How do I avoid triggering a due on sale clause with a subject to deal?
Member since 2023 · 1 post · 0 votes
How do I avoid triggering a due on sale clause with a subject to deal?
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Rental Property Investor · AL · Member since 2020 · 41 posts · 10 votes
3yI hear it happens based on the insurance policy change when it does happen. It doesn't happen much and probably won't be a process lenders go through in a systemic search until we hit closer to double digit rates on those 2 and 3% loans. Looks like the fed has chosen inflation instead of more rate hikes for time being so should prevent that from becoming a reality.
14 Replies
- Rental Property Investor · AL · Member since 2020 · 41 posts · 10 votes3y
I hear it happens based on the insurance policy change when it does happen. It doesn't happen much and probably won't be a process lenders go through in a systemic search until we hit closer to double digit rates on those 2 and 3% loans. Looks like the fed has chosen inflation instead of more rate hikes for time being so should prevent that from becoming a reality.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
The only thing you can do is not tell the bank. They are the last person who should know you are taking over a loan subject to, make sure you let the sellers know and are crystal clear.
- Real Estate Consultant · Fort Worth, TX · Member since 2011 · 45 posts · 39 votes3y
Quote from @Quentin Hollis:
I'm currently working on my first real estate deal and will be buying a property subject to the owners existing mortgage. I've done some negotiation with the seller already and we've agreed on the broad terms of the deal. My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance. I'm working with a real estate attorney to help me with transferring the deed. My question is how do I avoid triggering the due on sale clause in the mortgage when the seller transfers the deed to my name? I've heard there's a good chance the mortgage company won't care as long as the payments continue to be made on time but I still want to protect myself just in case. Does anyone know how to go about it?
Quentin, build your knowledge, make sure all this is done correctly.
Banks rarely call the loan just because of the deed being transferred, something else triggers this, mostly because the investor decides education is not worth the money.
It can be because the Insurance was not done correctly, the seller does not understand the process, the Title Company does not know what to do so they call the Bank and make a mess out of the process and a few other factors,
If the investor is knowledgeable on what to say to the Bank if they call this is a fairly simple conversation to have. If the Investor does not disclose to the seller how this process works and the Bank calls them yes you will have a mess and may be hard to undo.
A couple of years ago, I worked with an investor who never updated the contact information for the loan and the Bank call the seller (ex-wife), that day she was mad at her ex-husband and told the bank her ex allowed someone to steal their property from them and they got no money, she was kicked out of her house and there were strange people living there.
This could all have been avoided if the investor did this process correct.
Get educated, also I do not know your attorney but not many attorneys have the knowledge to do this process correctly.
Roger D. Pachal
- 3yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesGood post, very touchy situation. The best scenario for the buyer buying subject to is to have enough money and good enough credit to qualify for a new loan at current rates should the due on sale clause be invoked by the lender
Quote from @Roger Paschal:
Quote from @Quentin Hollis:
I'm currently working on my first real estate deal and will be buying a property subject to the owners existing mortgage. I've done some negotiation with the seller already and we've agreed on the broad terms of the deal. My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance. I'm working with a real estate attorney to help me with transferring the deed. My question is how do I avoid triggering the due on sale clause in the mortgage when the seller transfers the deed to my name? I've heard there's a good chance the mortgage company won't care as long as the payments continue to be made on time but I still want to protect myself just in case. Does anyone know how to go about it?
Quentin, build your knowledge, make sure all this is done correctly.
Banks rarely call the loan just because of the deed being transferred, something else triggers this, mostly because the investor decides education is not worth the money.
It can be because the Insurance was not done correctly, the seller does not understand the process, the Title Company does not know what to do so they call the Bank and make a mess out of the process and a few other factors,
If the investor is knowledgeable on what to say to the Bank if they call this is a fairly simple conversation to have. If the Investor does not disclose to the seller how this process works and the Bank calls them yes you will have a mess and may be hard to undo.
A couple of years ago, I worked with an investor who never updated the contact information for the loan and the Bank call the seller (ex-wife), that day she was mad at her ex-husband and told the bank her ex allowed someone to steal their property from them and they got no money, she was kicked out of her house and there were strange people living there.
This could all have been avoided if the investor did this process correct.
Get educated, also I do not know your attorney but not many attorneys have the knowledge to do this process correctly.
