Due on Sale Clause and LLC Transfers | 449

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Due on Sale Clause

It’s Tax Hacker Tuesday, and today, Tim Berry and Matt Theriault teach listeners about the due on sale clause and LLC transfers! Learn how to stop being scared of the due on sale clause, two ways to get around the clause, and how Tim found a loophole for one of his clients.

Due on Sale Clause

What You Will Learn About Due on Sale Clause and LLC Transfers:

  • How to stop being scared of the due on sale clause
  • The basics of the due on sale clause
  • A real story of an engineer/investor who came to Tim with due on sale clause concerns
  • How Tim found a loophole in the clause for him
  • The 2 ways you can usually get around a due on sale clause

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Transcript:

Speaker 1: This is Theriault Media.

Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%? Now you can!

Tim Berry, attorney at law, shares here, each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday!

Matt Theriault: Welcome to the Epic Real Estate Investing Show. It is Tack Hacker Tuesday, with my attorney and friend, Mr. Tim Berry! On Mondays, here at Epic, we show you new and creative ways, as well as time-honored ways of making money using real estate, and on Tuesdays, we show you how to keep it!

If you have any questions for Tim that you’d like to have answered, here, live on the show, you can go to taxhacker.com/questions and post it, there, and then we’ll answer it, here on the show. That’s kind of how it works.

Hey, Tim! How are you?

Tim Berry: I am doing epic, Matt! How are you doing?

Matt: Epic! I like it! It’s funny how my family when we go out, we see “epic” everywhere. We see it in the airport, we see it at restaurants, and now my son, he’s seven, goes, “Look, Daddy! Epic this! Epic breakfast! Epic brunch! Epic beers! See the epic t-shirt? Have an epic day! Look at the epic notebook!” It’s fun.

Tim: That’s cool.

Matt: We call that our reticular activator.

Tim: Reticular activator? How do you even spell that?

Matt: I know. Well, I didn’t say I know how to spell it, I just know what it’s called. I can pronounce it. It’s the portion of the brain that’s responsible for awareness. You get the new car and you think you’re the only person who’s driving that new car. You’re the first one to get it, and then, all of a sudden, now you notice it at every corner, that you weren’t the first one.

There’s a tax question, in there, somewhere.

Tim: Yes, you can write it off.

Matt: Okay!

We do a lot of creative real estate investing, here, at Epic, and a lot of different creative acquisition strategies, creative exit strategies, and one of those strategies being a subject-to strategy, where you’ve taken over ownership of a property subject to the existing mortgage. One of the questions that always comes up is that due-on-sale clause. We were talking, earlier, and you had something that you wanted to talk about, the due-on-sale clause, and the LLCs. I don’t know. Go with that. What did you have in mind, talking about with that?

Because everyone’s always interested in the due-on-sale. They’re terrified of it, and it paralyzes people from taking actions that they could otherwise take.

Tim: Yeah, no. I totally agree with them. Here’s the thing. Let’s talk about the basics of the due-on-sale clause. It’s just a paragraph on your deed of trust, on your promissory note, saying if you move the property, they could call the note due. The weasel word there is “could.” The bank has the right to call it if they want to.

Now, if you move the property, it’s not like you’re violating the law, so you’re not going to have, whatever his name is, Mueller, come investigate you and try to haul you off to jail, or something like that. It’s a civil issue. It’s just a contract issue. All it says is, once again, the bank has the right to call that if they want to.

Tim: Now, Matt, how many real estate deals have you been involved in, or heard of, or what have you?

Matt: Oof, I stopped counting, a while ago, but … shoot. Thousand plus.

Tim: Thousand plus.

I’ve been involved in five or six, myself, and that’s a vast understatement, but I have yet to hear of that due-on-sale clause being called.

Now, I was working with a new client, recently, and this guy’s an engineer. He’s an uber engineer. Well, he doesn’t work for Uber, but I meant that as an over-the-top type engineer guy.

Matt: Part-time gig.

Tim: Yeah. Part-time. Yeah.

Matt: Side hustle.

Tim: So, he’s reading through all the terms and clauses on his mortgage, and he’s saying, “Hey, look, Tim. I got these rental properties, and I can’t move them into the trust, like what you’re talking about. I can’t move them into an LLC, like what you’re talking about. It says it’s going to violate the due-on-sale clause.”

I said you know what? You’re probably right. It probably will violate the due-on-sale clause, and I’m talking the same thing. I’m saying, now, that I have yet to see it.

Now, Mr. Engineer … Mr. Boy Scout Engineer says, “Well, gosh. I’m not comfortable with something that’s going to violate the clause.”

I said, well, tell you what. Call up your lender and see if there’s anything we can do.

And the lender, to his credit, was very emphatic saying, “If you move these assets, it’s going to be a violation of the due-on-sale clause.”

Now, I thought, there’s got to be some little loophole, here, or something, somewhere, so I did a quick internet search. Did my little Google-fu, and I found a cool little thing inside the Fannie Mae servicing guide. This was as of June 13, 2018, there’s a section inside the Fannie Mae servicing guide that specifically says, black and white, properties can actually be moved to LLCs, and it gives these various provisions that you’ve got to follow.

