Today we're going to talk about the do on sale clause,
which in my opinion, as a former asset protection attorney, is not something
you should be afraid of or be as fearful as most of you are.
Quite simply, a do on sale clause is a provision in the loan agreement
that gives the lender the right but not the obligation to call your loan.
If you transfer the property from your name into somebody else's.
While many real estate
investors transfer their properties from their personal name over to LLC.
A lot of them still remain fearful that the do on sale clause
will be calling them.
And a lot of you guys are actually so fearful
that you actually don't transfer the property from your personal name
into the LLC for fear of the lender calling your loan.
So what do we have do on sale clauses to begin with?
This all started really from the lenders back in the 1980s when mortgage rates
skyrocketed to about 18% and people were starting to transfer
their properties to other people.
Keeping the current loan in place.
So, for example, you would have somebody who owned
a piece of property and let's say their loan was 4% at the time
and they wanted to transfer or sell that property to somebody.
Well, if the interest rate was 18%, what people started to do
was to transfer title to the property from.
From you to the new buyer.
But they would keep this loan in place so that the new buyer
only was paying the 4% as opposed to the new 8%.
Sometimes you call this a wrap,
but essentially the loan stayed in place even though the title transfer.
So lenders got wind of this and started putting language in the loan agreements
that actually prohibited them from doing that
and triggered this ability of the lenders to call the loan
if there was a transfer from one party to another.
So one of the things you want to understand is actually two
scenarios were the do on sale clause apply.
So in scenario number one is the scenario that really the lenders
are really concerned about, which is when you own a piece of property
and you're trying to sell your property to a third party.
Now, remember, the lender in this case has done its due diligence on
you, has underwritten you has checked your credit score, is comfortable
with your ability to pay the mortgage and therefore extended you the loan.
However, when you transfer that to a third party,
if you tried to keep that loan in place, will the lender now has a new credit risk?
They don't know anything about this party.
They don't know if they're credit worthy.
And so they have a concern, a legitimate concern, in my opinion,
about the ability of the new buyer to pay the loan.
So it makes sense that the lenders would be concerned about this
and have a provision in their agreements for this.
So even in this scenario, lenders aren't inclined to call the loan,
even when they know a third party has come into play.
For example, one of my good friends, Paice Moorby,
who is probably one of the more foremost
experts in the subject to industry, does these kinds of deals all the time.
And he talks openly about how he's done over a thousand of these.
And even in these scenarios, he's only had the due on sale clause issue
around five times, which I do the math is about half a percent of the time.
That's even becomes an issue.
And in every time he's actually been able to work something out with the bank.
So it's not something that happens all the time and the risk is probably
very small that the bank would even call the loan even in this scenario.
So that scenario one, but the scenario
that we are most concerned about, which is transferring our properties
from our personal names into our own LLC, is actually a separate issue.
It's not transferring property from my personal name into a third party,
sort of an arm's length transaction.
I'm actually transferring it into an LLC that is owned by me.
I'm just transferring it for asset protection purposes.
And this is something that's quite different
because unlike the first scenario in this scenario,
I still am the main owner of the LLC and I'm still responsible for the loan
and the lender's already underwritten.
Me is comfortable with my ability to repay.
So simply transferring it into an LLC that I own that has the same ownership
as this property is less of a concern to the lender.
So much so that both Fannie Mae and Freddie Mac actually have guidelines
in scenarios like this.
When you're transferring properties from your personal name
into the names of the LLC and both Freddie Mac and Fannie Mae's guidelines
instruct the lenders not to call the loan when it's a scenario
like this where you're simply transferring it into the LLC.
Fannie Mae.
These regulations reads The lender must process the following exempt transaction.
A transfer of the property to an LLC provided that a
the mortgage loan was purchased or securitized by Fannie Mae on
or after June 1st, 2016, and the LLC is controlled by the original borrower,
or the original borrower owns a majority interest in that LLC.
And furthermore, in situations where all of the following conditions are
met, Freddie Mac will permit a transfer of ownership of the mortgage premises.
The transfer is to an LLC, provided that the managing member
is the original borrower, and if there are multiple borrowers,
all of them must be members or partners of the LLC
and at least one of them must be a managing member.
As you can see, even Fannie Mae and Freddie Mac agree that
when you transfer the property into an LLC that is the same
original borrower of the same owner, the property is the same owner of the LLC,
then the bank is not supposed to execute on their due on sale clause.
So to be safe, make sure that the ownership
of the property matches the ownership to the LLC.
So if it's just you on the original deed, make sure you're the only one in the LLC.
If it's you and your spouse or you and your business partners,
make sure you guys are the same owners of the LLC and the same percentages.
And I think if you do that, you shouldn't have to fear about the due on sale clause
and think about it.
Just imagine if Bank of America started calling all of these loans.
None of these real estate investors would use Bank of America
to purchase properties because they would be fearful
that when they transferred it, they'd get called.
And so that's another incentive why lenders
typically don't want to go ahead
call the loan when you're transferring it to your own LLC.
What they're really concerned about is
if you're transferring it to a third party, that's when they care.