if you have a back door. If you know you could handle the problem if it ever arose… who the h… cares?

Further, the chances of a lender calling a note “at it’s option” are slim… unless, of course, they exercise that option (but, isn’t that a bit circular?).

Further… the phrase Rick refers to (the best posting of the bunch, so far)–“at the lender’s option”–is not there to help anybody out. It’s there so that the lender can “opt” to approve a subject-to take-over, if they wish without having to dismantle a high yield loan at a time when interest rates on new loans are low.

None-the-less, whether or not a lender would so “opt” is anybody’s guess… but it’s still a GUESS none-the-less.

Have any lenders ever so opted? Duh. Will they in the future? Yes, if they so opt. Will they so opt? If they have a good reason… yoobet.

Would I (me personally) worry about it? No… I no longer fly any higher than I’m afraid to fall ('learned my lesson on that issue real good). However… would I sell a property to someone who was willing to fly higher than they could comfortably fall (irrespective of whose “problem” it may be)? Maybe. That would be their choice. But would I pass the DOS off on them, knowing that? No… not if there was a good way to avoid violating it completely (not “circumvent”… “avoid violating it”).

Do people entering AITDs, Land Contracts, Lease Options, Lease Purchases, Sandwiches, Equity Shares and PACTrusts ever choose to fly higher than they can afford to fall? Yup!
Can one really circumvent the Due on Sale Clause? Sure. Simple. Just make sure the bank [probably] won’t find out. Is that always possible? Well, no, not normally… no matter how careful you would be your buyer under the AITD may not be as careful as you about property tax, insurance, prompt payments or litigious stuff hitting the fan.

What about just not recording the deed, certificate, affidavit, memorandum or notice? Well, that’s a pretty stupid question, isn’t it?

Can a buyer sue you for a purchase they made Subject-To without the lender’s knowledge three years ago that went sour because of a foreclosure by the lender (even though they accepted the exculpatory clause you put in)? Yes (they can sue you for wearing a wrinkled gorilla suit, if they “opt” to).

OK then, is there a way to effect a Seller Assisted Financing arrangement without subterfuge? Yeah, but (like JPiper said) even that could get you sued, irrespective of whether or not they’d win.

But, in all candor, is one method preferable over the others? You tell me (figuratively speaking, of course: that’s actually a rhetorical statement in the form of a question… this thread, like me, is already too fat) Just think about it.

[Or not]

Bill

If you want to know whether banks foreclose on DOS violations or not, ask Mr. De La Cuesta of the landmark Del La Cuesta vs. US Fidelity Federal Savings & Loan case that led to the Garn-St. Germain ACT in 1982. He felt at first as many of you may… until US Fidelity reamed out his naval (as it were).

DISCLAIMER: All misspelled words and grammatical errors are on purpose.

Re:Finished - Posted by Tim Jensen

Posted by Tim Jensen on April 08, 1999 at 01:54:37:

To Everyone,

I am finished discussing this topic(until the next time :). I think I’m right and you think that you are right. You rationalize your position and I rationalize mine.

I think the majority of the people here are smart enough to make up their minds for themselves. For deep down inside everyone knows what is right and what is wrong.

Tim Jensen

Kyle, Mark & Tim - do any of you understand what the “Due on Sale” clause means. - Posted by Rick Vesole

Posted by Rick Vesole on April 08, 1999 at 24:03:29:

The standard “due on sale” clause is not a due on sale clause at all. A due on sale clause as you seem to describe it would be something like “Thou shalt not sell without paying us off”. That is not at all what the “due on sale” clause says or means. Here is the standard Fannie Mae clause “If all or any part of the property or any interest in it is sold or transferred …without the lender’s written consent, Lender MAY, AT ITS OPTION require immediate payment in full of all sums secured by this Security Instrument” (Capitals added for emphasis).

In other words, selling a property without the lender’s consent is not a breach of the agreement, however, it does give the lender certain rights if it should choose to exercise them, one of which would be to call the loan due.

I just drafted a private mortgage today for a client which said that it was a 10 year amortization, but that at Lender’s option, he may call it due any time after 5 years. If the Lender does not call it due then the loan continues on. The payor is certainly not breaching this agreement by continuing to pay after 5 years if the lender does not call it due.

