Does my Rider delete my "due on sale" clause"?

Question

In reading my 1993 fixed/adjustable mortgage note (5/1) I have the standard paragraph 11 "Uniform Secured Note" statement that can trigger a "due on sale" clause. It reads "If all or any part of the property or any interest in the property is sold or transferred without lenders prior written consent lender may require immediate payment in full of all sums secured by this investment".....and so on.

HOWEVER I have an "Adjustable Rate Rider" on my mortgage which I believe invalidates this clause. Is that possible, I thought most mortgages had this clause? The Rider reads: "This form applies only if form 3522 1/01 are used" (it was). "UNIFORM SECURED NOTE paragraph 11 is deleted in its entirety"

Can anyone share if they've seen this kind of clause invalidating the dreaded "due on sale" before? I will have a pro review my mortgage as I'm looking to put this property into an LLC, but I'm looking for a broad stroke answer first. Many thanks!

Lyn Green · Answer

@Joe Splitrock   Thanks for your input. I spoke to my insurance co. and you are right, I cannot name the LLC on my Umbrella Policy. Further I can't get the Liability on my base policy to even come close to what the umbrella offers. Between that and the potential "due on sale" with the mortgage I think I'm going to skip the LLC and just leave the property in my name. I am concerned about the large equity I have in the property, but I don't think there's anything else I can do to protect it. Thanks for taking the time to respond!

Joe Splitrock · Answer

It is highly doubtful that the due on sale clause is invalid in your mortgage. This clause protects the mortgage company so they have the option to call the loan when you sell the property. Newer mortgages allow properties to be transferred to LLC if the mortgagee remains the majority owner. Odds are good if you keep paying the mortgage, nothing will happen. Worst case, you will likely be required to transfer it back out of the LLC. Personally I would not even bother transferring it into the LLC, because it will likely provide little protection. Since the mortgage is still in your name, it could be used to pierce the corporate veil. Also based on the age of the property, odds are good you have significant equity in the property. That means in the case of litigation, the property could be taken. Another good strategy is just having high limits of liability insurance on the property. Also be careful if you transfer into an LLC to make sure the insurance names you and the LLC as covered parties. Talk to your insurance agent before making the change.

Joe Splitrock · Answer

I can't speak for your specific situation, but I do know investors who have been notified by the bank and they were able to transfer it back. It is better not to take the risk in my opinion. There is no tax benefit to the LLC because for the purposes of taxes it is a pass through entity, which means tax treatment is the same as if you operated as a sole proprietor (just owned it directly). An LLC is used for asset protection, to isolate from your overall portfolio for liability. The theory is that any litigation is limited to the assets in the LLC. In this case that would be the equity in the property. Make sure your umbrella policy would apply if the property was in an LLC. You need to have the LLC and yourself named on the policy, which some policies will not allow.

Lyn Green · Answer

@Joe Splitrock   Thanks for your input! Transferring my property back out of the LLC is a better solution if I get hit with a 30-day notice than immediate payment in full. Is this something the servicer would normally let you do? (I realize they're not in the real estate business, so it makes sense.).

Regarding the LLC, I do already have a high umbrella policy, but are there benefits to having an LLC on my tax return versus just taking normal real estate deductions and depreciation? I'm trying to minimize taxes and more specifically keep my AGI as low as possible for other reasons. Thanks for any insight.