https://www.youtube.com/watch?v=nS_9Os_42MQ
In this video, the speaker discusses the due on sale clause in mortgage agreements and its potential impact on real estate investors when transferring property into a limited liability company (LLC). They emphasize the importance of understanding the due on sale clause and provide practical tips to prevent banks from accelerating mortgages due to such transfers.
The due on sale clause is a provision that allows lenders to accelerate a mortgage when property ownership is transferred without their approval. This means that if an investor sells a property subject to an existing mortgage, and the lender discovers it, they can demand the full repayment of the loan, potentially at higher interest rates.
The video highlights two common triggers for the due on sale clause:
To avoid these triggers and prevent acceleration, the speaker suggests the following strategies:
The video also mentions that some exemptions to the due on sale clause exist, such as the Garden Saint Germain Depository Act of 1982, which limits the enforceability of the clause in certain cases, like transfers to family members or revocable trusts.
The speaker emphasizes that violating the due on sale clause may not have severe legal consequences like going to jail, but it can result in the lender demanding repayment or refinancing. They recommend carefully considering the risks and benefits when transferring properties to LLCs or land trusts for asset protection.
In summary, the video provides valuable insights and tips for real estate investors to navigate the due on sale clause and protect their investments while transferring property into LLCs or other entities.
Are you considering transferring your real estate into a limited liability company? Well, beware, because banks are looking to accelerate mortgages. In this video, I'm going to show you what goes wrong and what you can do to prevent a bank from accelerating when you transfer property into an LLC. All right. Let's get started.
Okay, so here's the issue. When you're transferring your investment real estate into a limited liability company, there's a real chance that if the bank discovers that transfer, they may accelerate your mortgage and that could prove disastrous for you as a real estate investor.
Now, what am I referring to? Come on over here. I'll show you what we're talking about.
Okay. So here's what we're looking at here. Let's assume that you bought an investment property pre 2022. So that means you're probably sitting down here at one of these lower interest rates on that mortgage. And ideally, we want to keep that lower interest rate.
But the problem is, as we transfer that property into the LLC, in a bank discovers the fact that there's been a property transfer and that mortgage has not yet been sold to Freddie or Fannie. They can accelerate what that means. It's going to push you up here into one of these higher interest rates because you're going to have to refinance the property.
Now, I don't want to see this happen to you. Unfortunately, real estate investors are starting to to realize the effect of making these property transfers and not doing it correctly. They're leaving a trail that alerts banks to the fact their property has been transferred. Now, we want to avoid that. And let me just show you what's been going on here.
So here's the first example. This individual received a letter from US Bank indicating the bank it notified that the mailing address differs from the property address. So what typically occurs when a property is transferred into a limited liability company? Many times the individual made the transfer or bought the property subject to an existing mortgage, will contact the lender to inform them to change the mailing address for the mortgage statements. Now that is not something you want to do. Do not contact the mortgage company and tell them to change the address because that's going to set off a red flag in their system as what has occurred here. This set off the red flag for this individual. The bank reached out, contacted the individual investor and said, hey, we notice there's a mismatch there. The address, the statements are no longer going to the address of the original borrower. Therefore, we have a problem with this. You need to provide us all this independent verification data that add up. Long story short, the bank is now accelerating this mortgage because of the fact this property was transferred into an LLC.
Now, another reason way in which banks can find out you made a property transfer is when it comes to the insurance on your property. So when you transfer property into an LLC or business entity, what you're going to do then is change your property insurance because you have to list the entity as an insured party. Now what's been going on is when people are transferring their properties into LLC, they're calling up their insurer and they're saying, Hey, change the name insured from my name to the LLC.
Now as you can see here, and this one says the name of the homeowner's insurance policy re receipt for this account does not match the name in our records for the loan documents. So when they change that insurance policy over in listed their LLC as the named insured, it prompted this letter from the lender to be sent out to this investor. And again, this is another situation where the lender is looking to accelerate the mortgage because they got into those low interest rates and now it's at a higher interest rate. So this gives the bank an opportunity.
So what do you want to do here? So when you transfer your property into a limited liability company, when you contact your insurer, do not change the named insured over to the LLC. Instead, list the LLC as an additional insured under your policy. So it it'll still get picked up under the policy. But when the bank sees a copy of the policy, the name will no longer change. You'll still be listed as a named insured, so it won't set off any red flags.