This is the same right as the lender has with a “Due on Sale”, it has the right to call the loan due. There is no breach for selling the property, the only breach would be if the buyer does not pay off the loan IF the lender chooses to call it due.

As far as passing the liability on to the buyer, I have no problem with it as long as it is fully disclosed to the buyer. After all when the original seller sells to me, I knowingly take the risk that the loan will be called.

Personally, I would probably never pass the risk on to the buyer, I have always assumed that risk myself because I have always represented to the seller that if the lender did call the loan that I would be responsible for paying it off.

Re: I’ve got a REAL problem with this “due on sale” garbage! - Posted by Tim Jensen

Posted by Tim Jensen on April 07, 1999 at 21:48:00:

Kyle,

Let me start off by saying that you really should leave your true e-mail address on a posting. It just adds to your credability.

Now onto your post. I happen to agree with you on the DOS clause. I have disagreed with a lot of people on here about it. I have concluded that people have a way of rationalizing their behavior.

I no longer discuss the DOS clause, because I get insulted and ridiculed for not thinking it is right.

What I would do if I was you is simple. Go to your next real estate investment meeting or apartment asssociation meeting. When there find one of the bigger investor’s there, they are easy to pick out. Go up to them tell them who you are and ask what they thinks about getting around the DOS clause.

I think you’ll get a interesting point of view.

I have lunch with a three real estate investors almost everyday. I told them about getting around the DOS clause. Needless to say, these three MILLIONAIRES said that they wouldn’t bother with a deal that involved violating the DOS clause.

Bottom line, you need to do what is right for you. If you decide that you think it is unethical or risky then don’t do it. That may mean that you have to wait a while before your first deal, but at least you did it your way.

Tim Jensen

Estoppel can protect you. - Posted by Rob FL

Posted by Rob FL on April 07, 1999 at 19:33:37:

Once you have changed the name on the insurance policy and the checks start coming to the lender in a different name, the lender is on notice that something may have occurred.

There was a federal lawsuit in 1996 here in Florida where the due on sale clause was violated and 3 years later, the bank decided to start foreclosing after accepting 3 years worth of payments. Based on a few pertinent facts, the federal judge stated that the lender was estopped from foreclosing because they had ample time and knowledge to know that a title transfer had occurred. The new owner had sent in over $10,000 worth of payments and the judge gave the lender the option of refunding the payments or dismissing the foreclosure based on the doctrine of estoppel. I will have to dig up the case info to get more details.

Risk of Detection? - Posted by JPiper

Posted by JPiper on April 07, 1999 at 14:34:03:

I agree with one element of your post?..that violating the due on sale clause entails a risk. Most of the other conclusions you draw from this I would disagree with. By the way, I have not heard Legrand’s tapes or read his courses?.so I can’t comment on the issues relative to that.

Just so that you know, the due on sale clause is triggered under most modern due on sale clauses by virtually EVERY creative type of transaction, not just a “subject to” transaction. So really, your assessment here is one that if taken to it’s logical conclusion would preclude you from doing lease/options, AITD’s, contract for deeds, subject to, etc. The possible exception here might be PACTrust, but even with this there is no guarantee that the lender won’t accelerate?.there is just a possible legal action you could take to stop such acceleration. So in reality, your conclusions lead you to buying/selling for cash or with new bank loans exclusively. That’s no problem with me. I think you should do what you’re comfortable with.

My hunch is that your knowledge regarding DOS issues is somewhat limited, and therefore your conclusions are drawn from incomplete information. Again, I would agree that there is a risk of acceleration under a due on sale clause. However, properly done, the risk of DETECTION of the violation is extremely low. There have been countless posts and articles written on this issue in the past, so I’ll leave it to you to research this if you’re interested.

A properly done transaction DOES disclose the risks of the transaction to the seller, and to the end buyer if there is one. In other words, the parties to the transaction have been made aware of the risks, and have agreed to accept this risk. Whether you believe that a buyer would enter into this transaction knowing these risks is an irrelevant statement?.they do, all the time.

