Due On Sale Clause About to Become More Common?

Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes

We haven't seen that many due on sale clauses being enforced by lenders over the past decade or so. At the same time, we're seeing some gurus selling strategies like subto as if there is no risk of triggering a DOSC. More and more investors are looking to assume low-interest loans rather than deal with reduced cashflow thanks to today's interest rates. It was before my time, but my understanding is that triggering a DOSC was more common in the 80's during a similar rising interest rate environment like we find ourselves in now. Lenders are probably more likely to enforce their right to call the loan if they feel their security is at risk in the hands of an unvetted buyer, or they believe they can make more money if the buyer applies for a new loan. It seems like it is becoming good business for lenders to start enforcing (they may actually also benefit by getting these 2-3% interest loans off their books). Are we about to see an uptick in due on sale clause enforcement? Curious to hear what some lenders and folks who have been around a minute think about this...

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Pace Jordan MorbyPro Member

Investor · Tempe, AZ · Member since 2016 · 20 posts · 50 votes

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
3y
Quote from @Steve K.:
We haven't seen that many due on sale clauses being enforced by lenders over the past decade or so. At the same time, we're seeing some gurus selling strategies like subto as if there is no risk of triggering a DOSC. More and more investors are looking to assume low-interest loans rather than deal with reduced cashflow thanks to today's interest rates. It was before my time, but my understanding is that triggering a DOSC was more common in the 80's during a similar rising interest rate environment like we find ourselves in now. Lenders are probably more likely to enforce their right to call the loan if they feel their security is at risk in the hands of an unvetted buyer, or they believe they can make more money if the buyer applies for a new loan. It seems like it is becoming good business for lenders to start enforcing (they may actually also benefit by getting these 2-3% interest loans off their books). Are we about to see an uptick in due on sale clause enforcement? Curious to hear what some lenders and folks who have been around a minute think about this...
I've been around since the earth cooled. ;-)
I think you are thinking along the correct lines.
8 Reply
Steve K.
OP
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y
Topical considering tonights events, eh? Gurus will have to switch to a new snake oil.
1 Reply
Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Steve K.
I do not think we are and the reason being is lenders use servicers to service the loan. It’s rare for a servicer to check the status of any transfers
They check insurance and taxes. If insurance and taxes (which are usually paid via escrow) are getting paid in most instances the lender doesn’t even know - especially for all the loans that are securitized
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Pace Jordan MorbyPro Member
Investor · Tempe, AZ · Member since 2016 · 20 posts · 50 votes
3y
We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
3y
@Steve K.
On a conforming loan, no.... Not saying I'm an expert in all of this but, this talk of rising rates and Due on Sale being called in just doesn't make sense. Honestly, I feel this community should know better.
We know about the secondary markets. The loans are already pkged and sold. early/prepayment only decreases the income/value of the pkg. The "bank" that originated the loan is just a servicer. They get paid to service a loan since the Note is gone. If the Note is called, they have nothing to service so they get paid less.
The logic continues... If the Note is being paid, nobody makes money by calling in the Note...
3 Reply
Steve K.
OP
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y

Quote from @Pace Jordan Morby:

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

Wouldn't the downside of doing any of those things be that if the existing owner gets any liens or judgments, they will still attach to the property? If so that's a big additional risk for the buyer. Also I don't think it's that clear that any of these tactics would actually prevent the bank from enforcing the due on sale. For example according to this, it seems that transferring the title is not required for the DOS to be triggered:

http://law.justia.com/cfr/title12/12-5.0.1.1.54.0.83.2.html
From the bank definition of sale or transfer: "For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests."
That reads to me very clearly that the granting of any legal or equitable interest in or to a property secured by a mortgage can trigger the DOS, which would include any lease option, land contract, contract for deed etc. as it clearly states in the defintion. I'm not a lawyer or anything, this is just coming from what I've learned on here, there are many valuable old threads about this topic on here like this one:
https://www.biggerpockets.com/forums/83/topics/86029-subject....

and this one:
https://www.biggerpockets.com/forums/311/topics/183825-due-o..
How is it working our for you in practice?
6 Reply
Steve K.
OP
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y
Quote from @David M.:

