The Due-On-Sale Clause Is Real!

The Due-On-Sale Clause is the clause in your Deed of Trust or Mortgage that simply says that if you sell the property, the entire debt against the property is immediately due and payable.

That should not need to be explained, but apparently it does, because so many people think it doesn’t really mean what it says.

So let’s delve into it and look at the words, and discuss their meaning.

THE DUE-ON-SALE CLAUSE

When you bought your property, you went to a Closing, and you signed a lot of legal documents.

One of those documents was either a Deed of Trust or a Mortgage.

That document very likely contained a section that is referred to, and might even be captioned, “Due-On-Sale.”

It is not the usual complicated legal gibberish.  It says, in brief, that if you sell the property, the loan is immediately due and payable.

Despite this clarity, there exist today a virtual cult of believers who insist that if you just transfer the property out of your name to your LLC, the loan is not really due immediately, or it might be, or it depends on what has happened to your friends in similar situations, or it doesn’t matter anyway.

Fortunately, most people do not have their loan “called” immediately.

So, they think that there is no problem.

There is a problem, and you need to understand what it is.

DUE-ON-SALE CLAUSE EXAMPLE

Let’s go through this step-by-step.

The Due-On-Sale Clause is a statement in the Mortgage or Deed of Trust that is securing the financing on your real estate.

The clause says that if you sell the real estate, and that really means transferring it out of your name, without paying off the loan that the real estate is securing, you are in Default of the provisions of the financing agreement, and the debt on the real estate is immediately due and payable.

There is a popular misconception, however, that if the property is transferred to your LLC, taking it out of your name, then the Due-On-Sale clause should not be a concern.

The reasoning, if you could call it that, is that the Lender doesn’t really care, as long as they are still receiving payments on the loan.

However, the financing documents, the Mortgage or Deed of Trust, are legal documents, with binding obligation and consequences, and their say nothing about whether or not the Lender cares, and they do not give the Lender the option to abide by them.

If both parties do not immediately amend the documents, they mean what they say.

If you commit an act that triggers the Due-On-Sale clause, the clause is triggered, the maturity of the Note is accelerated and matured, and the remaining Principal of the loan is immediately due and payable.

It cannot be undone, and there is no subsequent act possible that reverses it.

Think about it.

You borrowed $300,000 and used it to buy a Duplex, signing a Note with the Lender to pay back the money, and the Lender has a right to take the property if you don’t pay back the money you borrowed.

Now, you transfer the ownership of the property to your LLC.

Such a transfer is considered a “sale.”

Title to the property has gone from one entity to another.

Therefore, you have triggered the Due-On-Sale clause.

The world of Finance is conducted on strict business principles.

There are State and Federal laws that govern the conduct involved, and provide both civil penalties and criminal sentences for violations.

If you sell an encumbered asset with first paying off the debt, you could be doing what the law calls Hindering A Secured Creditor.

If your Mortgage of Deed of Trust agreement requires you to notify the Lender and obtain permission before selling or encumbering the real estate, and you do not do so, you could be committing the crime of Fraud.

There are some areas of Real Estate Investing where you might do whatever you can get away with, but this is not one of them.

When the economy goes into the toilet, the Lenders who did not enforce the Due-On-Sale clauses will start doing so, and in order to cover their own incompetence, they will be coming after you.

And the law is completely on their side.

You did it.

 

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RESOURCES

I touch on this same concept in more than one of my books, but the one with the most detailed information is “Do This, Not That!”  If you would like to preview it, you can go here on this website to look at it first, use the 3D Flip Reader to look at the Contents and read the first few chapters.

The paperback is available on my Amazon Author Page, along with my other books.

And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.

I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.

If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you should start with a Dictionary, and I have done one, in 3 separate Blog Posts here: Part 1, Part 2, and Part 3.  And I have a lot of material for you to consider on my S1031 Exchange website.

You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography.  Here’s mine.

the due-on-sale clause

 

DISCLAIMER

I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia.  But I am not your Attorney.  I would be honored if I were, but I am not.  Reading this Blog does not created an attorney-client relationship between us.  Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.

August 24, 2022

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