Due on sale clause was called by bank!

[Serge S.]

I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.

Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.

[Jeffrey Vandagriff]

@Serge S. I don't know how to say this, so I'm just going to say it. I'm so glad this happened to you!  Ok, I'm not glad that you are having trouble with this lender, but so much great information has been opened up in this thread. Thanks so much for sharing this experience with the rest of us. I hope it all turns out roses in the end for you. 

[Mehran K.]

This is one of the best threads I've read through in a long time. It hits home for me as I've transferred quite a few properties into LLC's recently with new partners. They're all aware of the DOS risk and we plan on switching back to personal names if we receive any letters. As mentioned above, it's important to have a plan of action before this, along with everyone understanding it could happen. That way it's easy to handle it and you're not caught with your pants down!

[Marcia Maynard]

Originally posted by @Mehran K.:

This is one of the best threads I've read through in a long time. It hits home for me as I've transferred quite a few properties into LLC's recently with new partners. They're all aware of the DOS risk and we plan on switching back to personal names if we receive any letters. As mentioned above, it's important to have a plan of action before this, along with everyone understanding it could happen. That way it's easy to handle it and you're not caught with your pants down!

I agree. It's a good thread. Hope you're not on an extended vacation when the letter arrives. Gotta act fast! :-) Thanks @Serge S. for sharing the photo of the actual letter. It is an eye opener!

[Guy Gimenez]

Overall, I'm sure the number of sub-to's subjected to action by the lender are miniscule. Like anything real estate related, the investor better have a Plan B though. I think you'll likely see many more letters demanding title transfers back to the mortgagor, but at this point, I doubt there will be any meaningful number of actual foreclosures on performing notes until interest rates are high enough to make it worth the lender's while. After all, a mere letter will usually generate enough fear to force many investors (at least those with substantial equity or considerable investment in the property) to take action.   

[Kurt Kwart]

Almost every sub-to will called due as interest rates rise.  These are the sketchiest deals

If a bank has a way to double profit, do you expect them to ignore it? 

[Cal C.]

Originally posted by @Ben Leybovich:

@Ned Carey

 It's not stupid to call a 3.75% note if you think that you can re-write it at 6% :)

 You're right and that will undoubtedly happen in the future once the Fed starts raising rates.  However, right now there are not a lot of people getting loans with rates that high.  

[Dennis Lanni]

If you can handle the stress let the 30 days go by.  I will send you a $20.00 gift card.  I have had a few lenders call loans (30 days or else sort of demands) and nothing happens after the 30 days.  In California I would get 121 days to dump the property if the bank went the foreclosure route.

Good luck & let me know ow where to send that gift card

[Jay Hinrichs]

@Dennis Lanni

   your not the issue .. its the poor sap who sold you the house sub too who is going to get their credit crushed.

[Greg H.]

Originally posted by @Kurt Kwart:

Almost every sub-to will called due as interest rates rise.  These are the sketchiest deals

If a bank has a way to double profit, do you expect them to ignore it? 

 Wait till they take a few back and find them stripped of appliances, copper , fixtures , and AC's 

Banks historically have been horrible at maximizing the value of their assets ! That why we all look to buy them

[Serge S.]

@Dennis Lanni haha, I would consider your gift card offer. Flagstar does not particularly scare me and I bet your right! The issue is that I have a few larger deals in process all of which have loan components. Last thing I need is a ding on my credit and all of the nonsense involved in removing that strike. 

I tend to agree with @Steve Vaughan and the @Brian Burke school of thought that LLCs are generally overrated. The reality is that if your negligent, an LLC will not help. If you do not maintain a yearly documentation package including full set financials for each LLC, operating agreement, etc then it will not help. It also cannot be a sole member pass through entity. So now go ahead and take your lawyers advice and hold each property in an LLC and grow your business. Imagine you hold 20 SFRs in 20 LLCs, 20 bank accounts to open and reconcile, 20 checkbooks, 20 ACH agreements, 20 sets of financials, operating agreements and K-1 partnership returns. And at the end of the day you need to get paid. So this requires a property management agreement between yourself and the LLCs just to transfer money back to yourself. Those transfers are then technically taxable with the FICA hit! Its pretty ridiculous as a 20 home portfolio will generally be producing marginal net income. Your LLCs will be a very material expense. And for what? The hope that maybe, IF you have done everything to the letter, your liability is limited. We investors can really over think things sometime. Sure its "good" to have the extra layer of protection. Worthwhile? Hardly.

