Has Anyone EVER been forced to pay an accelerated note because they transferred title and the bank enforced the due on sale clause?

Question

The "Due On Sale Clause" in every lender's note is a common investor fear due to the myriad of ways investors transfer title on deals.

In 30 years, I have NEVER heard of a bank accelerating a note that was paid timely because title transferred and they enforced the due on sale clause.

Has anyone ever personally had this happen and if so, could you educate the other Bigger Pockets members as to your experience and what to look out for?

Eddie Ziv · Answer

When you say "transfer" it depends to whom. If this is a transfer to a trust or even a self proprietary entity such as LLC, or corporation, it shouldn't be problem although in theory the lender can trigger the Due-on-Sale-Clause.
Based on the Title 12 of the US Code 1701-j-3, a federally nacted law, as long as the borrower is the beneficiary of a trust, thus the transfer to the trust, (And you can argue that self proprietary entity falls into that category) no Due on Sale can be triggered.
However if the transfer is done to benefit any person or entity other then the borrower, then, yes. You are in jeopardy.

Vincent Polisi · Answer

Richard, you are correct that every note I have ever read used the term "may" in reference to calling the note. This clause is, I believe, one of those phantom clauses utilized to strike fear in the hearts of investors and buyers but has no real teeth. With all of the subject to investors on Bigger Pockets, if this clause were to have any merit, surely an army of subject to investors would come forth and cite instances. From decades of experience, like many of you, I have watched the mortgage closing packages go from fewer than 20 pages many years ago to the size of the Atlanta phone book presently. I used to have to explain to colleagues, friends and clients that after we finished signing the HUD 1, the deeds, the TIL, the note and any riders, that every other document was there because some bank somewhere either got sued or lost a lawsuit about whatever the topic of the document was. For example, the no hazardous chemicals document, SERIOUSLY???!!!  What is the first thing every investor or homeowner does after they buy a home? Load it up with every conceivable cleaning supply imaginable, paint, turpentine, bleach, gas for the lawnmower, etc.,  most of which individually violate the clause and in the proper combinations could bring the entire house down.

I have never heard of any bank or lender paying money to re-examine the title after closing to uncover all of us evil investors who learned proper asset protection or how to structure a subject to deal. Likewise, I never had a knock on the door from a lender asking if they could inspect the property to ensure that I didn't have any hazardous chemicals in the home. (Good Thing, too or I would have been sunk).

So, it will be interesting to see if anyone has ever had a note called on a performing loan due to a title transfer.

Eddie Ziv · Answer

Vincent,
We are all in agreement regarding the probability of any given lender triggering the Due-On-Sale clause when it comes to asset protection and they may not do it now with land trust contract or even mortgage take overs. But wait three of four years fro now  when the 30 yrs fixed rate is 10.5% or 12% and people will try to pull that trick buying property with mortgage take over or land trust, I guaranty you an explosion of Due-On-Sale activation...

Paul Beauchemin · Answer

about 30 years ago I was unable to sell my first home. I "sold" it using a land contract while keeping my low interest mortgage in place. Somehow the bank got wind of it. Rather than accelerating the note, they talked me into co-signing a new loan with the couple that had bought my house. Fortunately, they paid the mortgage until the house sold.

Since then, I've only bought or sold property into trusts when existing financing still exists.

Vincent Polisi · Answer

Eddie:

So, apparently we need to talk to an investor in their 60s or 70s who was investing during the double digit interest rate 1970s and find out if they had due on sale clauses then and if they were enforced when rates rose.

Eddie Ziv · Answer

Vincent.
What do you think prompted the due-on-sale clause to begin with? It actually started in the 70s when banks started to insert the Due-on-Sale clause which prompted several law suits, The more known which reached the US supreme court was The  Fidelity Federal Savings and Loan Association v. de la Cuesta, 102 S.Ct. 3014, (1982).  Congress thereafter passed the "Garn-St. Germain Federal Depositary Institutions Act" (12 U.S.C. 1701-j), which codified the enforceability of the due-on-sale clause.

Richard Warren · Answer

One thing to keep in mind is that the due on sale clause says the loan â€œmayâ€ be called, not must be.  The bank has the option.  In talking to someone who has done a lot of subject-to deals over the years, he said it only happened to him once and that was on a privately held note.

:cool:

Eddie Ziv · Answer

Although I agree with Richard, the main reason for that is that in the past ten years or so, interest kept low and qualification was easy. There was no need for "transfer" or land trust type  when it came to property changing hands. I can foresee however, an explosion in "Due on Sale" calls once there is a hike in interest rate.

Richard Warren · Answer

If the bank exercises the due on sale and the loan isnâ€™t paid off their only real option is to foreclose.  Would a bank really do that on a performing loan?  I wouldnâ€™t think so.

:cool:

Has Anyone EVER been forced to pay an accelerated note because they transferred title and the bank enforced the due on sale clause?

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