What to tell seller over "due on sale" concern? - Posted by kelly,Il

Posted by Jim Pasquini on December 02, 1999 at 20:18:58:


What to tell seller over “due on sale” concern? - Posted by kelly,Il

Posted by kelly,Il on December 02, 1999 at 08:48:31:

I’ve read many posts on how to take title subject to the existing loan thru a land trust. I understand it is rare for the lender to find out if it is handled properly. Still, in the rare event the lender does call the loan due what really happens? I have no problem with guaranteeing their loan payments but the whole loan due at once would be a problem. How would this be handled if it really did happen, especially when you have 3 different parties involved(sandwich deal). I dont know how to answer sellers concerns other that to say it is a rare occurance that it will happen. What should I tell them would really happen in the event it occurs?

Tell them it won’t occur, and you both call me on our conference line. (nt) - Posted by Bill Gatten

Posted by Bill Gatten on December 02, 1999 at 19:47:21:

Be happy to help.


I just thought of this approach… - Posted by Jim IL

Posted by Jim IL on December 02, 1999 at 14:00:29:

I have done “subject to” deals, and so far, (knock on wood) that issue has been a minor one to say the least. The sellers were so motivated that they simply wanted out NOW! They could not afford to make the payments any longer, and I could and do.
But, if this arrises in future deals, I may try this approach.
We can tell the seller that we will do the deal taking it “subject to” and as we sell it, we will be looking for a buyer that not only can afford the payments etc., but also a buyer who looks like they can refi soon. (you know, not so good credit but improving.)
We will not tell the seller or guaruntee any refi date for sure, but we explain to them that our profit is not fully realized until the new buyer cashes us out. Which means our incentive to find a good quality buyer is pretty great. We do want to get paid.
I may then show the seller my local mortgage broker friends pamphlet and let them see the programs he has for less than stellar credit barrowers. (He specializes in B,C, and D credit).
I will tell the seller, that as long as my buyer keeps making strides toward improving there credit, and makes the payments on time, a refi will be MUCH easier.
And it will.
There are a TON of lenders out there that will do a refi from a L/O or a Land contract, after several months on on time payments.
If I get into the home low enough, I may even be in a position to carry a small second to help facilitate that refi. (as in, what if my buyer can only get an 80-90% loan?)

Bottom line is that you need to disclose to the seller the possibility of the DOS coming into play, but also address that concern with good solid answers and some background.
We have only done TWO “subject to” deals, but I can now say to a seller, "We have NEVER had the DOS enforced."
I could say it before, but now we actually have deals to back it.

Good luck to you,
Jim IL

Re: What to tell seller over “due on sale” concern? - Posted by John(NH)

Posted by John(NH) on December 02, 1999 at 09:59:49:

I would say that on that rare event our intention would be to refinance the property with another lender or pay it off if conditions were right. Basically, you’ll handle it if it happens.

Re: What to tell seller over “due on sale” concern? - Posted by Jim Pasquini

Posted by Jim Pasquini on December 02, 1999 at 09:22:42:

I think your concerns are misplaced. If you are going to use a land trust to facilitate this transaction federal law under the Garn-St. Germain act protects the property from the effects of the due on sale clause. The due on sale clause is a contingency you would need to plan for if you were using a l/o, “subject to”, AITD, land contract, etc.

Re: The only real answer so far? - Posted by Kelly

Posted by Kelly on December 02, 1999 at 13:27:11:

Thanks for responses. In my situation I want the whole deed using the land trust-subject to the mortgage. I have seen people ask the question, what really happens if lender calls because of due on sale and no one ever replies except to say it is rare. Your answer would work if one wanted to or could refinance the property or pay it off.Then that would be a great response to tell the seller. But, again what if you couldn’t? Would you deed the property back to seller and tell current L/O tenant they have to move or exercise immediately ( although they have a contract saying otherwise. Maybe seller or you put the house for sale immediately? What really would happen???
Maybe these questions are to negative in my thinking. I just like to cover myself before a problem occurs even if chances are rare. Also I think if I told the seller originally I would and could refinance if “due on sale” was called they just might somehow let lender know so they could cash out. Sorry I’m rambling. Any imput would be appreciated.

Re: What to tell seller over “due on sale” concern? - Posted by John(NH)

Posted by John(NH) on December 02, 1999 at 09:55:47:

Actually assigning beneficial interest of the land trust to another party also violates the DOS. Although private, if the lender knows about the assignment they could enact the DOS.

Re: The only real answer so far? - Posted by Bud Branstetter

Posted by Bud Branstetter on December 02, 1999 at 16:57:29:


I understand that you want to cover yourself up front. In life there are risks. Driving in your car is a risk, yet you do it. When you have little or none of your money left in a deal your concern would have to be for the unrealized profit. On a sandwich deal the seller is no longer involved. You bought him out even it was for nothing or the promise to pay him something in the future. Don’t confuse a sandwhich L/O with taking title subject to. When you acquired the property the seller would have signed an agreement that he knows that it has a DOS and that you do not guarantee you or your buyer will qualify for a loan if needed. In turn the T/B signs a similar agreement that he may have to qualify for a loan if it were called due. You would probably carry a note for equity if he had to qualify. The person that can qualify right now is not the one that is likely to be your T/B. They can’t qualify and you are the one that offers them a home without having to right now. If that bothers them then they won’t do it. Many others need the oportunity you provide and are willing to pay for it. It would have been the same for the original seller. Not all will but many want relief from the payments.