I am glad this thread has been helpful for many. I'd be interested in another thread hearing about investors that got sued and having an LLC actually saved them substantial losses.

[Jay Hinrichs]

@Serge S.

one of my business partners started down this ( each home needs to be in a separate LLC road) I told him great you handle it.. you handle all the filings you handle the checking accounts you get all the data to the accountant for tax's etc etc. Well we did about 6 deals and he said F it lets just start one company and roll it all in .. I said fine I will now do the books... its over kill that stuff in my mind.

[Serge S.]

@Jay Hinrichs seriously ... I started with this mindset as well. Created all the LLCs bank accounts and just couldn't keep up. Started piling homes into LLCs that were already operating. As soon as my CPA started talking FICA on distributions (transfers between MY accounts), it was over for me. Carry liability insurance and always do the right thing and you will be fine. If you intend to be grossly negligent then create your cover and good luck.

[Ned Carey]

Originally posted by @Account Closed:

Originally posted by @Ned Carey:

Hmm I don't know about that. It is stupid to call a performing loan. The banks position does not change one iota with a transfer. The original guarantor is still liable for the note and the property is still collateral.  (OK the ability to sell that note may have changed, but that is only because the next person in line is being stupid)

But I do agree they are catching on to investor strategies. They are just being stupid in reaction to them.

Ned:  if you believe that the bank's position doesn't change because of a transfer, you have not been listening to what @Dion DePaoli has been posting on this topic for at least the last year.  Go back and read the threads again. :)

 K Marie I have read his posts which is why I said "the ability to sell that note may have changed" 

[Jeremy Pace]

@Serge S.

I'm sure this is a very frustrating time for you.  This is why it's so important to do things the right way.

And yes, amazingly if you record a deed transfer, the bank will notice.

Also, in the future, simply name your LLC as an additionally insured (if not the owner of the property). This will provide your LLC with the coverage you want, but isn't communicated to the bank.

There are several instruments that you can use that don't transfer the deed.  You should investigate which is most appropriate in your local area.

Live and learn!

[Adam Johnson]

@Jeremy Pace - and to anybody else reading this rather lengthy (and informative) thread, I strongly recommend consulting an attorney and your insurance person before simply naming the LLC as additional insured. Here's why: technically, if the deed is quit-claimed into the name of the LLC, then you personally don't own it anymore technically. That is what triggers the due on sale clause because it is technically a sale.

To further complicate matters with this type of transaction, if ownership is transferred to an LLC, then you personally no longer have what is called an "insurable interest" in the subject property as a result. If that proves to be true (lawyer conversation, along with insurance person), then having an insurance policy in your personal name and listing the LLC as additional insured COULD technically leave you hanging in the event of a loss. To simplify this, it is kind of like taking out insurance on your neighbor's house, just because you want to. If the neighbor's house is struck by lightning and burns down, what is your personal loss? Likely nothing since you have no interest or ownership in the neighbor's house, so you may or may not collect on that loss. Very similar situation with quit claiming into the LLC.

To continue with another thought, having the insurance policy in your personal name while having the deed in an LLC COULD make it easier to "pierce the corporate veil" of protection offered by the LLC, rendering it's existence useless and defeating the original intent of doing all of this in the first place.

@Serge S. may chime in, but I suspect that he was well informed by his insurance person and told that he had to have the policy in the name of the actual owner (his LLC) and that is what started the whole mess for him. Serge, I'd like to thank you again for posting this issue. Hopefully it will help teach others that being "creative" is not always perfect and can have very real consequences if not handled properly.

To anybody else reading this, talk to your attorney and insurance people.  A few dollars spent ahead of time could save tons down the road!  Imagine having a catastrophic loss and finding out after the fact that you have no coverage.

[Jeremy Pace]

@Adam Johnson

 - thank you for the much more articulate explanation!  appreciate it.

[Dion DePaoli]

Just as a side note, or two. DOS threads are still hot topics.

We spend a lot of time trying to pinpoint the major influence which drives DOS. Certainly economic influences have some role to play. That includes the marketability of the loan in the secondary whether whole or in a security. That also includes the rate increase situation. To that idea, do know there are restrictions in some states when it comes to triggering DOS solely for the purpose of rate.

