All the above is correct re DF here's how to protect the buyer and seller and minimize the risk with Sub2
The Dreaded Due on Sale Clause..
First what the heck is it?
It's a clause in a mortgage, which provides that at the option of the lender, the entire unpaid balance of the loan is due and payable immediately upon failure to make required payments or upon sale of the property. Also know as an acceleration clause.
A little history lesson…
In the old days when banks loaned money and took back a 30-year mortgage that's exactly what you got.It didn’t matter if you sold the property to someone else that loan stuck with the property for 30 years and could be taken over and paid by anyone.
Well, in the early 70's banks, lenders, state governments and other interested parties were so upset that they were getting stuck with low interest rates, missing out on taxes, assumption and other sale fees, that lenders started adding due on sale acceleration clause to their contracts.
As you can imagine, a lot of borrowers thought this was unfair and brought suit against banks and lenders.Unfortunately around 1979 the United States Supreme Court found in favor of the banks, and today the due on sale -acceleration clause (usually paragraph 17) is found in most if not all conventional mortgages.
For years now buyers and sellers have been trying various ways to get around the problem. The leading real state books and educators teach the following basic approaches to buy real estate creatively.Some good and some not so good.Later I'll discuss the pros and cons of the best creative financing methods so you can determine which to use for your particular situation
Land Contracts
Options, Leases, Options to purchase
AITD's (All inclusive trust deeds or wraps)
Seller carry back deeds of trusts/mortgages
Taking subject to the existing financing
Not recording the deed, which is dangerous if not properly protected
Recording a memorandum of agreement
Trusts:Transfer the property to the sellers trust, get the bank to approve the transfer and then have the beneficiary of the sellers trust changed to the buyer.
Just transferring title into the buyers name hoping the lender won't call the loan.
Equity share
Any of these will trigger the due on sale clause and as a buyer or seller if you haven't put safeguards in place, you are unprotected against claims against the title from showing up and or the lender calling the loan due.
Are you prepared to take the chance that the seller may further encumber the property or resell to someone else?That the loan and taxes are being paid? Or the bank might find out about the transfer and call the loan due in 30 days and you lose your money and investment?It's happened. Unless you've got the credit to get a new loan or the cash in the bank I wouldn’t take the chance
What about the money?
Probably one of the most important issues that is never addresses in creative financing books is how the money is handled…
Money needs to be handled properly right from the inception of the deal.A buyer wants to make sure his hard earned monthly payments go to pay the loan.Sellers want to make sure the loan(s) and taxes are paid.
Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet
Here it is in a Nutshell. (This is what I use in California)
The concept is to keep the fact that the property has been transferred private.
The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement.
The transaction is maintained in the records of a settlement /escrow management company
Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record
Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property
Recording a deed or contract is not required in most states to make a valid transfer
Not disclosing the new sale to the underlying lender is not illegal in most states
Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated
OK sounds good, just how do we do it?
Let's put it all together
Seller signs a deed giving buyer ownership
The seller would agree to execute a grant deed (warranty deed, whatever its called in your state) in favor of the buyer
The deed is held unrecorded by the escrow management company until the loans in the seller's name have been paid or assumed.(If the seller doesn't like until paid try this. Buyer agrees to use best efforts to pay off existing loans that are in sellers name within five years of close of escrow.)
Protection for the seller
Buyer will execute a quitclaim deed back to the seller, which is held in escrow unrecorded
How to protect the buyer in the chain of title and potential future creditors of the seller.
For the buyers protection a lien of some percentage (I like to see at least 20%) of the purchase price in favor of the buyer executed by the seller will be recorded a "Sellers Performance Deed of Trust" The buyer will appear to be a juniors lender for public record purposes.
The seller is protected
For the sellers protection a reconveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer
This would allow the management company to unilaterally remove buyers cloud on the title by using the pre-signed reconveyance if the default was not cured as outlined.
