Mortgages & Creative Financing

Are You Afraid of the Due on Sale Clause?

193 Articles Written

If you’re a new investor you might be afraid of the due on sale clause. I’m about to share with you why you shouldn’t be afraid of it and also, something that happened to me this week regarding it.

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First off, my favorite real estate strategy is subject-to. I've done millions of dollars worth of sub-2 deals and I've never had a loan called due. In fact, I personally don't know anyone who's had a loan called due. I'm sure it happens but I'm willing to guess less than .0001% of the time.

You have to remember that most banks only care about getting their money. They don’t care where the check comes from as long as the mortgage is paid every month. In today’s economy they’re thankful for anyone who pays a mortgage with all of the foreclosures going on.

In short, they’d be fools to call a performing asset due. It wouldn’t make any sense.

But what if you’re so afraid of the due on sale clause you want to do a land trust or use some tricky method to conceal your sub-2? I wouldn’t bother if I were you. It’s a waste of time and money. I hold all of my sub-2’s in various LLC’s and it’s worked fine for me.

But let me tell you what happened this week that made me think of the clause. I got a letter in the mail from Bank of America that said something to the effect “we show that 123 Main Street does not have any insurance on it. You have 30 days to provide proof of insurance.”

If you’re not aware, when you do a sub-2 deal you have to get your own insurance since you will be the new owner of the property. Usually I send the bank the new insurance information but this time I forgot.

How I handled this…

So all I did was fax in my new insurance information to Bank of America and that took care of the problem. When I mentioned having to fax the bank, a fellow investor said to me, “doesn’t that mean they know you transferred the property and they could call the loan due?”

Of course it does. But again, it doesn’t matter. Unless you plan to do something dishonest like take over a loan and then not make the payments, you pretty much have nothing to worry about.

Also, if this is something that keeps you up at night, don’t do it. But remember, to be a successful business person you have to take risks. And the due on sale clause barely qualifies as a risk in my opinion.

One last thing. Remember I’m not a lawyer. This is my opinion, so seek some pain-in-the-butt lawyer’s advice if you need it.

    Replied over 9 years ago
    Great info… thanks a lot. I haven’t really started investing yet, but your point is one I will have to remember when I do. Thanks! Mitch
    Replied over 9 years ago
    Wow GREAT post. The one line that should be shouted on the rooftop to every investor is the one where you said, “No bank would ever call for a due on sale on a PERFORMING loan EVER period end of story.” Especially now, in this market, where they have their hands full with non-performing loans they are not even going to mess with someone selling their home where the loan is performing. Great post!
    Richard Leyba tejada Rental Property Investor from Canal Winchester Ohio
    Replied almost 3 years ago
    thanks for the Post!
    Greg Lovern
    Replied about 1 year ago
    Is this still true today, with rising interest rates? If the loan’s rate was a few points lower than the going rate, would that give lenders a significant incentive to call the loan?
    Chris Bell Engineer from Dallas, Texas
    Replied about 1 year ago
    I would like to know also – Are banks still of the practice to not call the loan if it’s performing? Or have they started to call when they see the titles being transferred?