Now, obviously, if these things concern you about moving property into a limited liability company because you have one of those lower interest rate loans and you don't want a risk lender acceleration, then I would suggest you set up a land trust and transfer your property into a land trust, because in those situations, the banks typically don't see that as a transfer for estate planning purposes and they're less likely to contact you and discuss possibly accelerating if you made a mistake and you change the insured over to the name of the trust or the mailing address change. So a lot of times if you do want to change the mailing address, what I would tell people is to list that you're changing the mailing address for tax purposes only. Send a letter and say we'd like to change the statements to come to this new mailing address. We're doing it for tax purposes only. This could get you beyond that first letter problem that that I showed you. But by and large, banks are on the lookout for these things. So you have to be extra due diligent when you're transferring your properties in your LLC, so you're not putting yourself in this type of situation. All right, guys. Who transferring properties an LLC can have a detrimental impact on your mortgage if it's not done properly. As I stated, if you want to do it in a safe manner, I highly suggest you consider using a land trust. I got plenty of videos on my channel. I'll put a link to one of my Better Land Trust videos in the show notes that you can click on. Watch that and I'll give you an idea if you're not familiar with Land Trusts how to set one of these things up, you want to learn more. I invite you to come to my live one day tax and asset protection event where we talk about land trust entity planning, transfer of properties into limited liability companies and trust how to avoid the due on sale clause. And we cover taxation and more importantly this free event that you can attend. You're also going to learn about taxation when it comes to real estate and how to make sure that you're really reducing your taxes through real estate, investing down as low as possible and you'll get all your questions answered because I bring a team of professionals with me to the event who's going to sit there and they'll answer upwards of 1200 questions per event to make sure we're taking the concepts that I'm describing and applying them to your individual situation. I hope to see you there. Oh I go to due on sale clause jail. If I if I violated this individual themselves failed to ensure their own property, failed to pay the property taxes or behind in the mortgage. Hey, guys, we all know that navigating the world of real estate investing can be a minefield, and one wrong move could cost us big time. One such pitfalls the dreaded due on sale clause which, if triggered, could jeopardize our investment in financial stability. So in this video, we will dive into the strategies, creative solutions and practical tips tailored specifically for real estate investors like us to help us dodge those due on sale triggers and keep our investments in tact. In fact, I'll cover everything from understanding the basics to the due on sale clause to advanced techniques that will help us maneuver around these potential roadblocks. All right. Let's get started.
All right. So what is a due on sale clause? Well, it's provision in most lenders agreements that prohibits the transfer of real estate without triggering an acceleration of the note. So in layman's terms, what that means is if you sell your property to someone and they buy the property subject to and if you're not sure what subject to means, check out my other videos on subject to investing. But if they buy the property subject to that existing mortgage and the lender discovers it, they can accelerate that mortgage and call it due and make that new owner of the property pay off the existing mortgage.
Now, why do they have these clauses in mortgage agreements? Well, it comes down to the fact that if you're a lender and you enter into a contract with a borrower, you've assessed that borrower and the risks that that borrower may pose to either not repaying or if they're going to repay that mortgage on time. So now all of a sudden, you're in the situation where you have a new property owner that you don't know about holding title of this property, but they're responsible for paying off the mortgage. And this is a concern for lenders, of course, because they're not in privity of contract. They haven't been able to assess that buyer to see whether or not they could pay off or meet the terms of that mortgage note. So the lenders have built into their loan agreements that if the owner of a property transfer is there, the real estate without their approval, that they can accelerate. Now, this has been a real problem for real estate investors who are concerned about transferring their property into limited liability companies, into trusts and things like that. But if you watch my other videos where I discuss the due on sale clause and how to get around it, you'll note that in many of those videos I discussed that this isn't a real concern in most instances, but I've got a video coming up soon that will show you a letter that one of our clients received who entered into a transaction where the lender was actually looking to accelerate. So you definitely want to check that out.
So what is going to trigger the due on sale clause?
Well, many events that triggered the due on sale clause is what I was talking about, that if you enter into a contract to sell your property to someone or if you're buying the property subject to an existing mortgage, if you transfer your property into a limited liability company or you transferred into trust, all of these types of transfers could potentially trigger the due on sale clause, even entering into a lease option agreement if the lender discovers it. This can trigger the due on sale clause and allow them to accelerate the note.
Now, given that the lender can accelerate the note, what are some common exemptions to the due on sale clause? Well, the most notable exception is going to be the Garden Saint Germain Depository Act of 1982, which in fact limited the enforceability of the due on sale clause. Because back then, in 1982, lenders, because of high interest rates similar to what we're in right now, we're accelerating mortgages on individual borrowers, added transfer their properties into living trust for estate planning purposes or between family members. So what they actually stated with the Garden Saint Germain Act is that if a borrower transfers the property to a family member, to a revocable trust, that the lender cannot accelerate the note.