When I have sold via land contract, as an example, my contract informs the buyer that an underlying loan exists that could be accelerated, that in the event this happens that the buyer is responsible for refinancing or selling the property. Now will the lender accelerate? Quite doubtful. Why? The deed is still in my name, or in the name of a trust (allowed by federal law). The loan is current. The land contract is not recorded. How would the lender determine a violation? However again, the risk is disclosed, and the buyer by contract is responsible for refinancing or selling. Now I’ve never had a loan accelerated?.but I can assure you of one thing. If it happened I would either assume the loan, or refinance. Why? Because I have a deal which is profitable to me?there’s a profit incentive. Eventhough the buyer is made responsible contractually, I would still refi or assume if it came down to it. Having said this, I would extract further concessions from the buyer in the event this were necessary.

The same thing could be said of a lease/option?.except in this case I take on the responsibility for the loan. I still disclose it’s existence to the tenant/buyer, but in this case I take responsibility for the loan myself?it is afterall my property. And again, I have a strong incentive to perform on this responsibility?it’s called the profit incentive.

The DOS clause is WAY down my list of concerns frankly. In my time in the business I’ve never had a loan accelerated, nor I have I seen one accelerated that was current. But the issue is one that needs to be handled correctly. Obviously loans that are in arrears force the lenders hand, but not because of due on sale issues.

I would suggest that you educate yourself adequately so that you can make an informed decision regarding this. If the result of your study is that it’s a situation that’s too risky for you?.then don’t do it. But understand that lenders don’t accelerate just out of the blue?.there has to be a reason. Detection of a violation can be made virtually impossible.

JPiper

That’s why… - Posted by Jim Beavens

Posted by Jim Beavens on April 07, 1999 at 12:23:28:

That’s why you should buy Bronchick’s courses to complement LeGrand’s. I agree LeGrand glosses over too many details for my taste, but Bronchick goes over every one with a fine tooth comb. At the same time, Bronchick fails to really take a step back and explain how all the techniques he teaches fit in with the big picture of your real estate investing business. This is where LeGrand shines.

Remember that you’re in control here, and you can do anything you want. If you don’t feel comfortable making the buyer sign a disclosure, then don’t do it, and accept the fact that you’re on the hook to see that the underlying loan gets paid no matter what. Most everyone here takes that position anyway, but you might appreciate having that disclosure as a last resort in case Alan Greenspan has a heart attack tomorrow and interest rates shoot up to 13% (in which case we’re all screwed anyway…)

I figure it’s worth it to try and get your buyer to sign it, and if he balks then you can make a judgement call on whether to do without it or not.

Just my opinion…

Re: I’ve got a REAL problem with this “due on sale” garbage! - Posted by Stacy (AZ)

Posted by Stacy (AZ) on April 07, 1999 at 11:44:51:

Kyle-

I had a similar reaction to these issues when listening to LeGrand’s tapes. I think it’s fine to question anything you are learning from any course or book. It would be just plain naive to accept everything you read and hear, no matter who is doing the teaching.

I think some of the reactions you’ll be getting will be because your post came off a little angry. Just wanted you to know I checked around on my own about the same issues, and have satisfied myself that this method is low risk and morally sound. You just have to do the same research for yourself and determine if it fits within your boundaries.

Good luck-

Stacy

Ignorance Can Be Hazardous to Your Wealth - Posted by Baltimore BirdDog

Posted by Baltimore BirdDog on April 07, 1999 at 08:55:04:

Dear Kyle,

Like you and many others, when investigating how to manage my risk when I first started studying real estate investing, I had concerns over the dreaded due on sale clause. However, by listening to LeGrand and reading the posts on this site, I’ve managed to get past it. Here’s why.

  1. As Jim said, you can refinance when the lender calls the loan due, though this could be at a higher rate since the lender is more likely to call your low interest rate loan due when rates increase.

  2. The lender has two choices: a) call the loan due and end up with the property through foreclosure and thus a non-performing asset on their books which they will have to remove by selling at a discount and paying real estate broker fees, attorney fees, and other closing costs or b) keep accepting your payments and earning interest on their money. Once they learn that you’re not afraid of foreclosure because you’re protected from personal liability via your land trust, they’d be stupid not to back down. LeGrand has encountered the situation once in the hundreds of deals that he’s done and the lender did back down.

