DUE-ON-SALE CLAUSE: The clause (Para. #17) in virtually all mortgage loans, which permits a secured mortgage lender (federal, state or private) to call the entire unpaid loan balance Due and Payable immediately should the property securing the loan be sold, transferred, traded, gifted or otherwise disposed of without the lender’s prior written consent (and without giving them the opportunity to charge more money or say “No” to the transfer).
Despite the due-on-sale clause and its implications in the creative real estate financing business, it is quite possible for one to take over the payments on a non-assumable mortgage loan without needing to fear, or even to be concerned with, a DOS Violation…without violating it.
In order to effect such a take-over without an unauthorized transfer, one simply assures that the property is, in-fact, NOT being sold, traded, hypothecated or transferred in any ‘unauthorized’ manner. In other words, since placement of real estate into the borrower’s revocable living trust for asset protection purposes is fully allowable under the law (12USC 1701-j-3; and since appointment of a co-beneficiary is a prudent thing to do anyway: a would-be seller need only place its property into such a trust, and then deal with the interest in the trust, rather than dealing with the property itself. At this point, the buyer (of beneficiary interest: not real estate) gains virtually 100% of the same incidents and benefits of Fee Simple Real Estate ownership that he or she might have under a traditional transfer of the property’s title.
The only caveat here is that the living trust that is utilized for this purpose must be an Illinois-type, title-holding Land Trust. Such a trust is fully revocable and it is an inter-vivos trust; however, land trusts by nature are directed by their beneficiaries, not the trustee: and all “legal” title, as well as all “equitable” title, is vested with the trustee. Beneficiaries of land trusts own no real estate, only personal property…and even though they retain all the benefits of an owner, the property has not been sold, transferred or hypothecated.
The trust term of the agreement is decided upon by beneficiaries and stipulated in the contract. Such terms generally run for from 1 to 20 years, with the understanding that, at the end of that time, the trust will be terminated and the seller's interest (as little as 10%) will be forfeited to the co-beneficiary (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.). Often times, however, beneficiaries might mutually agree to share profits at termination in proportion to their respective beneficiary interests (50:50, 90:10; 75:25, etc.).
It is most important to understand here that the verbiage of a lender’s Due-on-Sale clause doesn't always convey exactly what we or our attorneys THINK it does, or what the lender expects us to believe it does (a little trickery here)…irrespective of whether a lender's exercising its rights under a DOS clause are "real," "false" or indifferent. What the DOS does infer is: “UNLESS PROHIBITED BY APPLICABLE LAW…” the lender has a right to foreclose, if the title to its security is transferred into a trust, and if a beneficiary interest in that trust is sold or transferred." Well...make no mistakes about it! Such action ‘IS’ indeed prohibited by “applicable law.” The Law (The Federal Depository Institutions Act of 1982) strictly prohibits ANY lender from taking exception to a borrower's placing its property into its own inter-vivos (living) trust (such as a Title-Holding Land Trust) and appointing a 2nd party to function as a co-beneficiary or remainder agent. Further, there is nothing to prevent those same co-beneficiaries from leasing the property out to any one they may choose…say, to the 2nd co-beneficiary, for example.
Overall, the process described here creates what is tantamount to a legally constructed, and very safe and well-shielded ‘Wrap-Around Seller-Carry’ device. Since the original owner of the property has named the second party as a beneficiary in the trust and leased to the property to him or her under a triple-net lease (i.e., net, net, net lease, wherein the tenant pays mortgage interest, property tax and handles all maintenance), the resident beneficiary (or investor co-beneficiary) has obtained all the benefits of a sale… without there actually having been one.
This article was written by my good friend and associate Bill Gatten, who will be featured as a special live guest Aug 10-12 in Roanoke, VA as well as on a bonus teleconference Thursday night, Aug 9th at 8:30pm EST at www.reimostwanted.com/liveevent.html
Part 2 of this article will be coming tomorrow. All the best - Charles Dudley
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