How To Beat The Due-On-Sale Clause

Question

So there has been some uprising in the discussion of Sub2 investing and the Due On Sale Clause.

Most recently, a blog post of mine titled: Attention: Residential Real Estate Agents

The topic of that blog post was to open the idea to Realtors of selling their clients properties Sub2 and the benefits. Of course, as usual, you've always got a few of those 'That Guy' who will come around and purposely stir up trouble about the only real downfall to Sub2 investing; Due On Sale Clause

Every time I get into one of these discussions, the opposing party always shows their true uneducated 'beliefs'.

Here are a few things that usually come up:

Land Trusts

Garn St-Germain Act

Due On Sale Clause

One of the biggest things I quickly find is that the opposing parties quickly state that the Garn St-Germain act is where the Due On Sale clause started when in reality, it's been around a really, really long time.

Here is an article that I wrote earlier this year: The History of The Due On Sale Clause where you will see how far back it really goes.

If there is any wrong information in that article, please let me know. I certainly would appreciate correct information. Just make sure you include your proof and not just speak to speak and make others believe it's truth.

Now, one of the biggest problems I have is the 'Big Timers' pushing products to make people believe that the 'Land Trust' is the key to Sub2 investing.

There is even an article published titled: How To Beat The Due On Sale Clause, are you kidding me? This stuff shouldn't be allowed to be published, let alone be considered credible  because you might recognize his name.

There is even this statement made in that article: Where did the "due on sale" dilemma come from? Banks began inserting "due on sale" clauses in their mortgages in the 1970s when interest rates rose dramatically.

Does this person seriously think that the Due On Sale Clause originated in the 1970's? I seriously hope not. That would mean he has not done his own home work(due diligence) before putting himself out there like that.

Here are the simple facts as said by me,

Sub2 or of course, "Subject-To" investing has risks, we all know that. All Real Estate investing involves risks. This is why the rewards are so great.

By far, the biggest and most fearful risk involved in Sub2 investing is the 'Due On Sale' Clause

I have always said that I am not worried about the due on sale clause, not because they can't call a loan due, we all know they can, but because Sub2 investing is a short to mid-term strategy for me.

I will always have a solid exit strategy in place, as you should with investing to begin with. It's been said that you should never enter without an exit strategy in place and that is soooooo true.

This is my open invitation to those that have either previously, currently or in the future consider or participate in a Sub2 transaction to discuss these things on an open platform.

The only rules I ask are these:

~ For those of you who want to be funny and say 'Subject-To' can be anything in the contract i.e, subject-to inspection, subject-to your grandma wearing pink thongs etc..... please, leave that elsewhere, you know exactly what we're talking about so leave it at that.

~ Please make sure you prove your statement is fact by including the source of your information. Please don't say that Sub2 is illegal in Montana without including the specific state law # etc.......

~ Please keep it on track, now hi-jacking into how to market for Sub2 deals, where to find contracts etc..... Lets leave the discussion to it's true nature. Create your own thread for those questions.

There it is, you basically know where I stand and I'm openly invite you to this discussion. I actually look forward to hearing different views of this as I'm always open to further educate myself.

Brian Gibbons · Answer

This is MHO.

You can not beat the DOS Clause. Trusts and other tools are imperative for keeping a low profile.  To place a property in a land trust for asset protection, is that a good idea?  I believe so.  That is my opinion.  Land trusts are not recorded.  Trustees and Beneficiaries.  Like Living Trusts, Insurance Trusts, Charitable Remainder Trusts, Family Limited Partnerships, et al.

A side note: Sub2 has been abused where REIs have purposely NOT PAID (i.e. chosen not to pay) PITI payments to lenders-insurance-county tax and collected rent.  This is fraud.

If you buy sub2 and do not pay the PITI because you do not have the money FOR WHAT EVER REASON, and there can be many reasons you are not paying the bill, this is what I worry about in REI, some joker getting in trouble.  Having the press and the AG getting involved.  That may be off topic.

So my vote is Land Trusts protect the REI better than most tools.  I can purchase and sell beneficial interests of land trusts on a kitchen table.  With control and privacy.

Merry Christmas & Happy New Year to all,

Brian

Bryan Hancock · Answer

I have studied the posts by industry experts like John T. Reed and some others that have written extensively on the subject of "getting around the due-on-sale clause."  Most of the articles have good points.  The truth is that this is a really gray area that will always have its supporters and detractors.

If banks are issuing debt that they believe will have an average duration of 7 or so years and are pricing it accordingly I guess you could argue that their interest is being impaired a bit by someone piggybacking on the note and extending the average duration.  The question then becomes...Doesn't the average duration already reflect the extra time because investors are buying sub-to all over the United States?

Since Fannie and Freddie are the ultimate purchasers of most of this paper it really has gov-mint undertones too.  Are taxpayers that support the GSEs being ripped off because the average duration of the notes is longer than it "should be"?