In case a lender becomes aware and decides that they are going to ask you to qualify it will take some time for negotiation. In turn, if that is unfruitful the lender would have to institute a foreclosure action. Again more time to solve the problem. I do not believe that 1 out of 100 deals would have a DOS problem. In a thousand there may be. I’ve just never have heard of any documentation that it was done without something else causing it. While others concern themselves on what if’s I work on those 999 and make money on them. I would be interesting to be sued when you had an agreement that they knew about the DOS and did it anyway but now don’t want to qualify for financing now that it would hapen.

Re: What to tell seller over “due on sale” concern? - Posted by Jim Pasquini

Posted by Jim Pasquini on December 02, 1999 at 10:44:05:

I’ll respectfully disagree with you on this one.

First, from Bronchick’s website http://www.legalwiz.com/

"The Garn Act carves several exceptions in which the lender may not enforce the due-on-sale:

Exemption of Specified Transfers or Dispositions

With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon -…

…(8) a transfer into an inter-vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property;

…and second from Gatten’s website http://www.cal-equity.com/


First, a seller, willing to keep the existing loan in his/her name (for a while), creates a land trust in his/her own name and places the property into it: i.e., Robert and Mary Jones vest the property with “The Robert and Mary Jones Trust.” In that the trust is an inter-vivos (i.e., living) trust; and because it is directed solely by Robert and Mary; and since no sale of Real Estate has taken place; and since the trust is in the borrower’s name only: there are no income tax consequences, and? the lender’s Due-on-Sale Clause is not violated. As a matter-of-fact, holding one’s real estate in this manner is a prudent estate-planning device, whether conveyance of ownership is the objective or not [e.g., see: Get That Property out of Your Name-Using Land Trusts for Privacy and Protection, by Wm. Bronchik]. Federal law (the Garn-St. Germain Act of 1982) emphatically prohibits lenders from taking exception to a borrower’s right to place its property into such a trust.
Next, along with the property’s use, occupancy and possession, a co-beneficiary interest in the trust (50%, 75% 90%, etc.) is assigned to a second party. Note that, although it can be forfeited at termination, at least a 10% beneficiary interest should always be retained by the seller, in order to conform to the IRS’ 10% rule (i.e., no land trust beneficiary may hold less than a 10% interest); to discourage “Due-On-Sale” disputation; and to avoid a property tax reassessment.
Then, an Agreement for Use and Possession between the trustee and the new co-beneficiary is created, whereupon the IRS, and most states (Tennessee and Louisiana not withstanding), characterize the resident beneficiary as an owner of an “IRC §163 Qualified Property,” even though the real estate has itself been converted by the land trust to personalty. [See IRC §163(h)4(D) pertinent to real property held in estates and certain trusts, in which ownership is characterized as personal property]


Acceleration under provisions of a “Due-on-Sale clause”: Acceleration due to sale or transfer is not justified by transfer of a property’s title to a revocable, inter-vivos trust in the borrower’s name, wherein the borrower is the beneficiary and retains Power of Direction. Neither may a due-on-sale clause be triggered due to conveyance of a leasehold interest in the property, when the lease is for less than three years and contains no Option to Purchase (FDIRA).4 Nor is “the” due-on-sale clause triggered by the naming of a remainder-agent, successor beneficiary or co-beneficiary ? so long as legally warranted foreclosure upon its security by the lender is not impeded. Assignment of beneficiary interest in a land (title-holding) trust relates only to personal property: not the sale or transfer of the real property security.5 The title-holding land trust is one of few trust mechanisms known to clearly convert the real estate corpus to personalty (i.e., the trustee clearly holds 100% of the legal and equitable title.6 (See also Kenoe, Edwards, Resnick, Freyfolgel, Mooney, etc.)

Based on these citations I would assert that the enforcement of the due on sale clause is averted due to proper structuring of the deal in the first place and not as a result of it being a transferred using a secret, silent, or private agreement like many investors choose to employ.

Re: What to tell seller over “due on sale” concern? - Posted by John(NH)

Posted by John(NH) on December 02, 1999 at 10:56:45:

Hi Jim, I see you quoting but I don’t see you reading! First, the question is about a land trust, not a PACTrust. Now, quoting YOUR OWN quote,

…a lender may not exercise its option pursuant to a due-on-sale clause upon -…
…(8) a transfer into an inter-vivos trust in which the borrower is and remains a beneficiary and
which does not relate to a transfer of rights of occupancy in the property;

Since the borrower assigns his beneficial interest, it violates the DOS. You quoted it yourself!