  3. Your personally liability is nonexistent because you take title to the property in a land trust. The trust serves as a shield for the beneficiaries, which are first you and then your new buyer once you sell and transfer your beneficial interest.

Regarding LeGrand’s theories, once you sell, it IS the buyer’s problem; however…

you have completely disclosed and explained the risk of the loan being called due to the buyer;

the buyer has accepted this risk for any number of reasons (poor credit, unable or unwilling to save money for a 20% down payment and go to a bank for a conventional loan, etc.);

the buyer has signed a waiver of liability stating that they understand the risks and are releasing you from all liability, and;

no one has put a gun to the buyer’s head. They can wait to save money and/or repair their credit to buy a house. They can go to their local housing authority to find out what financial assistance is available for low-income and/or first time home buyers. Or, if they absolutely can’t do any of these (something I find hard to believe), they can continue to rent. Let’s face it. Life’s not fair. Not everyone can afford a house, especially without some assistance from us or someone else.

Finally, a few parting shots:

First, LeGrand is anything but arrogant. Even so, he and the other gurus on this site have earned the right to be direct and confident in their responses to our questions. Our role is to shut up and learn. It is a bonus to us if they are nice and courteous, and thanks to all gurus who participate here, because you are. You will never know your value as a resource to us.

Second, the archived posts on this site hold a wealth of information, especially on common concerns such as the due on sale. You might benefit from searching the archives for more views on the due on sale. Mine is certainly not the only one nor the most comprehensive.

Third, it seems like you left the last letter off your e-mail address, maybe unintentionally. However, I’ll say this anyway. Posting your correct e-mail address lends you a lot more credibility and minimizes the risk that people will pass over your question. I’m responding to your post so that others may benefit as well, but if you truly desire honest answers to your questions, I think you’ll find that this is the way to go.

Hope this all helps and good luck in your investing. If you want financial freedom, you’re on the right track. Keep it up!

-Jeremy

I got a deal for you then… - Posted by Jim IL

Posted by Jim IL on April 07, 1999 at 04:28:11:

I’ll tell ya what.
When you find a property where the seller will let you take it over, “subject to”, with no money down, DO NOT TAKE THE RISK! BEWARE THE D.O.S.!!! (eek!)
Pass it along to me.
Just call me and I’ll gladly sign it.
I’d love to own these. And if the lender calls it due, then I’ll just refi or sell it to someone with a new loan. not too mention, I’ll also QUIT making the payments when it is called due, and not worry a bit, because the loan is not in my name!!

I understand your concern, but when MANY people here say it is okay and not to worry about it, because they have EXPERIENCE with this, well, put it this way, I certainly will NEVER call thier advice GARBAGE.

I frankly am offended by that remark, and want all the EXPERIENCED REI’s here to know that I value what they share, and thank you.

So, call me with these deals Kyle, and I can make some CASH!

Have a nice day!
Jim

Re: Kyle, Mark & Tim - do any of you understand what the “Due on Sale” clause means. - Posted by JPiper

Posted by JPiper on April 08, 1999 at 14:13:32:

Interesting point Rick…never thought of it in quite that way. Thanks for the post.

JPiper

Re: I’ve got a REAL problem with this “due on sale” garbage! - Posted by JPiper

Posted by JPiper on April 07, 1999 at 22:10:41:

Tim:

I guess one of your points here is that if 3 millionaires that you know wouldn’t violate the due on sale clause, then it must be right. What if 3 millionaires told you that violating the due on sale clause in some specific manner was something they routinely did?

Why would 3 millionaires be concerned about a violation of the due on sale clause? Are they afraid they couldn’t assume the loan or refi?

In any case, I do agree with one thing you said?.if you think the idea is unethical or too risky, then you shouldn’t do it. Looks like you found a fellow traveler Tim.

JPiper

Interesting, Rob… - Posted by Tyler

Posted by Tyler on April 08, 1999 at 12:40:37:

Good info…

Would you just give this info to your attorney in the event that something like this happened?

I’m wondering how you could use this info to your advantage when presenting the offer to your potential buyer…??

What do you think?

Hmmmm…

Re: Estoppel can protect you. - Posted by Rob FL

Posted by Rob FL on April 08, 1999 at 10:01:32:

If anyone cares, the case was a federal bankruptcy.