@Steve K.
On a conforming loan, no.... Not saying I'm an expert in all of this but, this talk of rising rates and Due on Sale being called in just doesn't make sense. Honestly, I feel this community should know better.
We know about the secondary markets. The loans are already pkged and sold. early/prepayment only decreases the income/value of the pkg. The "bank" that originated the loan is just a servicer. They get paid to service a loan since the Note is gone. If the Note is called, they have nothing to service so they get paid less.
The logic continues... If the Note is being paid, nobody makes money by calling in the Note...
I agree in following the money. Doesn't the bank make more money by collecting 7.5% interest instead of 1.88% though? I locked in a few loans at 1.88 in 2020 that I feel like I cheated on, it doesn't seem fair for the bank. Couldn't banks call loans with low rates due and lend the money to new buyers at higher rates, all while collecting new origination fees, boosting revenues which are declining, and making more money?
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
It's going to be called on these subto deals for sure. It's not for the average homie taking it to the LLC. Fannie/Fae will have some protection, that plus these lenders want your business and won't threaten to force it that way.
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Steve K.:

Quote from @Pace Jordan Morby:

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

Wouldn't the downside of doing any of those things be that if the existing owner gets any liens or judgments, they will still attach to the property? If so that's a big additional risk for the buyer. Also I don't think it's that clear that any of these tactics would actually prevent the bank from enforcing the due on sale. For example according to this, it seems that transferring the title is not required for the DOS to be triggered:

http://law.justia.com/cfr/title12/12-5.0.1.1.54.0.83.2.html
From the bank definition of sale or transfer: "For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests."
That reads to me very clearly that the granting of any legal or equitable interest in or to a property secured by a mortgage can trigger the DOS, which would include any lease option, land contract, contract for deed etc. as it clearly states in the defintion. I'm not a lawyer or anything, this is just coming from what I've learned on here, there are many valuable old threads about this topic on here like this one:
https://www.biggerpockets.com/forums/83/topics/86029-subject....

and this one:
https://www.biggerpockets.com/forums/311/topics/183825-due-o..
How is it working our for you in practice?

Steve your absolutely correct all of those are events of default under the mortgage or at least 97% of all mortgages and deeds of trust in use in the last 30 years or so. Lease option though works for sure.. your leasing the property and you have a separate option agreement with a strike price.

I am with Chris though I don't think if the loan has been sliced and diced and is with a servicer company those will get called.. since the servicer makes their money servicing :). but DSCR loans private loans Portfolio loans in a actual bank all of those would be at risk.. Now some servicers may change tact on it.. but I have not seen it in the past personally.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Pace Jordan Morby:

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

@Chris Seveney@Account Closed
Pace, if this is actually you posting. First congrats on growing a monster U tube gig.
However can you please call off all your students that are spamming BP with glowing testimonial after glowing testimonial.. these students of yours or members or whatever you call your tribe are creating an account have one post and all saying the exact same thing about go giver and community etc.. which is great and all but its making your brand look pretty silly frankly.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
3y
@Steve K.
sorry, no.. If you get "following the money," could you take a look at my post again?
Yeah, BP has gotten so bad in my opinion. It tougher for me to "connect" with people here because they all expect me to "sell" them something. Then to have to talk them through all the pitfalls that they weren't shown (if they can get over that I have nothing to "sell"). Weird how it used to be "you can't trust the internet," now it "must be true because it was on the internet."
3 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
3y
Quote from @Jay Hinrichs:

Quote from @Pace Jordan Morby:

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

@Chris Seveney@Account Closed
Pace, if this is actually you posting. First congrats on growing a monster U tube gig.
However can you please call off all your students that are spamming BP with glowing testimonial after glowing testimonial.. these students of yours or members or whatever you call your tribe are creating an account have one post and all saying the exact same thing about go giver and community etc.. which is great and all but its making your brand look pretty silly frankly.
@Pace Jordan Morby: I've watched some of your videos. I'm curious how many no equity, non cash flowing Subject Tos you have out there and more importantly:

1. How are the sellers being protected, in the event things change, vacancies increase and mortgages can't be paid?

2. How are unsophisticated mom & pop lenders in 2nd and 3rd position on those properties going to get their investment back? They can't possibly understand the risk they are in.

The concern here and it should be a concern to you, is that introducing so many new people, who from their questions and expectations ( no money down, I can buy properties that don't have equity or cashflow, I can get rich quick). And who lack experience, sophistication and are unaware of the dangers of Subject To for the seller, is like handing out firearms and bullets with no safety training.

The government will clamp down on the abuses and chill the technique, ruining the use of Subject To. I for one, am trying to prevent further government intervention.
6 Reply
Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
3y
Lease option works to avoid DOS but it certainly doesn't work as a good alternative to sub-to. The whole point of sub-to is to obtain title for next to nothing with a great rate while avoiding most closing costs.
Pay a premium for an option to keep the seller in title, risk title problems by doing so and then exercise the option just to pay full closing costs with a new crappy rate. Yay!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Account Closed:

Quote from @Jay Hinrichs:

Quote from @Pace Jordan Morby:

We have had the due on sale clause called 4 times this month... but knowing your way around it is crucial. Either A: revert to a lease option with the option price being the mortgage balance when the option is executed... or B: Use an executory contract instead of SubTo. Land Contract. Contract for Deed. Agreement for Sale etc. I talk about this on my youtube channel.