I know of a guy in Austin that is applying for a bank charter so that he can issue debt without the clause in it.  He can refinance the "ticking time bombs" that investors have wrapped if the notes ever do get called.  Most importantly he can issue new debt so that people can wrap away as much as they want to.  Is this prudent?  Who knows...I guess everything makes sense at some price.

The real question, in my mind, is whether or not everyone benefits more by someone taking the property subject-to.  The seller generally benefits financially or they wouldn't allow it to happen.  The investor benefits.  The bank potentially keeps a foreclosure off the book...they benefit too.  Seems like a reasonable transaction to me...all parties generally benefit.

I could see how banks could argue their security interest is impaired with a new buyer.  It would be hard to argue that they are impaired overall though if the alternative is to have a large ding on their non-performing asset ratio because of another REO.

All of this arguing about the due-on-sale clause is trivial from my perspective.  The banks can, at their option, call the note due.  The previously uncallable note is now callable. Price this risk in your portfolio of properties and go on with life.  End of story IMO.

Rich Weese · Answer

As an old guy, I remember this item very well. As a broker in Fullerton, ca in the early 70's, this was a hot item. 
    Many were doing these wraps, aitds, etc. Lenders always had the right to call the loan (only on conventional loans), but I had NEVER heard of a lender calling one. There was an attorney from Riverside  that guaranteed to help you construct these and defend you. I don't recall his name, and never used him, but the bad news spread rapidly.
    I believe it was American Savings that eventually took him on and beat him. That was still the only one I recall.
    FHA and VA loans were fully assumable . If you could fog a mirror, you qualified to assume. They helped to make a lot of folks extremely wealthy. Great time for real estate. Rich

Will Barnard · Answer

I think all is the same right now. Any lender receiving prompt monthly payments could care or less who was paying so long as they get their check. Last thing they need is to call it due and have another liabilty on their hands.

Bryan Hancock · Answer

Any new wisdom on the famous due-on-sale clause debate?  Since there are new members I figured I would bump this to see if anyone can add some perspective.

Bill Gulley · Answer

Hi, as to Nick's original post; I don't see any question to address other than for correcting information to the History of the Due-on-Sale caluse, since I wasn't arround in 1933 and I'm not going to do research to provide documented references as Nick requested, my opinion is that, based on my knowledge, it is correct, that is to the historical nature. But presented with some spin.
          
          As to the other article, suggesting you hide the transaction and the purpose of the clause, it has alot more spin and is, in my opinion, information that is used to sell other products, books to be exact. SInce I am not an attorney I can't speak to the duties of parties involved to disclose information to a lender. I do disagree strongly with the author stating that if the deal is basically within a "few" points of the existing market that it is OK, what a few points might be is entirely up to the lender! There is, in my opinion, obvious "spin" presented.
          
          Not ot hijack Nick's thread, but unclear what the purpose of it is other than asking for documented proof of any information concerning the articles mentioned, my comment would be that;
          Having done over a thousand of these types of deals in the past, only the first few deals were made without disclosure to the lender, that's when I didn't know any better. After those I made full disclosure to the lender and continued without ever having a problem with the due-on-sale clause. A few times there were issues with it, but after the terms and circumstances were disclosed, even Bank of America did not opt to accelerate the mortgage to its maturity. 
          
          There are other threads on BP concerning this topic and as I have said all along, it's an interest rate risk exposure. Such is considered in making the laon as well as the average weighted maturity and yields of a portfolio, and if everyone did sub-2s, the basis for such analysis would be out the window. There is not much of any concern with regard to the transfer of any equitable interest based on the collateral, since any foreclosure is against all parties having an equitable interest in or to and in posssesion of the property secured, just not an issue!
          
          Seeing the time this thread was started explains alot. No takers and what's the point, that crap should not be published? I agree. Bill

Nick J. · Answer

Thanks for the responses everyone.

Steve Nicewarner · Answer

Nick, you've done a good job of laying out the history of the Due on Sale clause. And I won't argue with you on the legalities -- Sub2 investing certainly breaks no laws. My problem with Sub 2 is that the entire system is built on deceiving the bank about the sale. The gurus will suggest using land trusts and telling the bank you are the "Property Manager" so you can hide the fact you have purchased the property.

Let me put it this way: would you still do Sub 2 investing if you *had* to tell the bank you were buying the property?

Jonathan Rexford · Answer

Not really sure of a discussion on the issue. But you have no argument in my book. If it says that the mortgage is due when title transfers at the option of the mortgagee then it is the deal.

Buying a home is risk and reward. I do use land trusts to buy subject to. Not because I am scared of the DOS. I due for minimal asset protection and I really don't like my name all over recording.

But the fancy courses and webinars sell the SIZZLE as you had stated. I wish I could entertain a good debate. But I can't.

Nick J. · Answer

No takers?

How To Beat The Due-On-Sale Clause

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