Aside from those ideas and perhaps of a greater influence is the legal aspect that I do not get a feel many understand when it comes to the security instrument. (mortgage/deed of trust) A couple have mentioned it but I will just expand on it for a moment. When a loan is made a core component of that agreement is legal control of the real property. A secured interest can not be granted otherwise. When title is transferred to another party then legal control passes to said party. This erodes the secured interest the Mortgagee has since the new party is not fully bound by the terms of the agreement that created the secured interest in the first place.

That creates a competing claim. So the Mortgagee is not in the same position they were prior to the transfer. A new party is now present who has claim, even if inferior, to the real property and is not bound by the contract agreed to by the original Borrower and Mortgagee. Having legal control allows the new title owner to direct the property at their whim which is also not bound by the contract between the original Borrower and Mortgagee. So, say they make the property a parking lot. They can within their rights. (obviously other restrictions apply that is only for example)

The moral of the story here is the legal aspects which tend to not be as well understood in the common public are really the drivers for the action and the economic influences are more of an encouragement to pursue. Who owns and controls the property is a central idea to our common law heritage which has helped carve out the body of law we have around mortgages and deeds of trust.

Further, what would a world look like if contract integrity could not be upheld? Where does the chain of transfer end or does it? (if you are pro DOS) Essentially if we do not address the issue title could be transferred infinitely which only serves to create a burden on the enforcement of the secured interest. Hopefully you can start to see the mess this would imply.

Finally, I do think it is of merit to put our attitude towards contract agreements in check. The world does function on integrity. Knowingly and willing breaking or eroding the integrity of contracts is simply not good for a business environment. This sort idea has been a root argument against folks who advocate for DOS. If you do it and have to hide it [because you are in violation of the terms of an agreement] then it probably is not something you should do. NOR is it something we as a populous at large should encourage. There is nothing left when we have agreements that are not binding or meaningful.

[A.J. Chesney]

so when a due on sale clause is invoked, the bank says to the seller this amount of XXX which is your remaining mortgage is due within 30 days, then the current owner could refi just enough to pay off the remaining mortgage of the sellers + the seller financing?  

[Bryan O.]

Originally posted by @Ashley Pimsner:

Transfer the property back into your name, create a land trust and place property into land trust. Make LLC beneficiary of land trust. Problem solved! A land trust helps avoid "due on sale" clause, transfer taxes, probate, and keeps your real estate holdings private. Google land trust and do your own research, but I am certain you will find that this is the solution to your problem. Look up Mr land trust Randy Hughes to get more education. Contact a real estate attorney who specializes in land trusts asap. Best of luck.

Be VERY careful here, the Garn–St Germain Depository Institutions Act of 1982 is what allows you to place the deed into a trust, but it does not allow you to use that to transfer it to an LLC: "...the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property..."

Please make sure to check with an attorney before you consider doing this.

[Aaron Mazzrillo]

Originally posted by @Account Closed:

stop paying, gut the house/sell everything of value, break their loan obligation in bankruptcy, see how they feel then.

 This qualifies as some of the stupidest advice I've ever seen on this website.

[Jay Hinrichs]

@Aaron Mazzrillo

  concur  would not want to do bizz with someone with that attitude.. us bankers are human to ya know !!

[Aaron Hall]

@A.J. Chesney, you could refi in the 30 days but you would fall into the same scenario. The LLC doesn't have the means to acquire the property so he would have to get a loan as himself. Then he would have a loan in his name, have spent money on the refi @ a different rate than what he has now.

This doesn't put him ahead neither in name on title nor financially.  As he mentioned earlier he is also in the middle of working on other parts to his plans.  Normally another refi would make thing more complex in the short run and not solve anything in the long run.

[Matt R.]

Sidebar:

When I worked for a couple Wilshire Blvd attorneys, they only cared about the insurance coverage. Llcs or whatever it made no difference. Now if you pay cash for your stuff that might make a difference. You want an attorney to drop the liability case....tell him you have no insurance.

[Jay Hinrichs]

@Aaron Mazzrillo

  ps  we had a drought in orygun in feb.. steelhead were spooked river gin clear.. by the time it finally rained they had all moved up and the season is over... frustrating. it was so red hot to start

[Matt R.]

These guys Jay and Aaron living the life of Riley. They got time to talk about fly fishing...wtf:) I got to follow these dudes more.