The provisions are nothing major. It’s got to be in good standing. It has to be controlled and/or owned by the original borrower. Just basic stuff. Those people are freaking out on the due-on-sale clause. You’ve really got to dig down and see, why are you worried about it? What are you being told? It’s not so much what are you being told, but what’s reality. What’s the actual roles for that particular loan, because 99.9% of the time, any time someone tells you something can’t be done, there’s probably some legal exemption or loophole where, if you look long and hard enough, you’re going to find it, where it can, in fact, be done.

Matt: Mm-hmm (affirmative). Interesting. There’s a thing, and it’s for a Fannie Mae servicing guide that says you can do it. Right?

Tim: That’s the bottom line! Matt, once again, you just boil it all down to the essentials. There might be something inside the due-on-sale clause that says you can’t do it, but the Fannie Mae servicing guidelines, which is what pretty much everyone follows, says it can be done.

Matt: Right. There’s two points I always point out when people bring that up. The way that most due-on-sale clauses are worded, the fact that if you even think about moving it to an LLC, you have violated it.

Tim: Yep.

Matt: Tell your engineer he’s already in violation.

Tim: Yep.

Matt: Second thing is, transferring it to a trust is a very standard, normal estate planning practice. That, right there, will raise no red flags with your bank, and they won’t even pay it any mind. Is that pretty accurate?

Tim: Yeah, for the most part. It just comes back to simple basics. If the bank started calling all the notes of people who’ve transferred properties into LLCs and/or trusts, we’re going to have a real estate market crash, because so many people aren’t going to be able to make those payments, and now they’re going to have so much real estate, so much product inventory on the market, it’s going to drive prices down, which is going to screw the banks right back over.

Matt: Yeah. The banks would be shooting themselves in the foot, by doing that.

Tim: They would. It’d just be stupid.

Matt: Yep.

Matt: Well, there. There you go. Banks aren’t stupid.

Tim: Most of the time. Every now and then, they are, but you know.

Matt: They have stupid rules and laws, but boy they always seem to survive, when everything goes wrong, so they know what they’re doing, right?

Tim: Yeah.

Matt: Is there anything else to say on that, or are we good?

Tim: I think we’re good. Just as … yeah, the due-on-sale clause is out there, but look at it long and hard, and there’s probably a good chance you’re going to find a way that you can get around it, either A) through the actual terms of your mortgage and/or deed, or B) inside the guidelines of the people who actually own it.

Matt: Got it.

Matt: When you say the word “get around it,” that probably sparks some questions in people. As you’d mentioned, I think it’s important in reinforcing it’s not against the law. You’re not in violation, civilly, or criminally, or anything like that. It just breaches the contract. It’s just the contract. There’s no real estate due-on-sale jail.

Tim: If I can try and redeem myself on the “get around,” the way I see it is, you got a brick wall. That brick wall is about ten feet. You can either try and climb that brick wall, or you can look off to the side and see the little path that’s all legal, all allowable, and walk around that brick wall, get around it, and keep on moving with your destination.

Matt: Right. There’s a little door in the brick wall, you just have to shuffle down to the right, a little bit.

Tim: Yeah. There you go. You got to have the secret door knock.

Matt: There you go. The handshake, and all that stuff.

Tim: Yeah.

Matt: Tim, we would put together this Tax Hacker Blueprint, I don’t know, a couple months ago, and we’ve had a lot of listeners go ahead and take advantage of that. How is that going?

Tim: It’s going fantastic. 100% of the people, last week, went ahead and wanted to do that. This kind of ties in with that, because the Tax Hacker Blueprint is not just for tax savings. We also look at the asset protection. What’s the point of saving $50 bucks, if the entire value can be taken away by some stupid lawsuit, later on down the road?

We do the asset protection, and that’s going require moving real estate over to a trust or to an LLC. Now we’ve got a neat way that you can do it and not have to stay up at night, worrying about it.

Matt: Nice. Nice. Well, super! I appreciate all the good work that you’re doing, over there, for the Epic audience. Thank you! It’s been an honor to work with you. I’ve noticed that taxes are … This Tax Hacker Tuesday is a far more interesting subject to the audience than I would have really imagined, because it looks like we get a little bit of spike in our downloads on Tuesday, so … Dude! You’re becoming famous and you’re making me look good!

Tim: Well, Matt, here’s the thing. People can’t sleep on Tuesday nights, so they play this as sort of the fan and bam! It puts them right out.

Matt: There you go. Tim “Self-Deprecating” Berry. Alrighty, so whenever you’re ready to have Tim customize a Tax Hacker Blueprint for you, you can go to taxhacker.com and answer a few questions about your situation. You can tell Tim a little bit about what you’d like to have happened, and then his team will take it from there, and then he’ll even give you a copy of his free book, navigating Trump’s new tax plan.

Pretty simple! Taxhacker.com. Tim, any last bit of advice?

Tim: No! Thank you for the kind words, earlier, and look forward to helping people out!

Matt: Sweet! Alrighty, so that’s it for Tim and myself, today, and we’ll see you next week, for another episode of Tax Hacker Tuesday, on the Epic Real Estate Investing Show.

Speaker 1: That’s it, for today, as we dream of a tax system that works just for you. But, until then, you have Tim Berry! See you, next Tuesday, for another episode of Tax Hacker Tuesday.