Now, the rules have since been changed with Freddie Fannie lenders. Now, if your mortgage is underwritten by Freddie or Fannie, in point of fact that their underwriting guidelines allows borrowers to transfer title to real estate into a limited liability company without risk of acceleration. Now, this only applies to residential real estate that is held for investment purposes. If you bought the house and you're treating it as your primary residence, you can still do it. But you have to wait a year before they can accelerate.
So what's going to happen if a lender discovers that you violated the due on sale clause? Well, your typical you get notice via a letter. They'll send out a letter in the mail. And in that letter, they're going to tell you, hey, we've noticed that the title, the property has been transferred. We need verification that you're still the owner of this property. Now, you can do that by sending them possibly a copy of the LLC operating agreement. If it was you, you're the borrower and you transfer property your own LLC. If you went into a land trust like I recommend in many of my videos and you would send them a copy of the Land Trust Agreement.
Now where it does get particularly problematic is when you're buying property subject to and you take title in the name of a limited liability company and the lender discovers this, then you're going to have a problem where you have to actually attest that the seller, the person you bought the property from, is still residing in the property. And that is actually an issue that we're dealing with right now for one of our clients. And it's going to be part of an upcoming video of that if you're buying property subject to you, definitely, as I stated earlier, want to be able to watch. They'll be on the lookout for that.
Now, how do investors avoid triggering the due on sale clause? Well, just what I was hinting at. One of the best ways to avoid triggering the due on sale clause is that if you want to protect your real estate, you want to transfer it to a third party. Don't alert the lenders of the fact there's been a property transfer. And the best way to do that, in my opinion, especially in a situation like that, where you have rising interest rates, is to transfer it into a land trust. Then when you put it in the land trust, it's key that you don't want to do anything that is going to raise any red flags, such as use an out of state property address that can be problematic, create problems with the insurance, don't have any meaning, don't insure the property that's going to raise raise a red flag with respect to the property. And if you're buying subject to make sure that you have the seller on as the initial trustee.
So we want to make sure that after the property has been transferred, it looks after the fact that the seller is somehow still involved with the property. Now, obviously, if you're putting property into a limited liability company and you're using anonymity, then the seller's name or if it's your property, your name is no longer to be associated on title because you're not on the LLC. But again, in my experience, typically those types of transfers do not trigger a lender to look at the property unless you're missing things like not paying your property taxes, missing payments on your mortgage, or you're not insuring the property.
So what are the legal implications if you violate the due on sale clause? Because there's a lot of information out there where people think, oh, I go to due on sale clause jail. If I if I violated this. Well, it's really not that big a deal from the standpoint is it's not going to destroy your credit, it's not going to send you to jail. What's going to happen is you're going to be asked to either refi or pay off the loan if they discover it. So now you have to decide if you want to engage in either one of those options. Another option many times that is provided to you is just put the title back into your name. There's been several instances where we work with clients over the year where the lender actually found out about a property transfer into an entity, and they stated that it violated the due on sale clause. And those instances where the lender found out about this, which actually triggered it, had to do when the individual themselves failed to ensure their own property, failed to pay the property taxes or behind in the mortgage. So it doesn't happen very often. One instances I know of as well is that an individual transferred his property in to various limited liability companies at about 14 rentals, put them into 14 separate LLC, and then the actual lender themselves, the insurer of all these mortgages, was spot checking and they discovered the fact that this particular borrower's no longer entitled to the property. So what they did is they at that point, they reached out to them and said, hey, we got a problem with our insurer. You got to get those properties back into your own name. So many times we'll give you a the ability to cure. So is violating the due on sale clause worth the risk to put your property into a limited liability company or a land trust for asset protection? Absolutely. Because if it does happen that somebody finds out about it, you have options. But here's something you have to keep in mind, that if you get sued, you don't have options, right? They're going to come after you. They're going to try to take your property. That is a creditor. So we want to make sure we're doing is putting our property into an LLC to insure that if something goes wrong with the property or we get sued individually, that we've limited our overall risk of of loss. That is why I think it is imperative that little things like that to due on sale clause should not become big issues in your investing and stop you from putting together plans that will actually protect you in the event of a lawsuit. Hey, if you want to learn more about land trusts being a critical component, avoiding the suit due on sale clause. Check out this video up here that I have on the land trust. It will answer all of those questions. Take care.