Does a gut-job ever trigger a Due On Sale clause?

Question

Scenario:

You buy an owner occupied property, then immediately start a full gut job renovation.  Depending on permitting delays, labor/material shortage, COVID related delays, inspections, actual work conducted, etc., you don't actually move into the home for a year while making your payments.

I wonder if the bank would execute the DoS clause either because 1) if they visited during demo/construction, their initial investment has lost value, or 2) you haven't move into the home yet.

Does anyone have insight on this?  Thank you.

Kristina Jensen · Answer

Thanks for all the replies.  Here are the stats to help others learn where I faltered.

Purchase of 1958 (never remolded) SFR with basement/1st floor in good neighborhood, 1350sq/ft.  225k

Gut job and rebuild during COVID: 200k w/improvements (finished basement, shed with insulation & power for office, no builder quality items used, rear deck).  Total investment - just over three years, many years of life taken off, and home would probably appraise around 400k (25k in the hole for all that labor/mental stress, NOT WORTH IT)

My takeaway as an amateur.

1) a deep renovation is a bad idea.  I should have razed the building and built new or stuck with light renovations.  The time it takes a builder to work with a structures framing and CMU basement that are not plumb, square, true, flat or waterproof is more costly than rebuilding with current building codes and engineering.

2) Take the time and cost you think it will be and multiply by 3 and 1.5

3) contractors will fail you again and again.  WRITE YOUR OWN SCOPE OF WORK and make them sign that instead of the nebulous one they send you.

4) Demo'ing asbestos and lead is time consuming and costly.  I'll buy 1978+ in the future

Your mileage may vary, but those were my revelations.  An expensive education

Jay Hinrichs · Answer

waste is an event of default in pretty much all mortgages/deeds of trust.  banks dont do drivebys  unless they are local community banks who maybe worried about the borrower or collateral.

as long as payments were being made there would be no reason to do a driveby.

due on sale gets triggered by change of insurance .. but again very rare.

Andrew Postell · Answer

@Kristina Jensen yeah, you have zero to no likelihood of them calling the note due.  One thing to think about...if it were to ever apply in the future...if you received a standard, conventional loan that probably means that you are paying for the rehab out of pocket.  There are loans that allow you to roll in the rehab.  Maybe you did cover that here - but thought I would mention it just in case.  Thanks for posting!  Always great to hear from a fellow Texan.

Ronald Rohde · Answer

I doubt it.

Riaz Gillani · Answer

Few acceleration clauses trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether to invoke the clause. In the scenario you posed, a full-gut Reno without the lender's prior approval would generally put the borrower in default due to waste / destructive use of the real property. But, where a lender gains the right to invoke an acceleration clause due to a borrower’s default, the lender may lose that right if the borrower corrects their default before the lender invokes the clause.

Also worth noting that given the loan is still young and depending on the LTV, the lender could lose a good sum of money by taking legal action and foreclosing. So, while a drive-by is highly unlikely - act quickly for your and your lender's sake.

Kristina Jensen · Answer

It is an owner occupied (primary residence) conventional 30 year loan.

Andrew Postell · Answer

@Kristina Jensen I mean, the answer is probably not - but what kind of a loan did you get on this property?  Did you get a renovation loan, which requires inspections?  Or did you get a Hard Money Loan, which won't even allow you to occupy the property? There's other loans too.  Do you know what kind of loan you received?

Does a gut-job ever trigger a Due On Sale clause?

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