Roger D. Pachal
AUTHOR · CONSULTANT · SPEAKER · COACH · INVESTOR
- Investor · Brooklyn, NY · Member since 2016 · 2 posts · 0 votes3y
I'm in the process of researching this now. It appears the sale contract needs to spell out a lot of process perhaps. The below is not legal advice and you should hire a lawyer with past subject to experience. That's the step I'm on to confirm what I believe are the following key items:
1. Seller should transfer the property into a land trust. Transfer into a revocable land rust does not trigger a due on sale clause because of the The Garn-St. Germain Depository Institutions Act of 1982. The Act specifically prohibits lenders from enforcing the due-on-sale clause when a residential property of less than five units is transferred into a revocable trust where the borrower is a beneficiary.
2. Consider having the land trust turn into an irrevocable trust upon death of the seller if the seller is on the older side. This will avoid the asset having to go through probate and any 3rd party (family) related issues.
3. Seller transfers beneficiary interest to the buyer during the sale.
4. The trust holds the insurance for the property with seller and beneficiary as additional insureds.
5. A promissory note is used to record the contract. In case of default the promissory note converts to a performance deed and is recorded giving seller or heirs the right to reclaim the property. (I need more clarity on this one)
6. Use a payment processor to pay the original note and any wrap if there is a 2nd position secondary note that pays the seller the difference between their current mortgage and the total sale value. Additional escrow may be added for security for the seller.
- 3yTom GimerBusiness MemberDMV · Member since 2017 · 3k+ posts · 3k+ votes
1 is incorrect because of 3.
5 is prohibited in many jurisdictions or at a minimum causes insurability issues on future transfers.
Gimer Law516 Reviews - Investor · Brooklyn, NY · Member since 2016 · 2 posts · 0 votes3y
@Tom Gimer, I thought a trust can have any beneficiary without having to disclose to the bank or perform an additional recording. Initial beneficiary is the seller and the this can transfer to buyer at closing. The deed transfers to the trust without triggering due on sale and that is the only item requiring recording in the process.
Yeah, item 5 promissory note vs performance deed process is not super clear. The note doesn't get recorded but gives the seller a document in case of default. I think the performance deed can not be recorded initially and only in case of default but, again, not super clear. Can you elaborate on the insurability note? If the trust holds the insurance, it shouldn't matter. - Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes3y
Get the property in your name, make sure that the seller is an additional insured. Keep the bank as the mortgagee on insurance.
Since you are rehabbing, you should be done in 3 to 6 months anyway. It will take that long to foreclose even if they find out. Just refinance before they foreclose!!
But really, I have done this at least 5 or 6 times. By the time I rehab and sell, the bank never knew what happened. They got paid off and all done.
- 3yTom GimerBusiness MemberDMV · Member since 2017 · 3k+ posts · 3k+ votes
Quote from @Sharvil Patel:
@Tom Gimer, I thought a trust can have any beneficiary without having to disclose to the bank or perform an additional recording. Initial beneficiary is the seller and the this can transfer to buyer at closing. The deed transfers to the trust without triggering due on sale and that is the only item requiring recording in the process.
Yeah, item 5 promissory note vs performance deed process is not super clear. The note doesn't get recorded but gives the seller a document in case of default. I think the performance deed can not be recorded initially and only in case of default but, again, not super clear. Can you elaborate on the insurability note? If the trust holds the insurance, it shouldn't matter.That's correct but changing the beneficiary to someone or something other than the borrower does trigger the due on sale... no exemption applies.
A performance deed executed prior to default violates the borrower's right/equity of redemption in many jurisdictions. By insurability I'm referring to the problem created for title insurers evaluating what has transpired and whether they will issue a policy on the next transaction.
Gimer Law516 Reviews - 3yBo TullyPro MemberMember since 2021 · 14 posts · 5 votes
Quote from @Roger Paschal:
Quote from @Quentin Hollis:
I'm currently working on my first real estate deal and will be buying a property subject to the owners existing mortgage. I've done some negotiation with the seller already and we've agreed on the broad terms of the deal. My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance. I'm working with a real estate attorney to help me with transferring the deed. My question is how do I avoid triggering the due on sale clause in the mortgage when the seller transfers the deed to my name? I've heard there's a good chance the mortgage company won't care as long as the payments continue to be made on time but I still want to protect myself just in case. Does anyone know how to go about it?
Quentin, build your knowledge, make sure all this is done correctly.
Banks rarely call the loan just because of the deed being transferred, something else triggers this, mostly because the investor decides education is not worth the money.
It can be because the Insurance was not done correctly, the seller does not understand the process, the Title Company does not know what to do so they call the Bank and make a mess out of the process and a few other factors,
If the investor is knowledgeable on what to say to the Bank if they call this is a fairly simple conversation to have. If the Investor does not disclose to the seller how this process works and the Bank calls them yes you will have a mess and may be hard to undo.
