THE DUE-ON-SALE CLAUSE -- HOW TO AVOID IT

One can have a seller carry an entire non-assumable loan without needing to fear, or even be concerned with, a DOS Violation, by placing the property in a co-beneficiary land trust in the mortgagor's (seller's) own name and taking a partial Beneficiary Interest in it. The trust would be set to run for some specified period of time, with the understanding that, at the end of that period the seller's interest will be forfeited to the "buyer." Such forfeiture merely needs to be in consideration of some future act by the buyer (e.g., prompt payments; strict adherence to contract terms; a share in appreciation or overall profit; etc.).

The Dreaded Due-on-Sale Clause doesn't always say what we or our attorneys THINK it does, irrespective of whether a lender's exercising its rights under a D.O.S. clause are "real," "false" or indifferent. What it says is UNLESS PROHIBITED BY LAW, the lender has a right to forclose, if ...".


Well...make no mistakes about it! It IS prohibited by law for a lender to take exception to a borrower's placing its property in a Living Trust (such as a Title-Holding Land Trust) and creating what is tantamount to a legally shielded WRAP (AITD). This is done by the seller's merely naming you (the buyer) as the Remainder Agent or a Co-Beneficiary of that trust. For maximum safety, at least 10% of the trust's Beneficiary Interest and 50 of the Pwer of Direction must be retained by the seller, with an agreement to forfeit it to you upon disposition of the property at the trust's termination.

When calling on someone whom you want to carry the loan for you: if you really want to be assured of 'getting the Deal,' make it so good for the seller that he can't refuse. Suggest to him that for his own saftey and peace of mind, you'll pay to put the property into a neutral trust in HIS OWN NAME; and that he needn't transfer the title to you until you've proiven youself by refinancing the property. Explain that you'll merely become a co-beneficiary in that trust until his loan is retired in, say, 6 months (or 3, 4 or 5 years or more).

Note that this arrangement (called a "PAC Trust") gives you, as the buyer, 100% of the tax write-off; 100% of the Use, Occupancy, Possession; 100% of the Equity Build-Up through principal Reduction; full rights to Rents; and all Profits upon Sale or other disposition. As well, you also have any and all other rights oridinarily available under the "Bundle of Rights" in any form of Fee-Simple Real Estate ownership.

In a PAC Trust, the seller never has to take any chances with you; and you don't have to take any chances with the seller. The property is henceforth protected from liens, suits judgments, divorce actions or claims, bankruptcies or anything else you can think of, including state and/or IRS tax liens... and the Due-on-Sale Clause is no longer an issue.

As far as the attorney's suggestion that a Lease Option would be better with reference to the Due-on-Sale Clause, that's ridiculous! He just wants to make a profit on doing the deal for you (a L/O is a Due-on-Sale violation; you and your property are always subject to the other party's marital disputes, BK's, liens, suits and judgements...and you end up with no tax write-off). An attorney suggesting another course of actifon would be well advised to consider reading the law (the Garn St. Germain ACT, the FDIRA 1982): it clearly states than any lease for more than 3 years OR ANY LEASE WHICH CONTAINS AN OPTION TO PUCHASE is valid grounds for a lender's acceleration its loan's pay-off (i.e., IT VIOLATES THE DUE-ON-SALE CLAUSE!).


Phew!! These legal beagles who graduated from Dewlap Holler U., and who were sworn in over their fourth Pina Collada just p...tick me off!!


Bill

To find out more about Landtrust and Equity Transfers Using Landtrust, Click Here.