Land Contract - Minimize Risk for Due on Sales Clause?

[Jeff Helm]

Hi BG folks, I was hoping you could help me out with this situation.

I have a seller who would like to sell me his house on LC, with $9K down payment.  We both want to do this so that in 6 months I can cash-out refinance, pay the balloon off and have traditonal 30 year fix rate mortgage on the property.

My question is, how do we best avoid the dreaded risk of the mortgage company calling the note due in this 6 month time frame?

Thanks in advance!

Jeff

[Jeff Rabinowitz]

There will always be a possibility that a lender (or servicer) will activate the dos clause when a sale has been made and a LC sale is a sale. However, all that need be recorded with a LC sale is a memorandum of LC. (You as the buyer want this recorded to protect you. If the seller tries to refinance or sell the property you will be notified.) The lender will not be notified that the memorandum has been filed. (Title does not transfer until the LC has been satisfied.) If the property insurance is changed the lender will be notified--it may not be necessary to change it. Since your intention is to do this for only a short period of time it is unlikely that you would not have time to execute your plan even in the unlikely event that the lender discovered the sale and wished to activate the dos clause. 

You could notify the lender of your intentions and wait for a response. It is likely you would not get any response at all or if you do it would come when you are very close to completing your exit strategy so that it would be moot.

I am not making any recommendation here. There are issues about integrity of contracts and ethics that come into play. It would be best if you or the seller had the means to retire the mortgage if it were called, if there were enough equity in the deal so that you could attract a short term lender if it were called, or were willing to unwind the deal if it were called. It is always best to consult with licensed expert advisers when making decisions. In the end, we are business people making business decisions.