Buying & Selling Real Estate
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Due on sale clause was called by bank!
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.
The bank can't call our member's loans because the bank implicitly agreed to the transfer because the originating bank and their underwriting agreed to the second deed transfer in the closing package. The implicit agreement, per our attorney, is 'permission' and a DOS would not apply and a suit would not fly in superior court here (NC) and probably not anywhere because the act of underwriting and closing with the deed transfer to the LLC occurred simultaneously with and as an integral part of the closing.
When you buy, have your closing attorney add a deed transfer from you to your LLC as part of the loan package.
As for the "classic Subject to" method... I've not (and I'd guess my other members haven't) done it YET. When we do, we will get permission in writing and say 'we will take over payments with personal guarantees... or you can foreclose on the defaulted owner... it's up to you. Here's our member's FICO scores and company history... Your call.' We mostly buy at the courthouse, so either way works for us.
There is opportunity coming when loans are called. Maybe after a 2+ year lull because of the "good" market, we (collectively, those of us sitting on the sidelines) can get back into acquisition mode and bail out undercapitalized S-2 newbies.
This post is for entertainment and not to be construed in any way as legal advice. Consult an attorney for your legal matters.
@Dion DePaoli, @Bill Gulley, @Michael Worley, If the bank has accepted payments from the LLC for 2-3 years have they not de facto accepted the transfer? What if the bank were informed by the borrower that the transfer was going to be made before hand and the bank never responded? Can the bank collect the payments as long as it is convenient for them and then decide to call the loan at any time when they decide it is no longer convenient or may be more profitable for them to do so?
Originally posted by @Dana Whicker:
Bankers might be a bit slow, but they're not stupid. Maybe they're catching on.
exhibit A:
Thanks for the information, I was pursuing a Sub2 deal but decided to buy the house by different means. Thanks BP members for the education!
My geometry teacher used to tell us that we weren't getting the correct answer because we were over thinking and making it more complicated than it actually is.
There is no conspiracy to garner higher interest rates. The lenders/servicers are just following the rules set in the Note. It really is that simple.
I have to ask...if you know good and well your lender would NOT allow you to close in your LLC, why do you think it's OK after you close??
If you want to hold property in your LLC you need to go with a business/commercial loan. They happen to be pretty abundant right now with decent rates and you can even go stated income with scores down to 650.
I know I will likely not make any friends with this statement but far too many people seem to lack true understanding of the way a lender/borrower relationship works. They are the ones with the money and they get to make the rules. They do not trick you, it is all written in the Mortgage docs for you to read before you sign. If you do not like the terms, do not take their money.
Creativity and deal weaving is one thing. Trying to outsmart lenders is something else altogether.
Originally posted by @Serge S.:
@Dennis Lanni haha,
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.
I would like to hear from an attorney as to how many times LLCs are "pierced." After all, unless you have a PM YOU the investor make the management decisions, and so if you are liable I would think a good attorney would pierce the veil even if you are doing all the bookkeeping and documentation correctly. Isn't a good umbrella policy for $1 million better than an LLC? If so why do I need an LLC?
@Mark Forest, if you have a PM you may be held responsible for their actions which were taken on your behalf. You hired the PM.
I've heard of this happening once before to someone we knew. It's rare, but definitely a risk. It's shocking though that they would do it over something so trivial.
Originally posted by @Jeff Rabinowitz:
@Dion DePaoli, @Bill Gulley, @Michael Worley, If the bank has accepted payments from the LLC for 2-3 years have they not de facto accepted the transfer? What if the bank were informed by the borrower that the transfer was going to be made before hand and the bank never responded? Can the bank collect the payments as long as it is convenient for them and then decide to call the loan at any time when they decide it is no longer convenient or may be more profitable for them to do so?
Of course they have not accepted the transfer.
The NOTE that you pay is NOT THE SAME as the collateral. Yes they can collect payments as long as they like because you have a contractual obligation to the lender. Part of that contractual obligation is to pay the note, part of that contract states very clearly that the collateral for that note will be a FLDT/Mortgage on the property. That lien must be satisfied before you can transfer ownership in order for you to not be in breech of contract.
As Kimberly mentioned, there seems to be some fundamental misunderstanding of the nature of the Lender/Borrower relationship by some.
When you borrow money you make a deal with the entity that you borrowed the money from. If you decide to renege on the deal, it's not the bank's fault. The deal you sign is not just about paying the payment on time every month.
Originally posted by @Jeff Rabinowitz:
@Mark Forest, if you have a PM you may be held responsible for their actions which were taken on your behalf. You hired the PM.
Well that just reiterates that having an LLC does not seem to help. Given the issues that Serge has listed I think they are a determent, but then I am certainly not an expert.
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
- 12,868
- Votes |
- 21,918
- Posts
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
No, the bank acts upon discovery of the breach, not the date it was committed, just as with fraud (and with fraud, any statute of limitation begins at the time of discovery, not the time of the act). Since the option to call a note is at the discretion of the lender, there is no statute of limitation.
Chris is correct that permission may be granted, rarely will it be in writing, implied consent is common, that is not actual consent as described in a standard deed of trust.
I used a notice of transfer that assumed permission was granted if the lender failed to advise otherwise within a reasonable period of time, not really a legally binding way to go, but it caught many off guard, a few were not and those were paid off if push came to shove. I don't think the wording of Chris' notice will be that successful, it seems a tad adversarial Chris, LOL.
Just handing over credit scores and financials won't be enough, prudent lending practices will require a lender to obtain information just as they do in a new origination, you can't just mail your own qualifying standards to them. Someone could send them anything, so it must be verified.