Re: What to tell seller over “due on sale” concern? - Posted by Jim Pasquini

Posted by Jim Pasquini on December 02, 1999 at 11:24:45:

John, I see you reading, but only reading what you want to read to support your position. Let’s clear up one thing first. The PACTrust is based on an express, revocable, beneficiary directed, inter-vivos, (Illinois type) land trust. Therefore, references to it are valid when discussing land trusts. If you had read all of the quote rather than just the first citation you would have found what Gatten refers to as The Recipe. The protection from the due on sale clause is not strictly derived by throwing the property into a land trust, but rather from the structure of the trust in total. You are not incorrect in your statement, you just aren’t seeing the whole picture.

Re: What to tell seller over “due on sale” concern? - Posted by John(NH)

Posted by John(NH) on December 02, 1999 at 12:16:26:

Hi Jim,
Remember this is just friendly banter so let’s not be offended. If the original question was about a PACTrust I could understand your quoting of it. Now what’s this whole picture I’m supposed to see? The only comment I made was the DOS is violated if the beneficial interest in a land trust was assigned to someone else (i.e. not the borrower). I’m not sure why you’re quoting chapters of other people’s material, or why you’re getting all riled up , but are you saying the DOS isn’t violated if the borrower assigns his beneficial interest to someone else??? That’s the ONLY thing I’ve been trying to comment on. As for the PACTrust, it does require the borrower retain a beneficial interest, so true the DOS would not be violated. If the borrower assigns ALL of his beneficial interest like I mentioned, even in a PACTrust, don’t you think that violates the DOS?

Re: What to tell seller over “due on sale” concern? - Posted by Brad Crouch

Posted by Brad Crouch on December 02, 1999 at 18:36:56:

Jim & John,

You don’t have to be using a PACTrust in order for the seller to retain a 10% co-benificial interest in a trust. This works for ANY land trust.

As long as the seller retains “A” beneficial interest (not necessarily “THE” beneficial interest), the lender cannot use the DOS to call due.


Gentlemen! Gentlemen! Wait! You’re all correct. - Posted by Bill Gatten

Posted by Bill Gatten on December 02, 1999 at 19:38:33:

It’s less likely when a partial interest is given up and control is maintained by the borrower: but transferring all the interest in a corporation or trust could indeed been seen by the underlying lender as a divestiture of the control over the property (by way of losing the “Power of Direction”), which property is the security for their advance of moneys. Loaning money to someone who secures their debt with an asset, who then gives that assets to someone would tick me off too.

Less likely, but also possible is that a “partial” transfer, could also cause a lender to make such a claim if they wanted to. But remember that what a lender (or anyone else) “claims,” or might “think,” doesn’t make it so (i.e., “It don’t necessarily hoe no cotton (as it were)”–witness the Wellenkamp decision which triggered the whole Garn St. Germain Act of 1982 (12USC 1701(j)): B of A made bald-face claim re. their Due-on-Sale Clause, and learned quickly that their “claim” was bogus according to the high courts. The Wellenkaimp decision was preempted later by the results of the De La Cuesta case (i.e., ?vs. Fed. S&L), but it goes to show that banks are not gods. There are several Illinois cases where banks have claimed that a borrower’s granting of beneficiary interest in land trusts was a DOS violation?and they all lost (100% of them).

Our position is steadfastly–and shall continue to be until proven wrong by case law–that beneficiary interest in a land trust is personalty, and not realty; and, therefore, its assignment does not constitute a transfer or sale of realty. We then strengthen that position by assuring that a borrower never relinquishes Power of Direction, or all of its Beneficiary Interest. This way, a lender couldn’t “claim” that the borrower had relinquished its control of the security for their loan, so long as the tenets of the GSG Regs. re. inter-vivos trusts have been met).

On the issue of their being a difference between a PACTrust™ and a land trust: that’s like comparing an empty house with a furnished one with a pool…the rules are the same as far as the structure is concerned, whether its furnished or not(the PACTrust uses a land trust as its underpinning, but merely incorporates other documents along with it to effect the assignment and the possessory-interest transfer).

And, too, remember that naming someone a co-beneficiary or remainder-agent in a trust of any kind is akin to appointing someone to be an heir in your will, or a beneficiary on you life insurance policy. What they own at the moment is air…it’s not realty and its not personalty. It’s the IRS that insists on “treating” such interest as realty, because they can’t tax air (IRC 162(h)4(D). Its the Uniform Commercial Code and probate regulations that treat it as personalty…because they don’t have a category for air, and can’t treat it as realty (because that part of the assets is clearly held [owned] by someone else (the trustee).

So?who want’s a beer?


I’ll buy the first round - Posted by Paul Macdonald

Posted by Paul Macdonald on December 03, 1999 at 23:32:05:

but I’m planning on slying pumping you for knowledge and war stories that I can learn from… so somewhere between the first round when you’re warming up and the last one when I can’t find my pencil and we’ve just figured out how to achieve world peace it should be fun.