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Article  by   James  A.  Gage

Due On Sale Clauses And Lease Purchase Deals

  Many people who try to discourage individuals from using lease options to invest or purchase real estate, often use the scare tactic of "you know, if you use options you'll trigger the due on sale clause with the bank". Nothing could be farther from the truth. Remember, with options we control a contract on the property, thus controlling it without ownership! We never take title to the property until we decide to exercise our option sometime in the future determined by the lease option contract.

  So as you can see in this short explanation, "due on sale" clauses are not applicable to Lease Purchasing transactions.

  For those of you that use other strategies that may trigger this clause, you will find a brief synopsis of the history and what scenarios do not trigger the clause and which do cause problems to the creative real estate investor.

  Assume that several years ago, your brother purchased a property and obtained a mortgage with a very low interest rate -- say 6 percent. Assume now that mortgage rates are much higher, ranging around 10- 11 percent. Mortgage lenders are in the business of making money, and obviously they do not like to allow people to assume a low interest rate when rates are much higher.

  This scenario sounds unlikely in today's market place, but many readers will recall the excessively-high mortgage interest rates during the early 1980s, and early 1990s.

  Thus, many years ago, the mortgage industry came up with the concept of "due on sale". Most mortgage loan documents contain language to the effect that if property which is secured by a mortgage is sold or transferred without the lender's prior written consent, the lender has the right to call the entire mortgage due, and insist on payment in full. This is known as the "due on sale" clause.

  There has been much litigation over this concept throughout the country, and the great majority of the court cases have upheld the lender's right to enforce the due-on-sale concept.

  In 1982, however, Congress enacted the Garn-St. Germain Act (12 UCA 1701j-3), which imposed certain restrictions on the enforcement of this clause. This law contains nine specific exemptions where a lender is not permitted to exercise its option pursuant to a due on sale clause. When there is a real property loan secured by a lien on residential real property containing less than five dwelling units -- including a lien on the stock of a cooperative housing corporation -- a lender could not enforce the due on sale clause under the following circumstances:

  • A transfer where the spouse or children of the borrower will become an owner of the property;
  • A transfer to a relative resulting from the death of a borrower;
  • A transfer by operation of law on the death of a joint tenant or tenant by the entirety;
  • A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
  • 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 (i.e. the so-called "Living Trust").
  • The creation of a purchase money security interest for household appliances (i.e. where you pledge your house in order to purchase a refrigerator);
  • The granting of a leasehold interest of three years or less not containing an option to purchase;
  • A subordinate lien which does not involve a transfer of rights of occupancy in the property, and any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

  With that being said how do you get around the "due on sale" clause? The easiest and the best way in my opinion is to implement a lease option strategy. Other ways include setting up a management company, look for properties that have higher than market interest rates ( remember, the bank is in the business to make money, if they can make 10-11% on their money chances are they won't want you to purchase at a lower rate).

James A. Gage. is a best-selling author and internationally-known expert in Lease Purchase, AKA Rent To Own Real Estate Investing and Negotiating. He Mentors One-On-One throughout the U.S. and across the world. James is also director of the Gage Consulting Group, LCC , 800 Main Street, Suite 104 Holden, MA 01520 . http://www.jgage.com


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