Due on Sale Language from Twist Post - Posted by Ed Wachsman

Posted by Bill Gatten on November 17, 1998 at 12:15:24:


Thank you for the note. I feel favored. Along with Keno on Trusts, your book (Get that Property out of Your Name) is our ?Bible.?

With regard to the ?Due-on-Sale? issue (as innocuous a threat as it may be), we felt the way you apparently do at first as well; but after emerging victorious in hundreds of arguments and dozens of run-ins with lawyers, accountants and lenders on the issue, we?ve settled comfortably into our position. We have so far completed in excess of 1,000 of these transactions (mostly Ca. & Hawaii, but a few in other states), and have met with just about every adversary, obstacle, objection, rejection and nay-sayer you can imagine.

Of course, you are correct in stating that the Garn-St. Germain Act infers that a transfer [of title to a trustee in an inter vivos trust] that does not relate to a transfer of the rights of occupancy, may not be construed by a lender as a Due-on-Sale violation. However, in terms of whether or not a ?subsequent? transfer of occupancy rights has any affect on the DOS is wholly another issue. Obviously, any property held in a living trust can be leased out without a DOS violation (assuming, of course, that the lease is for no more than 3 years, and that it does not contain an Option to Purchase). Bill, the key here (in our opinion) appears to be whether the trust itself relates to a transfer of occupancy rights, or not? NOT whether the property is leased or rented out following the establishment of the trust.

Note that when a party wishes to effect a 3rd party land trust transfer utilizing, say, the PACTrust (our name for the documentation process), here?s all we (or they) do: 1) First, we set up the trust, which is a document involving only the owner of the property and his/her trustee (no one else). 2) Next, after the trust is executed and the title is vested in the trustee, a co-beneficiary (or from 1 to 9 other beneficiaries) is appointed. Note, at this point, that neither the Trust itself, nor the Beneficiary Agreement relate to a transfer of occupancy rights. 3) Finally comes the decision to (perhaps) allow one of the beneficiaries to live in the property under a Lease with the Trust (this lease document is, of course, only between the tenant and the property owner, the trust, as directed by its beneficiaries).

Now? Which step violated the due-on-sale clause? 1) Creating a trust? 2) Leasing the property out? 3) Naming someone as a co-beneficiary (or remainderman, remainder agent, successor trustee, etc.)? And bear in mind that whether a rental rentals tenant claims (rightly or wrongly) that his/her rent is tax deductible has nothing to do with the mortgage lender. Likewise, as we point out in all our DRE training, books, courses, etc.: whether or not the trust?s beneficiaries agree to share the proceeds, or relinquish them to the other beneficiary, in a future sale of the property (say, 4-5 years down the road), has nothing to do with the lender either.

The key word here is ?buyer.? In the system we work with, there is no ?buyer? until the trust terminates and the property is sold (e.g., for FMV to anyone who wants it? should the tenant want it, he/she pays FMV too, minus, of course, any equity promised to him/her by the other beneficiary). The appointed co-beneficiary holding a personal (not real) property beneficiary interest in the trust, is merely a tenant in the property under a lease agreement (albeit, with essentially the same benefits that a ?buyer? might have) and remains so throughout the term of the agreement. A purchase of the property doesn?t take place until the scheduled termination of trust (4-5 years later).

After all, don?t thousands of people put their rental-income properties into inter vivos trusts (family trusts, land trusts, etc.) every day and transfer occupancy rights to their tenants? If I hold my single-family rental properties in separate land trusts,and give occupancy rights to my lessee’s, have I somehow violated the Due-on-Sale Clause? If I chose to make any one of my tenants a co-beneficiary in one of my land trusts, have I violated the Due-on-Sale clause?

THE KEY: 12 U.S.C. Code 1701(j)(8): “a transfer into an inter vivos trust in which the borrower is and remains [a] beneficiary and which [trust itself] does not relate to a transfer of rights of occupancy in the property”

Due on Sale Language from Twist Post - Posted by Ed Wachsman

Posted by Ed Wachsman on November 16, 1998 at 07:21:39:

By popular demand :), the following is the complete and exact language of the DOS clause from my “twist” question of a couple of weeks ago. It is from a mortgage given in Dec. 95 utilizing Ohio - Single Family - FNMA/FHLMC Uniform Instrument Form 3036 dated 9/90 and amended 3/94.

  1. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender’s prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law s of the date of this Security Instrument.

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.

Re: Due on Sale Language from Twist Post - Posted by Bill Gatten

Posted by Bill Gatten on November 16, 1998 at 20:43:53:


As I mentioned before, this kind of verbiage is almost a cheap “attorney-trick.” Notice that the clause clearly infers that if “the borrower” IS NOT A NATURAL PERSON… then the borrower must get prior approval before transferring, hypothecating, gifting, or placing its mortgaged property into an inter-vivos trust (re. “beneficial interest in borrower”) Well… duh… the borrower IS a natural person if its not a corporation, partnership, association, joint venture, amalgamation or a trust of some kind.

Furthermore within the clause, it is clearly stated that if the referred-to action by the lender is, in fact, prohibited “by applicable law,” then the clause holds no water. Well… the fact is that this is typical FNMA/FHLMC verbiage, and foreclosure for a claim of DOS violation by vesting to a land trust IS INDEED prohibited by applicable law. The Garn-St. Germain Act (the ?FDIRA? or the Federal Depository Institutions Regulations Act of 1982) protects placing a property into a revocable living trust, wherein the grantor retains the Power of Direction.

Thanks for the repost and a chance to again vent my spleen on this issues (as it were).


Remember that if someone (e.g., you) would want to convey ownership benefits to another, it doesn’t have to be done by transferring title. It can be done (safely, conveniently and completely in keeping with this due-on-sale clause) by simply placing the property into a land trust and conveying [A PORTION OF] the trust’s beneficiary interest to the would-be “buyer” as a co-beneficiary.

Good luck,


Re: Due on Sale Language from Twist Post - Posted by Rob FL

Posted by Rob FL on November 16, 1998 at 20:33:18:

Clause 17 is the standard Fannie Mae/Freddie Mac languauge used in all conventional loans.

One minor point . . . - Posted by Bronchick

Posted by Bronchick on November 16, 1998 at 21:14:55:

I really don’t care about the D.O.S. and neither do most lenders, but just for the mental masterbation consider this:

The Garn Act states that a transfer to an intervivos trust does not violate the DOS if the transfer does not relate to a transfer in occupancy. Even if the borrower does remain “a” beneficiary, if he transfers the property into trust, moves out, then the buyer moves in, he has technically violated the DOS.

12 U.S.C. Code 1701(j)(8): “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”

Furthermore, what if the seller files for bankruptcy? Do you really want him having ANY interest in the property. The chances of the lender finding out and calling the loan are slim. The chances of a defaulting seller coming back to haunt you with his financial problems and his remaining interest in the trust are very good.