Posted by phil fernandez on July 06, 2001 at 18:43:51:


What you are doing is selling off a future cashflow for a lump sum of cash now. That lump sum of cash goes, as Michael says, to pay off the existing loan balance to the bank that is making DOS noise.

The discount will depend on a number of factors such as the payors credit, history of making those mortgage payments, amount of equity involved, type of property, whether it’s owner occupied or not, how long the payor has been paying on the note, interest rate and other terms of the note etc.

Often the discount is minor.


Posted by Mike in WI on July 06, 2001 at 12:51:56:

QUESTION: A “due on sale” clause is almost universal in mortgages from banks now and many hard money lenders are doing the same thing. I wanted to look at Lease/Options, but again, if you do that you are taking “equitable title” to the property (from my understanding), and a bank will accelerate a loan if “equitable or legal title has passed”. So now what? If we do a Lease/Option technique, our seller gets hit with a demand from the bank for full payment of their loan balance. I don’t see the seller going into a deal that will cause them that kind of pain.

Am I all wet on this? I sure hope so! I would be very happy if someone out there would show me that I’m wrong about these worries. I really want to become successful with this and perhaps I’m just not finding the secret to getting past these restrictions. Please help. :slight_smile:


Posted by Tactikon on July 08, 2001 at 05:31:51:

I’m beginning to work some L/O deals and was wondering if using the owner’s coupon book to make sure the payments are made could cause some DOS problems? Also , for security I’m recording a Memorandum of Option. Likely to be problems? Any thoughts?

The PACTrust answer - Posted by Bill Gatten

Posted by Bill Gatten on July 07, 2001 at 18:26:09:

Yes. According to law an L/O is technically a DOS violtion, however…

First off, a Lease Option does not convey legal or equitable interest to anyone if the option and the lease are two separate transactions…a Lease Purchase will do that, but not a future option to buy (that’s a contingent interest…like being an heir in someone’s will). Although?a defaulting devious tenant in an L/O can kick and scream and claim an equitable interest to avoid eviction and force a judicial foreclosure to buy time and free rent (he?ll lose if the contracts are properly structured; but he ends up with time and free rent anyway?and maybe even a nice chunk of cash when the landlord agrees to settle out of court in order to save thousands in legal bills and missed payments.

Secondly, passing of legal and equitable title will not trigger a Due on Sale Clause if the transfer is to a borrower-directed, revocable living trust (such as is a land trust).

So what we suggest to avoid the DOS issue, is to put the property into the seller’s land trust, take a partial assignment of beneficiary interest (90% to the seller?s 10% with an agreement that the 10% will be forfeited at termination); and then structure a beneficiary agreement specifying terms, conditions and the respective beneficiaries responsibilities.

Next, when the escrow closes (for the personal property transfers of the trust’s beneficiary interest to you), you merely lease the property from the trust (without an option?only the right to buy at FMV?less what is due to you as a participating beneficiary in the trust that owns the property).

When the trust (the PACTrust) terminates: the loans are paid off; the seller is paid any equity he has been carrying; you get back your entrance costs; and everything else is either yours or is shared between (among) the beneficiaries of the trust.

Bill Gatten

One exit stratergy to use IF they find out… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on July 06, 2001 at 14:48:34:

Often I have sellers who have sold their properties under a land contract, lease option, or some other form of “wrap around” type agreement where the payments are coming in to them and then they in turn must make payments out to the existing lienholder /lender on the property.

Sometimes the fear that you suggest becomes a Reality where the 1st lien lender gets wind of this “sale” or option and decides to get tough with the investor and attempts to enforce the infamous “DOS” due on sale provision in their mortgage in effect in an attempt to unravel this “psuedo” sale that has taken place.

All other things being acceptable, where sufficient equity exists between what is owed to you and what you owe to the lienholder, here is one solution/technique that can be used to generate quick cash and to simply be in a position of paying off the lienholder who is trying to accelerate their loan effectively stopping them in their tracks…

You can sell off your your land contract, agreement for deed, contract for deed, or such other installment sales agreement OR you can elect to convert your existing lease option arrangement you have with your prospective buyer into such a Seller financed type agreement (contract as indicated above or a mortgage, trust deed, etc.) where you agree to in essence finance them now as a BUYER and not a tennant buyer.

This existing or newly created debt instrument is then SOLD off and coverted into a Lump Sum CASH payout where from these proceeds, you would simply retire the existing mortgage lienholders debt.

When the dust settles, you have taken out or satisfied the existing lienholder by paying them off, and you will have cash in hand to move on to do your next deal.

This simply but very effective stratergy works well for either of these situations where a potential DOS violation is of concern.

To your success,
Michael Morrongiello


Posted by ToolBar_SC on July 06, 2001 at 13:59:46:

Your not wrong about these worries. Violating the Due on Sale clause does occur when you do a L/O. However, violating it does not automatically mean that the bank is going to demand full payment. There are many factors that go into the bank deciding to take this step. The first is the bank finding out about it and then the bank deciding what they should do. What they will do is anyone’s guess, I dare anyone to logically determine what a bank will do even if they find out about the L/O.

You could make it harder for the bank to find out about it by having separate lease and option paperwork and making sure the option is not recorded.

You could do a vast number of other things to disguise the fact that the DOS has been violated, but the bottom line is that it has been violated. Cheer up, however, as many on this board will say “There ain’t no DOS Jail”. Just make sure you have all your CYA paperwork signed sealed and delivered. Fortunes have been made this way in the past, currently are being made this way, and will continue to be made this way in the future. There is NOTHING wrong with doing your deal this way as long you have your CYAs.

Now if you want to do the same type of transaction (L/O, Subject To, etc. all that violate the DOS) but NOT violate the DOS, then your going to have to prepare the transaction differently. Now we’re into Land Trusts and in particular the PACTrust. You might want to look into these type of deals and decide if you want to go in that direction or not.

Enjoy and happy Investing


Re: DUE ON ACCELERATION CLAUSES??? - Posted by Redline

Posted by Redline on July 06, 2001 at 13:50:09:


Technically, you are correct. However the question you need to ask is: How would the bank find out? And what tools can I use to make these deals work? For example, a lease does NOT violate the DOS but an option does.

You need to read all you can about L/O’s and you’ll discover many ways to do business without wrestling with the banks. Read the articles here and there are also some excellent courses on the subject. It’s very doable.

Good luck,


Posted by Scott (AZ) on July 06, 2001 at 13:48:31:


More information please… - Posted by DC

Posted by DC on July 06, 2001 at 15:40:53:

Mr Morrongiello,

On the surface, this sounds like a good strategy. But in all liklihood, is it difficult to pull this off? For example, how do you ‘sell off’ the new debt instrument? Would you need to sell at such a discount that it wouldn’t make sense to do so? I guess I just need to be more educated on this strategy. Thanks.

Also… - Posted by Paul_MA

Posted by Paul_MA on July 07, 2001 at 02:06:14:

I’ve used this strategy to sell my own home. AND I called the lender and told them what was happening!!!

They asked if the land contract was recorded, and I replied no. So they didn’t seem to care.

The bottom line is, if they wanted to play hardball and call the mortgage, and if I continued to ‘season’ the mortgage (4-6 months usually), we would be in foreclosure court very close to the payoff date anyway. An expense they would be paying for no reason!