I want to state right from the get-go that the only thing that a straight or naked real estate option grants is an irrevocable right to purchase the property under option within the option period. Nothing more! An optionee has absolutely no beneficial or equitable interest whatsoever in a property under option. Furthermore, in my professional opinion, the creation and sale of a straight or naked real estate option does not violate the due-on-sale clause contained in government-backed and conventional mortgage or deed of trust loans secured by a lien on residential property containing five or fewer units. Again, in my professional opinion, there is absolutely no way that any lender can legally exercise its option pursuant to a due-on-sale clause on discovering the creation and sale of a straight or naked real estate option. Why do I hold this opinion? Because Title 12 of the Code of Federal Regulations refers specifically to lease-option contracts, but makes no mention whatsoever of straight or naked real estate option to purchase contracts. Real estate options are not covered under Section 591.2 (b) of the Code of Federal Regulations that defines the due-on-sale clause as follows:
Due-on-sale clause means a contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale or transfer of all or any part of the real property securing the loan without the lender's prior written consent. For purposes of this definition, a sale or transfer means the conveyance of real property or any right, title or interest therein, whether legal or equitable, whether voluntary or, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests.
Furthermore, the creation and sale of a straight or naked real estate option does not transfer any legal or beneficial interest in the property under option until after the option is exercised. The transfer of the property or a beneficial interest in borrower is the standard loan due-on-sale covenant, which is included in all Fannie Mae and Freddie Mac conventional residential mortgage and deed of trust loan documents. It states in part:
"Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.
During the course of researching this book, I found no court cases nationwide in which a residential lender has exercised its loan's due-on-sale clause and declared a loan to be in default upon discovering that the borrower had created and sold a straight or naked real estate option on the property securing the mortgage or deed of trust and promissory note.
The due-on-sale clauses included in almost all commercial mortgage or deed of trust loans do not specifically prohibit the creation and sale of a straight or naked real estate option on the property securing the mortgage or deed of trust and promissory note. The fact is that other than government-backed multifamily loans, most commercial mortgage or deed of trust loans are one-of-a-kind loan instruments written specifically for the property securing the loan and almost never contain any prohibition against creating and selling a real estate option.
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