Due on sale question

Has anyone ever had a mortgage company exercise the Due on Sale clause on a L/O deal?

I read of an investor in Oregon that sends a notification to the lender that he will be servicing the loan and he has never once had a lender enforce the Due on Sale clause.

This seems to be a more “above board” way to do this.

Any comments are appreciated.

;)[b] Prof, in a lease option, title does not transfer, so the dos is not an issue



Glad to meet you.

I think you need to do a little more detective work, as to what triggers the DOS clause because it is a transfer of interest not the title.


(d) Exemption of specified transfers or dispositions

(4) the granting of a leasehold interest of three years or less not containing an option to purchase;

So, Lease/Options fall under the DOS clause.

John $Cash$ Locke

John, Thanks for that post, I appreciate that and feel bad that I gave out the wrong info. I was always told that one of the best ways to construct deals was the lease option because it avoids the dos clause!

Again thanks and have a great day!


So does that mean that you can’t do a L/O then? It sounds to me that from the advice given the option to buy part will trigger the DOS.

The reason I ask is that lease optioning seems to be a pretty good way to do things given that you can structure a win-win-win for everybody. My goal is to follow the highest ethical standards in doing whatever REI I do. It seems to me that the way most people discuss L/O it seems like your skirting around the edges of ethical when it comes to the DOS.

Is there a way to do L/O where all parties, including the lender, are on board?


Glad to meet you.

So that you follow the “highest ethical standards in doing whatever REI you do” read the following:

“the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;”

All you have to do is get written consent from the lender since it is an “option” that the lender can call the loan due and your ethical standards are left in tact and you can do Lease/Option deals.

John $Cash$ Locke


Thanks for the advice on that. I appreciate your input.

John… how many times have you seen a lender call a DOS cause when doing a sub2 purchase?

How many times have you seen a lender call one due using a l/o?



Glad to meet you.

Myself, 500+ Subject to deals and never a DOS clause accelerated.

When I find someone who has done 500+ Lease/Option deals I will ask them and let you know.

John $Cash$ Locke

We’ve actually met in person before… at the Chicago REI with Jane Garvey. :slight_smile:

In any case, I only asked because I had someone I “council” send me an e-mail and they were a bit concerned that you stated a bank can call it due on a l/o deal if they really wanted to…

I assured him it’s not a problem, but figured I’d post it here as well and get the answer straight from the $CASH$'s mouth!



All kidding aside you have to do your paperwork properly and be straight forward when dealing with a seller, first phase.

You also have to take a look at the original loan for contingencies that would trigger the DOS.

I will give you an example:

Seller has a state funded FHA loan, which has a contingency clause that states the owner must live in the property and of course the standard DOS clause. Also these type loans are normally low interest rate loans.

The buyer albeit a Subject To or Lease/Option investor changes the address of the owner so that they get the all mail concerning the property. This throws a FLAGG up. so the lender folks send out an investigator to find out why the address changed. The buyers whether Contact for sale or Tenant/Buyers answer the door.

The investigator ask’s to speak with the owners who are on the FHA loan, the person at the door say they don’t live here anymore and we are purchasing the house. Loan called.

So part of anyones investing plan should be to understand the various types of loans offered by lenders and what happens when you do not do your due diligence.

So we are in a risk vs reward business, but if you do not know what you are doing in creative real estate investing, a person will be more on the risk side than the reward side. I just happen to believe that Subject To investing offers much more reward $, than Lease/Option does, so if the risk is there either way, I will opt for a higher reward and do Subject To deals anyday.

John $Cash$ Locke

Agreed with on all counts… my comments are always assuming you’ve done your homework, have explained everything in whole and fully with the seller/buyers, and know what you’re dealing with, but I’d also argue that you’re less likely to have a loan called due on a l/o than on a sub2 deal.

Almost every loan states that you cannot deed someone the property and not give the bank that option, very few state that the buyer must live “in” the property. A bank will be less likely to call it due when someone has an “interest” in the property, than when the property has been fully transferred, correct?

In the example you give it wouldn’t make a difference which purchase method was used, you would have taken the risk and would have to deal with the consenquences.

Luckily for us, banks don’t tend to call notes due, excpet in rare instances like where there’s an open line if credit, and/or unique instances like the one you’ve used as an example above. ;D



If the bank finds out I do not think it would make much difference whether it is a Subject To or Lease Option a tranfer is a transfer.

I have no statistical information to back up my statement, but most people associate the DOS with Subject To investing, probably because the Lease/Option folks have done a better job of covering up the fact.

John $Cash$ Locke

I would suggest that the banks would pass on calling due an option where they may call due a sub2 because an option is just that, an “option”. It might never be executed and remain only a lease, or a rental, where a sub2 already “has” been executed.

Good topic though… I never before even considered the possibility of a l/o being called due!



I must have missed the part in the paragraph below that said “if it is not executed it would only remain a lease”. An option is an option is an option.

(4) the granting of a leasehold interest of three years or less not containing an option to purchase;

A person robs a 7/11 he never shows a weapon, but is pointing something simulating a weapon at the clerk from his jacket pocket as he demands money from the cash register. He gets away, however the store video taped the robbery with cameras.

He is recognized later and arrested, the state statutes say there is extra time involved if a weapon is used. He tells the police that they can’t add the weapons charge because he was only pointing his finger at the clerk through his jacket pocket. Nice try but I wouldn’t hold my breath that he would get away with his story.

That’s like telling the lender, just because, both parties signed an option to purchase it does not mean anything because it hasn’t been executed.

John $Cash$ Locke


But there’s a big difference between robbing a 7/11 and buying a house sub2. Neither of us would EVER dream of robbing a 7/11, yet we both buy houses sub2 whenever possible.

“Technically” you are correct, but realistically… we all know it’s not going to happen unless we do something REAL stupid.

You’re not saying we shouldn’t be doing sub2 deals or l/o’s, are you? I don’t understand your argument.



I used an analogy with the 7/11 story, pointing out that just because someone says the option has not been executed, it does not mean that a valid option does not exist no matter how you try to disquse it.

What I said in my analogy has nothing to do with not doing Subject To or Lease options and is purely speculation in your mind. Therefor my analogy should not be related in part or it’s entirety with not doing deals.

The chances of the DOS clause being accelerated are minuscule compared to the overall picture when using the proper proceedures in executing deals. “Now executing deals does not mean to shoot someone at the closing table.”

John $Cash$ Locke

Hey Guys,

Great conversation on the DOS. I’m totally enjoying this! Cash has some great points in here. Yes the DOS can be due IF the correct homework and investigating is not performed. There are loop holes to get out of the DOS when signing a L/O with the seller, though! They must change the DOS clause from them living in the property to a rental property. This in return protects all parties from the DOS in a L/O!
That way when you change the address. No agents will be knocking at anyone’s door, because they know a tenant will be in there, not the owner! As Cash stated, do the correct paperwork, and there will be no DOS!!!

Hope this helped a little bit!!!

Happy Investing!!!