3 reasons banks allowed me to "assume" payments, 1. they knew me, 2. they trusted me, they knew if stuff hit the fan I could take them out of the loan, and 3. I was holding the contracts or notes in servicing in a regulated company. I wasn't just an investor who had a personal interest in the transaction, even though, at times I did have. Completely different than an investor off the street. :)
This not what I would do - but after getting stonewalled by them in my attempts to work out an agreeable I would certainly lay it out on the table in order to get them to see their true best interests.
stephen
----------------
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.
Thanks for sharing.it does happen..
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.
Thank you for making it clear where your morals are. Doing so, with the intent of hiding the eventual transfer of beneficial interest from the bank in an effort to circumvent the law and the mortgage instrument which you agreed to is both unethical and morally wrong, as well as a violation of various federal laws. Great advice to give others.
John T. Reed tells us all we need to know about hucksters who think they can get around the due on sale clause.
Originally posted by @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.
This is a great posting and an issue im actively involved with now. I have another related question for experienced investors and legal experts on the forum...
How can someone avoid probate and the due on sale clause when passing 1-4 unit investment properties to children?
I am most interested in hearing from people who have actual experience and have been successful in accomplishing avoidance of both due on sale clauses and probate.
I have a relative with property who would like to avoid probate, taxes, and due on sale clauses and have the property passed to my sibling.
Thanks in advance for any responses.
#4 Marketing Your Property Contributor
- Lender
- Greater LA/Orange County area, CA
- 3,542
- Votes |
- 3,858
- Posts
#4 Marketing Your Property Contributor
- Lender
- Greater LA/Orange County area, CA
Suggest you start a new thread with your fresh points to your post's query
Originally posted by @Rick H.:
Suggest you start a new thread with your fresh points to your post's query
Thanks Rick. I will do that.
I started a related topic about how to avoid alerting the bank through changing your insurance, or if changing your insurance is even necessary.
I'd appreciate it if someone could give me some insight on this:
I met with a local RE attorney yesterday who's primary job is litigation. So his take was from a reverse engineered litigious standpoint. He says the Series LLC is hands down the best way for asset protection. When you have the Series LLC, you do not need the high liability insurance coverage if you do not own homes outright. If ppl wanna sue you, it becomes less of a payday because you have a 1st lien holder that needs to get paid first, after that only then can they come after your equity. Not worth it for the attorney who's suing you because it is not a guaranteed payday and plus you might not have much equity to go after.
An example he gave was a RE investor who had about 15 SFRs (cant remember if they were fully paid for or not) without LLCs and was sued by someone he had been in a car accident with. The other party had an attorney check his assets and found a possible payday. The cost to defend yourself in court can amount to quite a bit and even if you win, you are still out a lot of time and money.
However, he stressed the Series LLC is NOT guaranteed protection for DOS or NEGLIGENCE.
To me, the Series LLC sounds doable if you own the properties outright. But if you are starting out, you will likely have mortgages tied to your properties. Taking another hard look at umbrella coverage now..
This being said, I like the idea of commercial lending where LLCs seem to be more acceptable at the onset. Putting down more upfront will likely be a reality, but I don't see any other solution at this time for expanding.
By perception:
Why are banks so damned inclined to keep people as under-dogs? I will never feel sorry for any losses they incur.
@Account Closed As one who regularly obtains financing as an LLC I gotta ask....don't the folks at Region's make sure the LLC's are legit BEFORE they close the loans??? Every lender I deal with surely does. Not only do they vet the LLC's, they also have strong language in the closing docs that prevents changes to the LLC after closing.
#5 Guru, Book, & Course Reviews Contributor
- Investor
- Sherman Oaks, CA
- 3,914
- Votes |
- 6,088
- Posts
#5 Guru, Book, & Course Reviews Contributor
- Investor
- Sherman Oaks, CA
@Jon S
Probate avoidance is used with trusts.
Basic thought process is that a living trust owns the property and you don't own it personally, so that there's no probate on that particular asset when you die or get incapacitated, like for instance can't sign documents because you're incapacitated
There are other kinds of trucks for instance an insurance trust where life insurance is used to pay federal estate taxes, which can be expensive
You still need a "pour over will" though for your estate plan
An Estate planning attorney is helpful
If you don't have a legal will, you will go through probate, which can take a long time
Probate Avoidance links
http://www.nolo.com/legal-encyclopedia/ways-avoid-...
http://www.karplaw.com/page/florida-probate-avoida...
http://layman-nichols.com/probate-avoidance/
http://daroltuttle.com/estate-planning/probate-avo...
http://www.nolo.com/legal-encyclopedia/california-...
If you are super rich, you may need a AB Trust, see
Originally posted by @John Thedford:
Originally posted by @Ashley Pimsner:@Wally Smythe it can absolutely be done now and hold up. Here is the link to the legal precedent.
If you read the article, it is not guaranteed to protect from a due on sale clause. It is simply a way to help hide the transfer. Here is part of the article:
STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.
Keep in mind that the assignment of Sammy Seller's interest under the trust to you does trigger the "due on sale," but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:
- Change of name on the deed. Not likely, since lenders don't readily have "spies" at the clerk's and recorder's office;
- Different name on the check received for payment. Not likely, since the bank officers are far removed from the clerical workers who process payments; or
- Change of hazard insurance beneficiary. This is the most common way a lender discovers a transfer of interest in the borrower's property.
If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change.
However, if you transferred title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. The lender will probably not object, since it will assume the seller has implemented an estate planning device.
Read more: http://www.creonline.com/beat-the-due-on-sale-clause.html#ixzz3V9fiWKUe
I found this very same article two days ago facing the same situation getting conflicting opinions and needing a solid solution. :-)
If refi-ing into a portfolio loan was an option without a W2 I would go that route just to be able to complete my estate planning. It would be worth the cost, perhaps not the rate since these were acquired at very good rates.