Nontraditional Transfers And Due On Sale Clauses: Watch Out
When we think of selling property, we think of what is generally a voluntary process, or one that goes through the traditional closing process. There is a willing seller and a willing buyer, liens are checked, inspections are conducted, the buyer pays off any existing liens through the sale price, and the seller gets those liens paid off, and, hopefully, also receives some profit from the sale.
Transfers Outside of Traditional Closings
But many transfers of ownership of property don’t happen this way. In many cases, the actual title owner of the property may change, without an official closing. Imagine the following scenarios:
- Someone transfers his or her interest in property into a trust for asset protection or estate planning purposes
- Property owned by a business is transferred into the name of one of the business owners, or vice-versa
- Property is transferred from one person to another by way of a foreclosure
- A court order transfers property, which can happen when a business winds down, or there is a divorce, or a bankruptcy
- One family member just transfers ownership or title to property, to another family member
Payment of Liens
In all of these scenarios, legal title is being transferred from one person to another, without a closing process.
The person receiving the property through these means will get legal title, and will have to continue to pay off whatever liens exist on the property, such as mortgages, back owed homeowners associations, or code violations that may have attached to the property.
The new owners do not get the property “free and clear,” the way he or she might after a closing, when all existing liens would have been paid off.
Watch for Due on Sale Clauses
But the new owner may know this, and be ready and willing to continue to pay, for example, the existing mortgage payment. But a problem can arise with a “due on sale” clause in the mortgage documents.
A due on sale clause says that if title or ownership of property is transferred to someone else, in any way, with or without a closing, that the entirety of the balance of the lien is due immediately. Making payments is not an option.
The net result of this is that the new owner cannot just continue to make whatever the normal monthly payments may have been on any existing liens. Rather, the new owner must pay 100% of the outstanding loan or lien, immediately, no matter how much is owned.
This is true even if you are still the equitable owner of the property.
For example, imagine that you transfer your home into a trust, where you are the trustee. Even though you still are the equitable owner of the home, the title of the home has now gone from you to the trust—and thus, to keep the property from being foreclosed on, you will now have to pay every penny of what is owed on the mortgage, all at once.
Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today for help understanding the documents you will sign in your real estate closing.