I am brand new to this, but the person who trained me (who lives in a different state than I) made the statement that once a lender accepts payment from a third party they have voided the “due on sale” clause. He qualifies his statement by saying that is true in GA, but ask your local attorney if it is true in your state.
Being brand new, I don’t have an attorney to ask. This seems like a very important consideration when doing “subject to” contracts and sounds too good to be true. I have googled the question, but not found any content pertaining to a lender accepting payments from someone other than the mortgagee and then losing their right to exercise their option to enforce the “due on sale” clause.
Has anyone heard this before or has a definitive answer? I am located in Florida. Thank you.
Lawyer’s approach to this issue
It being rare to find any legal issue on which 2 or more lawyers agree, I’d say a particular lawyer’s approach to this would depend on who/what side he represented.
i.e. if I represented a lender and it was wanting to find a legal way to call (accelerate) its note then it and I would probably claim that the borrower had violated his DOS clause and therefore the whole note was due.
Conversely a lawyer representing the borrower would claim the opposite.
I’d guess the written law to be spotty on this and differing from state to state and either of us would be excited to find a statute, law or court decision really favorable to our side of the issue.
Probably can be done today totally online.
Thanks, John, for your feedback.
FreedomProperties,
I believe the person who ‘trained’ you is a friend given what you said in another thread. You made the point there that they left out a lot of details.
I would always challenge, question or independently verify anything a trainer says. More so when they are paid to train you rather than they are paid out of your successful application of what you are trained.
You could hire an attorney to give you a view. As John says, views can vary. It would likely be a bit better than your trainer as the attorney has a license to lose and they have insurance to pay out when they say the wrong thing. Still not perfect, just better than the trainer’s personal viewpoint.
Laches
If a lender forecloses because of the due on sale, the defense raised is called, “laches”. Basically, it’s an argument that a contract clause that has not been enforced timely has been waived. This is not necessarily GA law, but common law in most states.
The problem with this defense is that it is an equitable argument, which means it is up to the discretion of the judge to do what he thinks is fair. There’s no particular time, number of payments, or proof that makes the argument stick. I’ve seen cases where a borrower paid for 6 years and then the lender tried to foreclose and the judge prevented it. I’ve seen other cases where the borrower paid 2 years and the judge allowed the foreclosure.
In short, there’s no guarantee that the laches defense will work.
Thank you, William, for your post on this thread. Your article on how to beat the “Due on Sale” clause is what introduced me to this website. Do you advise real estate investors to always create a trust as you described in that article. I have not discussed this with an attorney because I am brand new and don’t have an attorney…yet. Is this a costly process?
I have never heard of anyone using this strategy but I know if I were a “subject to” buyer, the due on sale clause would leave me very unsettled.
Again, thank you for jumping into this thread. The person who was originally training me had a very cavalier attitude toward it–having people sign an acknowledgement of the clause and explaining to him that banks will never act on it. That raised some red flags for me because I did not have a frame of reference to evaluate his attitude toward it. The more I read about it, the more I began to wonder if it was prudent to proceed with deals all over town as if it simply didn’t matter.
Due on sale risk
In today’s market, I don’t see a big risk if you take over a 5% loan and market rates are under 4. In a few years, rates may increase to 7,8,9 or even higher, and then banks will take notice.