Very Scary Halloween Notes: Due on Sale (Santa?) Clauses
In honor of Halloween, I was trying to come up with something scary to write about. And then it came to me . . . the acceleration clause. It’s the language that allows a bank to ‘call’ a loan when and if they find out title has been transferred.
Yes . . . the proverbial, mysterious, vengeful, ever-looming, life-throttling, hatchet-in-the-skull, grave-digging due-on-sale clause is definitely a spook many people find threatening. It’s a (Santa) Clause that could turn into a Nightmare Before Christmas for people trying to put deals together with creative seller financing techniques: subject-to, wrap, etc.
I’ve always proposed that there is a relatively small likelihood of a bank calling a loan these days. It just doesn’t make sense for them to foreclose on a performing asset. Aren’t they busy enough foreclosing on properties where they aren’t receiving the payments???
And that’s when I started having some doubts . . .
Since when does common sense have anything to do with how a bank does business these days? They routinely refuse short sales so they can sell for 50% less as an REO down the road. Yup . . . prescribing the lenders with qualities they do not possess (such as common sense) is probably not a great idea.
What if they desperately need to beef up their reserve requirements one month? Might they go digging for loans they can call in to restore some liquidity? I do know people who have had this happen to them.
So, while I still maintain that there is a relatively small chance that a bank will call a loan in today’s climate, if it’s absolutely crucial to the deal that the existing financing be left in place, then I suggest you use a different vehicle for structuring your transaction: the Equity Holding Trust Transfer System.
Brief comedic interlude:
Now, back to our original programming . . .
As scary as the due on sale clause can be, I have to say that there’s something MUCH MORE THREATENING out there!!!
I get a lot more scared looking at the grocery bill needed to sustain four teenagers . . . they’re like locusts. You think you have a field full of grain, or a refrigerator full of food, and whoosh!! They come through in swarms and decimate the food supply.
So, please be very very careful how many of these you will let live in your house, especially with the upward price pressure on commodities these days.