Let’s clear the air on DOS and L/Os . . . again? - Posted by Brad Crouch
Posted by Brad Crouch on April 28, 2000 at 21:07:08:
> Let’s clear the air on DOS and L/Os
This subject seems to be a constant, ongoing concern. The air has been “cleared” MANY times before. You might want to search the archives here on creonline to see what I mean.
> I have also heard and read that a L/O no matter what the type of loan is does not violate the DOS.
First, it is important to understand that there is nothing to “violate”. The mortgage documents NEVER say that title or equitable interest is not ALLOWED to be transferred . . . that would be against Federal law (Garn St. Germain Act). If you read one of these “due on sale” clauses, you will see that nowhere is this a “forbidden” activity. Therefore, there is nothing to “violate”.
It more be more accurate to say the DOS can be “triggered”, but not “violated” since it is NOT against
the law or could even be considered a “breach” of the contract. All there is, is a “remedy” for the lenders to call their loan due, at THEIR option (not an automatic thing at all).
> Can someone please explain this so we can put this to rest once and for all.
A lease of 3 years or more, triggers the DOS
A lease of 2 years, 11 months and 29 days does NOT trigger the DOS unless an option to purchase is also involved.
A lease of any term that contains an option to purchase, triggers the DOS.
Whether or not having two separate lease option agreements, may or may not be construed by a judge as
"being combined". There are other reasons for using two separate documents with a tenant buyer and a
single document with the seller . . . mainly an equitable interest issue. And evicting through a court
authorized to do “evictions”.
Understand that a lease option that applies any option consideration (to include rent credits) to the
reduction of the purchase price, DOES give equitable interest to the optionee.
If it is determined that a “foreclosure” action is necessary (due to the “equitable interest” issue) the case will have to be transferred to a higher court. Which takes longer and is considerally more expensive.
And while the case is pending, you get to make the payments on the property from your pocket. So the
"goal" is to get an eviction rather than a foreclosure, in the event of a default. With two separate
documents, you can word it so that a default on the lease does not nullify the option agreement. Then
you are in a position to argue for “possession” and claim that the option is still in force. This MIGHT fly, and it might not. The future of the property with regards to immediate profit would surely be
compromised, if this strategy was used. Better to avoid court proceedings if at all possible.
As Bill Bronchick says, “there is no ‘due on sale’ jail”. While most sophisticated investers are not at all intimidated by the DOS, it IS something to prepare for. And most sellers are are not so sophisticated and
consequently ARE intimidated by the DOS. Especially when you ask them to sign a document to the effect that they are aware of the DOS potential problems, and that are willing to assume any risks involved.
A better way to do a “sandwich” type deal like this would be a PACTrust. If you are not familiar with
this method of property acquisition and disposition, I would suggest that you learn about it. If you
understand how this thing works, you really don’t need the PACTrust people at all. You can set up the
paperwork yourself, but it may be a bit more expensive to do so. And if you do it yourself, you can’t call
it a PACTrust?. Call it a JIMTrust.