Re: Due on sale & trusts Brad Crouch - Posted by Brad Crouch
Posted by Brad Crouch on November 04, 1998 at 13:34:07:
Jaydee,
> You said Bill Bronchick has a course on creating your
> own trust - Which one is it?
“Get That Property Out of Your Name”.
The way that lenders learn of a transfer of interest in a property, thereby violating the “due on sale” clause, is that the insurance company automatically notifies the lender when any changes on the policy occur.
The way to circumvent the “due on sale” clause is to put the property into a trust. The “borrower” does this, actually (seller). When this is done, the lender is notified. They are told the property is being placed in a trust for “estate planning” purposes. This is a common occurance, and permitted by the Garn St. Germain act as an activity which cannot violate the “due on sale” clause.
The next step is to contact the insurance company and tell them the same thing, adding the trustee as an “additional insured”. The insurance company alters the policy and then notifies the lender that the insurance policy has been altered.
The lender already knows about this, so no problem. So far, the “due on sale” clause has not been violated.
Now when the seller assigns the beneficial interest of the trust to you . . . this IS a violation of the “due on sale” clause, and the lender has the right to call the loan “due and payable” immediately. There are two interesting points here.
First, if the lender called the loan, you would still have time to find the money to cash them out. This makes it a mistake for the lender because they no longer have the loan money working for them . . . they will have have “lost” the loan.
Second, the lender has no way to learn of the transfer of interest in the property, as long as the payments are kept current. You can record a memorandum of option or even a performance mortgage, and the lender won’t know about it unless they actually “look”. And unless the payments are not current, they have no reason to look.
Having a “second” insurance policy can insure that in the event of a loss, a check for the full amount is mailed directly to the trustee. Sometimes it might be worthwhile to have your position “fully covered”, even if it means you are paying “double” insurance payments. You certainly don’t want to disturb the policy connected with the lender as long as you are circumventing the “due on sale” clause. It’s only a few hundred dollars per year, and would undoubtedly be worth having the financing available.
As a seller on a contract for deed, you would want to pay whatever taxes and insurance that became due. Just pro rate the anual amounts and add it to the buyer’s monthly payment. By paying these amounts yourself, you are assured they are being paid.
You can also have an escrow company (or third party) service the transaction over the period of time necessary to conclude the transaction. They would be escrowing the closing documents (including a quit claim deed executed by the buyer - in the event of a default), making the tax and insurance payments, and whatever else you have agreed upon.
This last “atomatic” method may actually be a very good way to go, especially if your own timetable doesn’t give you the ability to administer the deal. This would give you the time to put together more deals, but will cost more . . . either for the buyer, or you, or both.
Hope this helps,
Brad