Despite what you might read on the Internet, don’t worry about the due on sale clause. The fact is, since before 1960 we haven’t seen any banks foreclose based upon a violation of the due on sale clause while the borrower was making payments on time.
Banks are in the business of making loans and collecting mortgage payments. It’s true that the due on sale clause would allow them to foreclose on a property, but why would they do that? This could only hurt their interest. They can’t collect on payments if there isn’t a borrower to pay them.
When Do Banks Invoke The Due On Sale Clause?
I’ve seen a couple instances where a bank did decide to invoke the due on sale clause. But in all of those situations the mortgage wasn’t getting paid. The property was going to get foreclosed on anyway.
These days interest rates are at an all time low. This makes banks unlikely to invoke the due on sale clause. However, if interest rates were to go back up to the standard 6%, then they might change their minds. What exactly do I mean by that?
Let’s say you’re behind in payments on a 30 year mortgage with a 3.5% interest rate in a market where the prime rate is 6%. If the bank invokes the due on sale clause on your property and resells it, they’ll be able to make more money. This is because the property will be re-sold with a 6% interest rate instead of a measly 3.5%.
How Do I Avoid the Due On Sale Clause?
It’s important to remember that tens of thousands of real estate investors violate their loan covenants everyday. Yet the banks don’t invoke the due on sale clause. But if the banks really wanted to, they could.
Instead of gambling with your properties, what you should do is use a land trust. By using a land trust, you’ll be able to transfer your property without angering the bank.
For this method you’ll need an LLC and a land trust. So first you’ll create a anonymous land trust and place the property(s) into the land trust. Then you’ll make your LLC a beneficiary of the land trust. Problem solved!
Not only will a land trust help you avoid triggering the due on sale, but it also helps with transfer taxes and keeping your real estate holdings private.
Royal Legal Solutions is Here to Help With Your Land Trust and Asset Protection Needs
If you have any more questions about asset protection or the due on sale clause, I’d be happy to answer them for you in the comments below.
Also, while we’re on the subject of transferring property, you may be interested in our free educational resource on how to transfer your property and keep your old insurance. We offer these to all of our prospective clients and fellow investors to empower you to make the best choice for your real estate business.