"Due on Sale" clause and interest rates?
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
I know that the consensus is that "due on sale" is almost never triggered in the real world.
However if someone locked in at a historically low interest rate today and then deeded the property to an LLC (or some other type of transfer), and then interest rates rose several points over the course of the next few years, is it possible that the banks would start enforcing the DoS clause in order to get out of their (now) unprofitable mortgage obligations?
Bienes,
Yes they have that right. When they call you ask them when you should stop making the payments. If they say you cant, explain if they are calling the note due, you must stop. Ask for someone else. No one will ever tell you not to pay, so just keep on payin and I am pretty confident they will move on to the next one.
You can move properties into a trust for estate planning purposes and they can not call the note due, Just an FYI.
:mrgreen:
They can send whoever they want to the property to verify that there is a tenant there. That is exactly what the investor signed up for when they borrowed the money. I don't see how this would help their cause if someone transfers the beneficial interest of the trust to their entity to protect their assets.
What additional risks are associated with an investor trying to protect their asset from suits? How does this impair the lender's security interest if they made it clear that the individual was personally responsible for the loan when it was made?
The lender can do whatever audits, due diligence, etc. they want on the file. They still can't see who owns the property if the loan was made as an investment loan, was transferred to a trust, and the beneficial interest was transferred to a legal entity. Further, this does not in any way impair the lender's security interest. The risk profile remains the same and they still have the same legal remedies if something goes wrong unless I am missing something. That is why I don't think we will get any demonstrated case law rulings showing that the court upheld the calling of a note when the investor transferred the property to a legal structure to protect themselves. If someone can produce such a case I would love to see it.
Nope...I never claimed that. The whole world can see the property transfer into a trust and the ownership can change hands hundreds of times without the lender knowing about it.
...There is not a third party transfer to another individual or anything else in public records to show that the property is now owned by a legal entity. If there was an audit by one of the GSEs they wouldn't see the entity owned the property either.
Talk about having both ways! The "whole world can see the property transfer" but "an audit by one of the GSEs they wouldn't see the entity owned the property". Hmm. Here's a link to what Wells Fargo will want to see when there is a transfer. They send a letter when they see a violation. I think this is SOP. Just provide the trust/estate documents and a copy of the title policy and I dont think there will be an issue.
I also think that transfering to SMITH FAMILY CHARITABLE TRUST will get less scrutiny than 52427571 LAND TRUST. Both are real and I suspect exist for very different reasons.
I don't see why this is so complicated Chris. The trust is what shows up for the world to see. If you assign the beneficial interest elsewhere it DOES NOT get recorded and thus ownership can change hands hundreds of times. Ya follow? It isn't "having it both ways." It is a standard part of what trusts do...make things anonymous.
Brian, my point is that the GSE will see transfer from "Bryan Hancock" to "Bryan Hancock Family Trust". The bank may want to know that this is a transfer for reasons spelled out in the link I provided. As I said, not an issue. Personally, I don't have an issue with the bank asking nor do I have an issue with sharing the trust documents with their compliance department. I've not been down the path of withholding information they request... so can't comment what happens in that scenario.
They can request whatever they want. The trust documents you give to them won't specify which entity owns the property. The trust also won't be called Bryan Hancock Family Trust. It can be called whatever arbitrary name you want to call it like Texas Beats Iowa State Badly On The Road Trust.
The whole point is that it is stupid for them to even have a DOSC with this gaping hole with respect to transfer. If your trust sells the property to a third party that is a different story.
The lender loses nothing by allowing one to transfer the property to an entity post closing that I know of. Using the DOSC as leverage to call a performing note because the lender made a bad investment is completely stupid and would invite a suit IMO.
What would their rationale be for calling the loan due if it was transferred to an LLC (especially a single member LLC), if the loan was still in the individual's name, since I assume they could still pursue the individual's personal assets if the individual defaulted on the loan.
Yes, Bryan, call it I Buy 'Subject To' and Use a TRUST.
Let me try a different angle.
I was told a billion years ago that a paying tenant can't be evicted. Indeed, 10 years ago I had tenants who "paid" but routinely violated the lease. Not in payment, but in its other terms. The guy eventually left and the neighborhood sighed in relief. Well, a year or so ago I had a similar tenant. So I filed eviction. Not because of non-payment, but because of "default" of the lease. They had a pit bull, chained to a stump, that lunged and bit at me during a property inspection. It was scary. The dog was not allowed for multiple reasons. It's attack/lunge... I literally peed myself. My property manager was with me. He called the tenant. She cussed him out over the phone. I overheard it. We gave her 30 days notice. She complained. Remember, rent was paid. We went forward. We won in court and the eviction stood.
