Due on Sale Clause

[Unregistered]

Hi George,

I am interested in taking your "Texas Double Wrap" class but I was interested in how do you get around the "due on sale" clause with "wrap around mortgages"?

Doug Clark

[George Roddy]

Hi George,

I am interested in taking your "Texas Double Wrap" class but I was interested in how do you get around the "due on sale" clause with "wrap around mortgages"?

Doug Clark
Hi Doug,

I go into the "Due on Sale" issue in the workshop on multiple levels, and this forum is really not the proper venue to cover all the fine details. That said, I will hit the highlights for you.

First, the issue is way over hyped, sort of like an urban legend. I have had investors tell stories of Notices of Acceleration but no one can ever tell me who, what, when, where, etc... I think a lot of investors just like to repeat stories that they've heard just to see the response they get when the stories have no real basis in fact.

Lenders already have enough problems on their hands with all the unwanted inventory they are having to take in with non-performing notes in the form of foreclosures. Most of them are not too excited about the thought of accelerating performing notes.

There can be exceptions to these general circumstances however. First, you must not screw up the insurance. We cover that aspect of the transaction very carefully in the Double Wrap workshop. Second, if the interest rate on the underlying lien is super low there may be an incentive to accelerate to try to force the borrower to refinance. Third, small community banks tend to watch their notes more closely so there's always a slightly greater chance that a note could be called with a lender in those circumstances.

In general, we rely on three simple things: First, we conduct what we call a virtually "zero footprint" transaction via the Texas Land Trust so the entire deal is conducted in privacy. Second, the lenders are so jacked up and confused just trying to run their day to day operations that we give them way too much credit if we think they have some Due on Sale Department and are actually looking for these transactions. Third, they don't care anyway, they just want their note paid.

To underscore this, George and I have even openly approached lenders and told them we were taking over loans and received full consent. I've had students relay stories where previous owners have called lenders and complained about subject to transactions where they sold their property to an investor without lender consent and they now wanted the investor to pay off the note. The lenders' basic response in all situations was "we don't care as long as the note is paid".

HTH,

Bob