@Chris Seveney@Account Closed
Pace, if this is actually you posting. First congrats on growing a monster U tube gig.
However can you please call off all your students that are spamming BP with glowing testimonial after glowing testimonial.. these students of yours or members or whatever you call your tribe are creating an account have one post and all saying the exact same thing about go giver and community etc.. which is great and all but its making your brand look pretty silly frankly.
@Pace Jordan Morby: I've watched some of your videos. I'm curious how many no equity, non cash flowing Subject Tos you have out there and more importantly:

1. How are the sellers being protected, in the event things change, vacancies increase and mortgages can't be paid?

2. How are unsophisticated mom & pop lenders in 2nd and 3rd position on those properties going to get their investment back? They can't possibly understand the risk they are in.

The concern here and it should be a concern to you, is that introducing so many new people, who from their questions and expectations ( no money down, I can buy properties that don't have equity or cashflow, I can get rich quick). And who lack experience, sophistication and are unaware of the dangers of Subject To for the seller, is like handing out firearms and bullets with no safety training.

The government will clamp down on the abuses and chill the technique, ruining the use of Subject To. I for one, am trying to prevent further government intervention.

about 15 years ago a owner finance sub too guru came through PDX and a group of their students followed the techniques they bought sub too with little to no down but the props had little to no equity. They then sold on either lease options or wraps and since there was no real equity the buyers only put a few grand down. So glorfied renters.. And they did about 30 to 35 of these and most of them the delta was 200 to 300 month so that got it up to 5k to 6k a month ( not enough for the group to live on of course there was 3 of them) then the defaults started.. and now you had some living in the home not paying these kids ( I call them kids because they were my kids age ) now had to debt service .. and then another default.. so now they had to deal with default / foreclosures evictions and by the time 20% of the portfolio was late or non pay which of course is going to happen with these type of end buyers.. they were sunk.. they never had the money up front to take on 3 to 4 mil in debt. So they started to default to their sellers. It got pretty rough for them complaints to the DA the AG lawyer letters etc.. thats about when i met them. I stepped in and probably rescued maybe 10 of them. the rest ended up in a huge mess. They did not go to jail but their dream was crushed. And they were wiped out.

My Company at the time bought props sub too but we NEVER ever bought anything that did not have substantial equity day one so that we could always exit at anytime with a tidy profit. Our model was a make money now model not a buy hold and keep someone elses mortgage alive for years and years. IN addition we were well capitalized with many millions in working cash and 8 figure Lines of credit for distressed real estate purchases. Big difference when a note get called and we could stroke a check next day.. Then investors whose only hope is a sale or refi that they may or may not be able to get in today's lending environment. And as we know foreclosure rescue ( which was our bizzness along with courthouse steps purchasing) the sub too foreclosure rescue rent back became illegal in Oregon and WA and highly restricted in CA. And the defaulted note/owner is a major part of sub too rescues just not legal and or highly restrictive in many markets.

That all said for sure there are opportunities for sub too but there is a lot more to it from both sides of the transaction. In 90% of the deals the seller is a complete fool to allow someone to take title sub to a debt they sign for.
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Michael Key
Entrepreneur & Real Estate Investor · ID · Member since 2016 · 82 posts · 84 votes
3y
Quote from @Steve K.:

Quote from @David M.:

@Steve K.
On a conforming loan, no.... Not saying I'm an expert in all of this but, this talk of rising rates and Due on Sale being called in just doesn't make sense. Honestly, I feel this community should know better.
We know about the secondary markets. The loans are already pkged and sold. early/prepayment only decreases the income/value of the pkg. The "bank" that originated the loan is just a servicer. They get paid to service a loan since the Note is gone. If the Note is called, they have nothing to service so they get paid less.
The logic continues... If the Note is being paid, nobody makes money by calling in the Note...
I agree in following the money. Doesn't the bank make more money by collecting 7.5% interest instead of 1.88% though? I locked in a few loans at 1.88 in 2020 that I feel like I cheated on, it doesn't seem fair for the bank. Couldn't banks call loans with low rates due and lend the money to new buyers at higher rates, all while collecting new origination fees, boosting revenues which are declining, and making more money?

The bank can loan the money back out at a higher interest, yes. But... now the requirements are even tighter.

