Would lease option trigger due on sale?

4 Replies

Hi, I did a 25 year lease option with a seller. The lease is not recorded. But if the bank finds out that he did a lease option with me, can the bank call the loan due (due on sale)? I think I read somewhere that you can do a 3 year lease option and it won’t trigger due on sale. Not really sure. Please help me out if you have any knowledge about this. 

Originally posted by @Jack Ni :

Hi, I did a 25 year lease option with a seller. The lease is not recorded. But if the bank finds out that he did a lease option with me, can the bank call the loan due (due on sale)? I think I read somewhere that you can do a 3 year lease option and it won’t trigger due on sale. Not really sure. Please help me out if you have any knowledge about this. 

 I've never heard of such a thing, however lease-to-own can sometimes jam up a refinance since the ownership interest enumerated in the lease-to-own will predate the recording of the refinance mortgage.... traditional financing likes being in 1st position, not 2nd position behind a tenant. 

Originally posted by @Jack Ni :

@Chris Mason Thanks for the comment :) so short answer, lease option for 25 years with mortgage attached to the property won’t trigger due on sale if bank finds out that seller did a lease option with me? 

 I think the reason that I've never heard of such a thing causing due-on-sale to be invoked is because -- unless you attempt to refinance and attempt to do so with the current lender -- the lender will never find out.

Originally posted by @Jack Ni :

@Chris Mason Thanks for the comment :) so short answer, lease option for 25 years with mortgage attached to the property won’t trigger due on sale if bank finds out that seller did a lease option with me? 

Highly unlikely to be a problem. A Lease Option doesn't change Title until the Option is exercised. The lender doesn't have time to worry about it. If it should ever trigger or allege to trigger the DOS, a good attorney and a $200 letter to the lender solves the problem.

You do have other concerns though, at some point if the Option is exercised the seller needs to sign a Warranty Deed and a few other considerations. Will you be able to locate the seller in 25 years to have them sign? Depending on what you want to accomplish, you might call a local real estate attorney and ask if maybe a Land Contract or Wrap is better suited for your goals.