I’m just getting started investing in real estate. I don’t have too much money to invest and I live in a ridiculously expensive area (the Silicon Valley) so I’ve decided to look into doing “lease-options” and “subject to’s”. After doing some serious research on both of these ideas, I have one huge concern…the “due on sale” clause associated with purchase contracts.
It seems to me that the transfer of title associated with a lease option deal would automaticly trigger the due on sale by the current lien holder. Is there a way to negotiate this with sellers lender before entering into an option agreement? Is there any way to do this legally and ethically to minimize my risk in performing this type of deal?
Maybe I’m missing something here…I don’t want to enter into a deal, either take over the title or buy with an option, and then all of the sudden the lender calls due the loan and I can’t qualify!
That’s the risk you take my friend… It’s really just that simple… Risk / Rewards… You want rewards??? You’re going to have to take some risks…
Just to clarify a few things… Lease Options and Subj To’s are 2 totally different techniques… In a Subj To Deal, you GET THE DEED TO THE PROPERTY. It’s like your car title. If I sign over title to my car to you, I no longer own the car, you do… Even though my name is still on the loan.
Lease Options / Rent to Own are really 2 separate agreements. There is a lease agreement, and then there is an Option agreement to purchase the property in a certain timeframe.
Worst case scenario: Lender finds out that you’re evil and have been making timely payments on the loan. They get mad and pull the plug. Here are some options…
Sell or Refi
Get a partner
Work a deal w/current lender
Deed property back to orig. owner (DO NOT DO THIS UNLESS THINGS GET REALLY, REALLY, REALLY BAD… WHICH IS JUST ABOUT NEVER);
When investing, you need to know what your limits are. If you get into a deal and can’t refi out, then maybe that deal is too big for you right now… do the deal with a partner, or do a smaller deal… one that you can handle…
In our current market, a lender is HIGHLY UNLIKELY to enforce a Due on Sale on a performing loan.
I understand the difference between the “subject to” and the “lease option.” The “subject to” seems more risky in the sense of the lender calling the loan due.
What about the lease option though? Can a lender call the loan due on sale with an option agreement in place? I’m guess I’m also wondering if there are any legal ramifications by doing a lease option? Say I decide to lease the property from the buyer with the option to buy in one year. Then, I find someone to sub-lease option the property from me who pays me an option fee up front and a positive cash flow. (I believe the term is sandwhich lease?). Anyway, because I do not own the property and my name is not on the title, but I do have the option in place, are there any legal ramifications associated with this? Is it illegal in any way perhaps jail time, fines, etc.?
In this place in time, the lenders have a lot more to worry about than a loan that is performing but has a DOS clause violation. Lenders are scrambling to keep from hemorrhaging money and having to close their doors. The chances of a lender enforcing a DOS clause because of a Sub2 are extremely low (IMO).
Typically a lease option will not trigger the due on sale clause. A lease is simply a lease which does not transfer ownership rights to the property thus does not trigger DOSC. The transfer of ownership rights does not occur until you exercise your option and close on the property at which point the original lender gets paid off so the DOSC is moot. As for having the flexibility to sub-lease the property this is possible but you must have appropriate language in your original lease/option documents to give you this flexibility.
A lender can exercise rights under a due on sales clause when there is an option to purchase. Leaseholds with an option to purchase are not an excluded transaction.
“A lender can exercise rights under a due on sales clause when there is an option to purchase. Leaseholds with an option to purchase are not an excluded transaction.”
Does that mean a lease/option is illegal?
Let’s say I negotiate with the seller an option to buy in 1 year with the agreement that I’ll lease the property during one year time period and sublease the property to a rent to buy tennant. At some point during the option period, the lender calls the loan due, who has to pay to refinance the loan? Am I stuck in the middle, or can I walk away because I don’t own the property? Am I in a legal bind?