Hey, friends. Kris Krohn here and today, we are doing our advanced vocabulary when
it comes to real estate specifically we're going to talk about acceleration
clause, what is it.
Alright, my friends. So today on our advanced real estate vocab, there's a ton
you that are asking questions about acceleration clauses. What is an
acceleration clause? What do you need to know about it? Is this a good thing? Is it
a bad thing? Well, first of all, it's not necessarily a good thing, okay. What
ends up happening when you buy a house is you know that when you get a mortgage
that make you like break your hand by signing your name a thousand times for
this big thick half a ream of paper, there's all sorts of things in there
that honestly you're probably not taking the time to read all the fine print. In
the fine print, you're going to find an acceleration clause and this is what the
mortgage is basically saying, they're saying if you ever take this property
and transfer it into an LLC then we're going to accelerate the mortgage. Now here's
what an acceleration means.. Hello, customer, your house needs to be paid off
now or we're taking it from you so we'll give you 30 days to buy your house. Now
for just a moment, think how crazy that is, it's like whoa whoa whoa whoa whoa,
I make payments every month for 30 years, how do you want me to actually
pay it off? This is a clause that the bank's put in that is their way of
saying if we don't like something, you're doing with the property, we just have the
right to take it back from you and if you have a grundle of equity in it, that
now becomes their equity. If you've got a renter in there and you're making a
great cash flow, it now becomes theirs. Now there's a lot of things that can
trigger the acceleration clause. Technically, if your real estate investor
the right thing to do is to buy a house for an investment and to put it into an
entity like a limited liability company, an LLC but just you know technically
that triggers the acceleration clause. So banks are doing investment lending,
they're making you sign an acceleration clause knowing that the moment you
transfer into an entity for protection a corporate veil between you and your
business, that at any point, they could actually say see you're in violation,
that's my property now. Now never in my history of knowing anyone or my hundreds
of deals have I ever seen it tripped. This is actually just a precautionary measure
for the banks of saying listen, this is an investment property and we want to
make sure you've already hit the tripwire so that if anything happens
down the road, if mortgage rights change and you know, we don't like the rates
that you're paying, bottom line is, if we want to take this property back and
assume it, we can take it back from you and no questions asked because we've
made it too easy for you to trip the acceleration clause so the bottom line
is on every piece of real estate that I own, it's all sitting in an entity so
technically I'm in violation and the acceleration clause could be hit at any
moment but banks don't do it, it's their fall back for worst case scenario. I'm
sure they're still licking wounds from something they learn from the Great
Depression and that's why they came up with some of this mumbo-jumbo. I don't
really know when they started using it, I just know that it's never been a threat,
it's never come back and hurt, it's never going to anything like that but when you
buy a house, it's got an acceleration clause. Now give you a more practical
application. When you buy a home that you're going to live in, you make a
commitment to the bank, you're basically saying I'm going to live here for at least
12 months, that's your intention. Now the banks can't govern anything, they can't
really govern intention very well so there are individuals that will actually
kind of take advantage of the system and they'll buy a house and they'll put 3%
down instead of 20% then they move out a month later, sometimes they don't even
move in, they're like no, no, bank, I was going to live in it but then my wife or
this is a job change so I moved some I moved out. Now the bank, if you do that,
they're not going to care. If you do it again, they're probably not going to care
but if you keep doing it repeatedly and the bank sees the pattern, they're going to
say wait a second here, with investment lending, you got to put 20% down, you keep
trying to qualify for a home as if it's yours and you're going to live in it but
you never do, you just keep putting 3% down and if they started seeing that
pattern, guess what the bank's could do, they could trigger the acceleration
clause and say, hey, the person that sent on the loan is taking advantage of this,
they're doing something that is against the rules. Now is there anything wrong
with you living in the house for a year and then getting another 3% down on
another house? No. Could you actually do that every year?
Absolutely. Not many people like to be that transitory but what happened if you
wanted to buy the house and something happened and your intention changed and
you moved out three months later? Are you in violation
to trigger the acceleration clause? You're not. It's only when someone is
abusing the system and the bank figures it out that you could get into some
big-time trouble because they could just pull all that real estate from you.
Banks basically, they have rules that they also play by and they don't want to
be taken advantage of and so this is the banks, this is one of
their top controls for making sure that no one is really taking advantage of
them. Listen, we got a whole series here made up on this advanced vocabulary so
honestly make sure you are a subscriber, go ahead and ring the bell so that we
can keep notifying you and letting you know when we've got new videos hitting
because the more knowledge that you get here between your two ears with this
real estate, the more real estate you're going to own out there.