Who says I'm going to reapply at that bank? So they take a risk by calling the loan due in that they are giving up a performing asset in the hopes of loaning out at a higher rate to someone else...
I'd suspect their balance sheet will play a role in who is looking to loan out at higher rates. But then they'll also be dealing with declining customers who can get approved. Americans are seeing rising debt as it is. People just aren't applying for loans.
2 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Michael Key:

Quote from @Steve K.:

Quote from @David M.:

@Steve K.
On a conforming loan, no.... Not saying I'm an expert in all of this but, this talk of rising rates and Due on Sale being called in just doesn't make sense. Honestly, I feel this community should know better.
We know about the secondary markets. The loans are already pkged and sold. early/prepayment only decreases the income/value of the pkg. The "bank" that originated the loan is just a servicer. They get paid to service a loan since the Note is gone. If the Note is called, they have nothing to service so they get paid less.
The logic continues... If the Note is being paid, nobody makes money by calling in the Note...
I agree in following the money. Doesn't the bank make more money by collecting 7.5% interest instead of 1.88% though? I locked in a few loans at 1.88 in 2020 that I feel like I cheated on, it doesn't seem fair for the bank. Couldn't banks call loans with low rates due and lend the money to new buyers at higher rates, all while collecting new origination fees, boosting revenues which are declining, and making more money?

The bank can loan the money back out at a higher interest, yes. But... now the requirements are even tighter.

Who says I'm going to reapply at that bank? So they take a risk by calling the loan due in that they are giving up a performing asset in the hopes of loaning out at a higher rate to someone else...
I'd suspect their balance sheet will play a role in who is looking to loan out at higher rates. But then they'll also be dealing with declining customers who can get approved. Americans are seeing rising debt as it is. People just aren't applying for loans.

I think this is very accurate assessment of community banks and portfolio banks.. but for all the other fannie freddie govmit backed loans that investor and especially homeowners use its a non starter. those loans are all sold in the secondary market to servicing companies and servicing companies don't make loans payoffs just create more cash to buy more notes to service.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
3y
@Jay Hinrichs
I agree that deposit banks still actually holding the Notes (there still is a secondary market for nonconforming notes) have an incentive. But, would they take the risk of NOT being able to deploy the capital? Or, not deploy the capital as well with the increased uncertainty in the market/economy conditions? I've never worked with them so don't really know.

Even many of the non-deposit lenders actually have their funds sourced at fixed rate with large institutions, such as REITs, and the Notes are repackaged and sold off. Some of these DSCR's that I read on BP that people are getting have a secondary market. The (loan) wholesalers still need to collaterize the Notes to regain their liquidity...
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
3y
While it makes sense for them to call loans with a 3% rate in hopes of getting to lend at 7-8%, I still don't think many are going to be called. For one, few banks are paying that close of attention to that kind of thing. But also, foreclosure rates (while still low) are ticking up and any bank is going to be nervous about calling a loan that might trigger a default.
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Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
3y
@Steve K. I don’t understand why everyone gives so much anxiety to the due on sale clause. There is a simple solution. Just notify your lender of what you are planning on doing ahead of time. If they tell you no, then stop and find a different strategy. If they say yes, then you are golden and can proceed. Communication is easy people. Just communicate and it is not an issue.
3 Reply
Nicholas Joseph
Member since 2023 · 4 posts · 7 votes
3y
Recently had a DOSC called on a property when we tried to add our LLC to the title. My partner and I are buying into a deal with a friend and the title's in his name currently, but now need to figure out a workaround to get added onto the deed.
1 Reply
Joe S.Pro Member
Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
3y
Quote from @Account Closed:

@Steve K. I don’t understand why everyone gives so much anxiety to the due on sale clause. There is a simple solution. Just notify your lender of what you are planning on doing ahead of time. If they tell you no, then stop and find a different strategy. If they say yes, then you are golden and can proceed. Communication is easy people. Just communicate and it is not an issue.
How many lenders have you communicated with and asked permission to transfer the deed without paying off the loan?

1 Reply
Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
3y
@Joe S. Personally twice and have not had an issue.
1 Reply
Joe S.Pro Member
Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
3y
Quote from @Account Closed:

@Joe S. Personally twice and have not had an issue.

Did they give you a written permission or just kind of ignore the fact that you ask?
1 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
3y
Quote from @Joe S.:

Quote from @Account Closed:

@Joe S. Personally twice and have not had an issue.

Did they give you a written permission or just kind of ignore the fact that you ask?

@Account Closed asked, was it in writing?

@Account Closedundefined
1 Reply
Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
3y
@David M. I got permission from the loan officer that issued the mortgage. The mortgage was and still is held by the same bank. It was an email response. So yes, in writing.
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