A couple of years ago, I worked with an investor who never updated the contact information for the loan and the Bank call the seller (ex-wife), that day she was mad at her ex-husband and told the bank her ex allowed someone to steal their property from them and they got no money, she was kicked out of her house and there were strange people living there.
This could all have been avoided if the investor did this process correct.
Get educated, also I do not know your attorney but not many attorneys have the knowledge to do this process correctly.
Roger D. Pachal
AUTHOR · CONSULTANT · SPEAKER · COACH · INVESTOR
Regarding the insurance aspect of a subject to deal, what are the main questions you would ask an attorney to ensure the deal is structured correctly as it relates to the insurance policy? Do you include specific clauses in each of your subject to deals spelling out exactly how insurance on the property will be handled? I appreciate any feedback.
- Real Estate Consultant · Fort Worth, TX · Member since 2011 · 45 posts · 39 votes3y
Quote from @Bo Tully:
Quote from @Roger Paschal:
Quote from @Quentin Hollis:
I'm currently working on my first real estate deal and will be buying a property subject to the owners existing mortgage. I've done some negotiation with the seller already and we've agreed on the broad terms of the deal. My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance. I'm working with a real estate attorney to help me with transferring the deed. My question is how do I avoid triggering the due on sale clause in the mortgage when the seller transfers the deed to my name? I've heard there's a good chance the mortgage company won't care as long as the payments continue to be made on time but I still want to protect myself just in case. Does anyone know how to go about it?
Quentin, build your knowledge, make sure all this is done correctly.
Banks rarely call the loan just because of the deed being transferred, something else triggers this, mostly because the investor decides education is not worth the money.
It can be because the Insurance was not done correctly, the seller does not understand the process, the Title Company does not know what to do so they call the Bank and make a mess out of the process and a few other factors,
If the investor is knowledgeable on what to say to the Bank if they call this is a fairly simple conversation to have. If the Investor does not disclose to the seller how this process works and the Bank calls them yes you will have a mess and may be hard to undo.
A couple of years ago, I worked with an investor who never updated the contact information for the loan and the Bank call the seller (ex-wife), that day she was mad at her ex-husband and told the bank her ex allowed someone to steal their property from them and they got no money, she was kicked out of her house and there were strange people living there.
This could all have been avoided if the investor did this process correct.
Get educated, also I do not know your attorney but not many attorneys have the knowledge to do this process correctly.
Roger D. Pachal
AUTHOR · CONSULTANT · SPEAKER · COACH · INVESTOR
Regarding the insurance aspect of a subject to deal, what are the main questions you would ask an attorney to ensure the deal is structured correctly as it relates to the insurance policy? Do you include specific clauses in each of your subject to deals spelling out exactly how insurance on the property will be handled? I appreciate any feedback.
Regarding Insurance, personally I would never have someone else (A Lawyer) handle the insurance on a Sub 2 deal or any other real estate deal for me, you would be setting yourself up for failure.
First of all now you would need to get a POA for the attorney from the seller, that may not be your best move. Why not just invest in a little education instead of paying an attorney to do work you can do in 5 minutes.
Good luck Rog...
- Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes3y
one thing that you can do is have the seller transfer the deed to a living trust that they're the sole beneficiary of, and call the bank to give them a heads up that they're doing it for estate planning purposes. then, a month or more later, buy the property sub-to, and change the beneficiary of the trust. the bank can not see who owns a trust, and if they ever come back and question it, you can just swap the beneficiaries again, show the bank that the seller is still the owner, then swap it back again when they buzz off. this is one of many reasons it's so important to keep a good relationships with the seller if you're buying this way. you have to work together on some stuff.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes2yIn summary: fraud.
Quote from @Jessie Dillon:
one thing that you can do is have the seller transfer the deed to a living trust that they're the sole beneficiary of, and call the bank to give them a heads up that they're doing it for estate planning purposes. then, a month or more later, buy the property sub-to, and change the beneficiary of the trust. the bank can not see who owns a trust, and if they ever come back and question it, you can just swap the beneficiaries again, show the bank that the seller is still the owner, then swap it back again when they buzz off. this is one of many reasons it's so important to keep a good relationships with the seller if you're buying this way. you have to work together on some stuff.
- Investor · Kansas City, KS · Member since 2021 · 24 posts · 5 votes1y
What kind of attorney should I be looking for in my area to help me with this kind of situation?
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