In re Black, 221 B.R. 38 (Bkrtcy S.D. Fla. 1998)

I guess I missed the year it was 1998 and not 1996.

Re: Risk of Detection? - Posted by Bill Gatten

Posted by Bill Gatten on April 07, 1999 at 18:01:41:

Jim,

Of all the people posting on this site, yours is one opinion I (sincerely) revere the most. You are always on target, and not afraid of what others might think or say. And I’ve never seen an error in the virtual plethora of wonderful information you share with us… with the possible exception of tod…(oh never mind)…

So, how do you feel about this statement? “If the IRS doesn’t find out about it, they probably won’t care if you fudge just a little bit on your tax returns now and then: everybody does it.”

Now, before you declare this a non-sequitur, Jim, note that I’ve personally had loans called because of DOS viols, and have been repeatedly told in my seminars about dozens of others.

One must never lose sight of the fact that that lenders are banks, and banks are not people, and therefore do not function by logical deduction. The people in the banks could care less (generally), but the banks do. Just becuase it’s logical doesn’t mean beans to a computer program designed to detect loan and application infractions. Neitehr does it mean beans to an auditor who discovers that an approved FHA, FNMA or GNMA packager has knowingly allowed unauthorized divestitures to take place (i.e. turned the other way).

When I was in the banking business (owned a chunk of one) we used to hire people (including one VP for the California Association of Realtors) to pour over our portfolio, to ferret out infractions in order to bolster the saleable loans for prospective discounters.

Do you think we would have looked the other way when little old Widow Jones with a 15 yearold 5.75% loan just did an AITD without our approval, during a time of 14% mortgage rates?

Just food for thought.

OK, to heck with humility… IF there IS a way to avoid the DOS… why not use it? The PACTrust accomodates options, subject-to’s, flips, equity shares, short-term bridge financing, rent-to-owns, and anything else you would want to throw at it (except MH’s).

Bill

Re: Risk of Detection? - Posted by Sheik

Posted by Sheik on April 07, 1999 at 15:52:54:

Jim:

When you do an L/O, do you disclose (routinely) that you are not the owner?

How do you handle this aspect?

Thanks.
Sheik

Jim, just curious! Which of Bronchick’s courses are you referring to? Thanks! - Posted by Dean (IL)

Posted by Dean (IL) on April 07, 1999 at 13:19:38:

nt

Re: I’ve got a REAL problem with this “due on sale” garbage! - Posted by Bill Gatten

Posted by Bill Gatten on April 07, 1999 at 18:09:01:

Jim,

Of all the people posting on this site, yours is one opinion I (sincerely) revere the most. You are always on target, and not afraid of what others might think or say. And I’ve never seen an error in the virtual plethora of wonderful information you share with us… with the possible exception of tod…(oh never mind)…

So, how do you feel about this statement? “If the IRS doesn’t find out about it, they probably won’t care if you fudge just a little bit on your tax returns now and then: everybody does it.”

Now, before you declare this a non-sequitur, Jim, note that I’ve personally had loans called because of DOS viols, and have been repeatedly told in my seminars about dozens of others.

One must never lose sight of the fact that that lenders are banks, and banks are not people, and therefore do not function by logical deduction. The people in the banks could care less (generally), but the banks do. Just becuase it’s logical doesn’t mean beans to a computer program designed to detect loan and application infractions. Neitehr does it mean beans to an auditor who discovers that an approved FHA, FNMA or GNMA packager has knowingly allowed unauthorized divestitures to take place (i.e. turned the other way).

When I was in the banking business (owned a chunk of one) we used to hire people (including one VP for the California Association of Realtors) to pour over our portfolio, to ferret out infractions in order to bolster the saleable loans for prospective discounters.

Do you think we would have looked the other way when little old Widow Jones with a 15 yearold 5.75% loan just did an AITD without our approval, during a time of 14% mortgage rates?

Just food for thought.

OK, to heck with humility… IF there IS a way to avoid the DOS… why not use it? The PACTrust accomodates options, subject-to’s, flips, equity shares, short-term bridge financing, rent-to-owns, and anything else you would want to throw at it (except MH’s).

Bill