Nevada, is Land Contract illegal for DOS clause? - Posted by Bill G.
Posted by Bill G. on March 23, 2002 at 22:55:38:
This seems conflicting, as law is! I wonder if the land contract for a due on sale clause here in Nevada is illegal or in violation of the contract? See below.
Answer By William Bronchick:
Most state courts have ruled that a contract for deed (aka “Installment Land Contract”) IS a violation of the due on sale clause. Of course, it also depends on how the mortgage holder’s particular “due-on-sale” provision reads as well as the terms of the contract for deed.
THE (POSSIBLE) CONFLICT OF INFORMATION!?
Enter the "Land Trust"
The land trust is form of a revocable, living trust (you may have heard of these “living” trusts promoted by estate planning professionals). A land trust, like a living trust, is create by two legal documents:
- A trust agreement between the creator (called “grantor” in legal terms) of the trust and the trustee which defines the trust arrangement; and
- A deed from the creator of the trust to the trustee.
The trustee holds title for the benefit of the grantor (in this case, the grantor is also the “beneficiary”). If you place title to your property into a land trust, you have not violated the due-on-sale.
Let’s say that you come across a seller who is willing to give you title to his property for almost nothing down. The only glitch is that the loan is not assumable because the mortgage has a due-on-sale clause. Here’s the process for getting around it:
STEP 1: Sammy Seller signs a trust agreement with a trustee of YOUR choosing (e.g., your brother-in-law, partner, attorney, etc.) Sammy is named as the “beneficiary” of the trust.
STEP 2: Sammy Seller transfers title to the trustee (no violation of the due-on-sale clause)
STEP 3: Sammy Sammy writes a letter to the bank which reads:
"Dear Mr. Lender:My attorney has advised me to transfer title to my property into a revocable, living trust for estate planning purposes. You will receive all future payments from the trustee named below"
signed, Sammy Seller"
STEP 4: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record.
STEP 5: You are now the beneficiary of the trust. Your trustee makes payments to the lender.
Keep in mind that the assignment of Sammy’s Seller interest under the trust to you IS a violation of the due-on-sale, but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:
- Change of name on the deed. Not likely, since lenders don’t readily have “spies” at the clerk’s and recorder’s office;
- Different name on the check received for payment. Not likely, since the bank officers are far removed from the clerical workers who process payments; or
- Change of hazard insurance beneficiary. This is the most common way a lender discovers a transfer of interest in the borrower’s property.
If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change. However, if you transferred title into a land trust, the named beneficiary under the insurance policy will most likely be the trustee of the land trust. If you then sell the property by transferring the beneficial interest in the trust, the lender will not be notified since the insurance beneficiary (the trustee) has not changed.
You now have a safe, easy strategy to get around the due-on-sale clause. Let’s not hear another word about it!