I’m new to lease options, but am enthusiastically doing research. One equestion I am struggling with is how to practically avoid triggering the seller’s DOSC when buying a L/O and setting up a sandwich lease? Any suggestions?
Due on SALE clause. The SALE does not happen until your option is excersised and the home is purchased. If you are leasing with an option to buy the home has not yet been PURCHASED. When it is purchased the loan is paid and satisfied so the DOSC never comes into play.
As Rich said, the Due on Sale Clause shouldn’t be a factor at all. You are simply leasing the property, until and if you decide to exercise your option to purchase. At that time you would get new financing, pay off the existing loan, and be on your way.
The lender may have cause to exercise the DOSC. While the Garn St. Germain Act preempts the DOSC under many circumstances the granting of the option is specifically excluded. Excerpt below:
“a lender may not exercise its option pursuant to a due-on-sale clause upon—
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;”
Hmmmmm…interesting. Not sure how they would find out though.
Keep in mind the Office of Thrift Supervision, the government agency that regulates this area, takes the opinion that the Act only applies to owner-occupied properties.
I’m not familiar with the OTS’s interpretation but the act specifies five or fewer dwelling units so implies small rentals or owner occupied. I agree with Rich, how would the lender ever find out that you signed a lease option?
"(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon— "
If the option was recorded and the lender randomly did a title search it would be found but they would have no reason to do that. Also, only the most foolish of property owners would put the insurance in his t/b’s name, we all know the change of insurance is the #1 way the lender finds out.
There is a greater chance that Michael Vick will be honored by the Humane Society than there is of the DOSC being enforced because of a lease option.
Do you think recording a memorandum regarding the L/O, creating a cloud on the title, would trigger the DOSC? I suppose the lender would still need to have some reason to a do a title search. If a memorandum were recorded, maybe it would be best to ensure the seller does not attempt to refinance during the period of the L/O?
The lease option itself will trigger the DOCS, but you are wise to cloud the title in some way to prevent the owners from selling the property or adding debt.