Back to DOS. Brian, it's up to the lender. I looked up the wording in my state, specifically Chapter 45?21.16. Notice and hearing paragraph (c)(7) d. The "debtor ... shall be afforded the opportunity to show cause as to why the foreclosure should not be allowed to be held.... the debtor has the right to appear at the hearing and contest the evidence that the clerk is to consider under G.S. 45?21.16(d), and that to authorize the foreclosure the clerk must find the existence of: (i) valid debt of which the party seeking to foreclose is the holder, (ii) default, (iii) right to foreclose under the instrument, and (iv) notice to those entitled to notice." I looked up 14 cases in NC appelate court (I don't have all cases at my disposal because I am not a licensed attorney) relating to "default" but couldn't find a case about transfer to a trust. But I think it is clear. If there is a transfer, and (on monetary) default is evident, then the foreclosure will be allowed to proceed by my state's foreclosure process. I'd bet the scenario you describe has happened, but I can not give an SP or appelate court case number. Indeed, I think this would be a rare case because people who put property into a trust either let the lender know or will be willing to provide information when asked. Like you say, "If your trust sells the property to a third party that is a different story." That's the &$#^ point! That's why they inquire. I've got nothing to hide. If you use trusts to circumvent a DOS and deceive the lender, well... the lender may exercise the POS. More power to them.
Yes, Bryan, call it I Buy 'Subject To' and Use a TRUST.
Let me try a different angle.
I was told a billion years ago that a paying tenant can't be evicted. Indeed, 10 years ago I had tenants who "paid" but routinely violated the lease. Not in payment, but in its other terms. The guy eventually left and the neighborhood sighed in relief. Well, a year or so ago I had a similar tenant. So I filed eviction. Not because of non-payment, but because of "default" of the lease. They had a pit bull, chained to a stump, that lunged and bit at me during a property inspection. It was scary. The dog was not allowed for multiple reasons. It's attack/lunge... I literally peed myself. My property manager was with me. He called the tenant. She cussed him out over the phone. I overheard it. We gave her 30 days notice. She complained. Remember, rent was paid. We went forward. We won in court and the eviction stood.
Back to DOS. Brian, it's up to the lender. I looked up the wording in my state, specifically Chapter 45?21.16. Notice and hearing paragraph (c)(7) d. The "debtor ... shall be afforded the opportunity to show cause as to why the foreclosure should not be allowed to be held.... the debtor has the right to appear at the hearing and contest the evidence that the clerk is to consider under G.S. 45?21.16(d), and that to authorize the foreclosure the clerk must find the existence of: (i) valid debt of which the party seeking to foreclose is the holder, (ii) default, (iii) right to foreclose under the instrument, and (iv) notice to those entitled to notice." I looked up 14 cases in NC appelate court (I don't have all cases at my disposal because I am not a licensed attorney) relating to "default" but couldn't find a case about transfer to a trust. But I think it is clear. If there is a transfer, and (on monetary) default is evident, then the foreclosure will be allowed to proceed by my state's foreclosure process. I'd bet the scenario you describe has happened, but I can not give an SP or appelate court case number. Indeed, I think this would be a rare case because people who put property into a trust either let the lender know or will be willing to provide information when asked. Like you say, "If your trust sells the property to a third party that is a different story." That's the &$#^ point! That's why they inquire. I've got nothing to hide. If you use trusts to circumvent a DOS and deceive the lender, well... the lender may exercise the POS. More power to them.
The reality is so what...
We arent, as investors, suppose to be buying property Subject To which cant be resold for profit and have the underlying loans paid in the event a lender calls the loan due.
However if youre buying at small equity margins then disclose to all parties the possibility of the foreclosure and move on in the event the lender wants and can enforce to receive their money back.
Indeed, Michael. 100% agree. And in the case where people use trusts for their "intended" purpose, there isn't an issue.
We're not talking subject-to. We're talking purchasing a property AND DISCLOSING that it will be held as an investment and then transferring it to an entity. Specifically, we are talking transferring it to a trust and then assigning the beneficial interest to your entity.
I maintain that it does not impair the lender's security interest in any way and that the reason one will not find a court case is because they don't exist. I think everyone has made their points. Without evidence it has happened we are talking ourselves in circles.