CONSEQUENCES OF DEEDING A TITLE WITHOUT A PAYOFF - Posted by MIKE KNIGHT


#1

Posted by Kristin Stallworth on November 29, 1998 at 10:34:34:

Sorry, I guess I should have explained that statement more clearly. What I mean is this: In my experience, the lenders in California seem to be A LOT more sensitive about the due on sale clause than many other places I’ve checked out, and the investors I know there seem to be a lot more scared about trying it. Just as JP stated, though,the lender has to find out that it’s happened in order to do anything about it. I haven’t done any subject-to’s in Calif, because the investors I have there panic when I suggest it. CHances are, if you’re a bit of a risk taker, it’s probably just as feasible to try it in Calif. as it is here in Texas. But the locals I’ve met warn against it in a big way.
Just my 2C.
Good Luck,
Kristin


#2

CONSEQUENCES OF DEEDING A TITLE WITHOUT A PAYOFF - Posted by MIKE KNIGHT

Posted by MIKE KNIGHT on November 27, 1998 at 08:02:54:

What would happen if I transfer the title of my house to a buyer without him being able to qualify for my mortgage, which is a qualifying assumption?.
I am not worried about the consequences for myself as the house is getting ready to go to foreclosure and I am looking stop the process by putting someone in the house who can make the payments and give me a small down for my equity.
I am not against L/O but I would like to know for curiosity’s sake, what the lender would do if they found out and the buyer has been making payments on time but doesn’t qualify for their mortgage?.

THANKS FOR YOUR HELP


#3

Re: CONSEQUENCES OF DEEDING A TITLE - Posted by JPiper

Posted by JPiper on November 27, 1998 at 15:39:22:

Here’s your situation as I see it.

You’re in the foreclosure process and it sounds as if you don’t have the ability to bring the loan current. Therefore you will lose the house at the foreclosure sale.

Your options, assuming no payoff, are first to find a buyer who will formally assume your loan, which means they will have to qualify with the lender. If you can find such a buyer who will a)formally assume the loan and b) bring your delinquent payments current together with all fees, then the lender will provide you with a release of liability which will let you off the hook.

Virtually any other possibility that you have for transferring the property or otherwise getting a new buyer will in all probability violate the lenders due on sale clause (depending on exactly how the clause reads). This includes subject to assumptions, lease/options, land contracts, deeding into a trust and later assigning the beneficial interest, AITD’s, etc.

What happens when you violate the due on sale clause is that 1) the lender has to realize that this event has occurred and 2) decide to take action based on this violation. If both of these factors are present, then the action open to the lender is to accelerate the loan (declare it due and payable) and providing the loan is not paid off, to initiate a foreclosure action. This is exactly the position you are in right now…so the consequences to you are identical.

You will notice that I said that one of the factors that needs to be present is that the lender is able to detect the violation of the due on sale clause. So for the purposes of argument, let’s assume that you did a lease/option with a new tenant/buyer. Let’s say that you used separate documents for the lease and the option, and that neither document is recorded in the county records. Let’s further assume that the tenant/buyer gives you enough upfront option consideration to bring your loan current…and that the tenant/buyer’s payments are enough to pay your loan payment plus a little extra, and that this payment is sent to you directly, and that you pay the lender directly from these proceeds each month, and that you do so on a timely basis. Given these assumptions, the question I would pose is how will the lender realize any possible due on sale violation?? My answer would be next to zilch…and further, if they did realize it I know of no cases where a loan was accelerated when the payments were current.

Here’s where your risk lies in this scenario. Perhaps the new tenant/buyer at some point through the course of this transaction decides not to make the payment to you. If you in turn DON’T make the payment to the lender, eventually they will initiate foreclosure proceedings again…so you’re right back in your current position. You will need to initiate eviction proceedings to remove the tenant, correct any damage that may have been done to the property, and find a new tenant/buyer. No different than where you are right now. Other possible risks are that the lender discovers your violation, accelerates the note, neither you nor the tenant/buyer are able to payoff or refinance the note, you DIDN’T disclose the existence of this note to the buyer, and now the buyer initiates a legal action against you perhaps based on fraud. I would highly recommend that this particular issue be addressed by fully disclosing the existence of this loan and the possible consequences to a new buyer…IN WRITING.

There are other possibilities for handling your existing situation that I’m not going to go into. A thorough reading of the “How To Articles” may give you some further ideas. The one cautionary note I would offer though is that I would NOT do any type of transaction where I relinquished a deed to my property, and yet remained fully responsible for the loan, without having a means to regain control of the property if the buyer were to default in their payments. The lease/option suggestion will give you this means of control. If you are going to entertain other types of transactions and if you are not familiar with methods to regain control, then I would recommend that you seek out some expert advice on how to do so.

JPiper


#4

Re: CONSEQUENCES OF DEEDING A TITLE - Posted by Kristin Stallworth

Posted by Kristin Stallworth on November 27, 1998 at 13:28:00:

Mike,

It really depends on where you are. For example, in California, that is a huge no-no. However, here in Texas, the lenders mostly look the other way as long as the note is paid on time. But if there is a due on sale clause in your mortgage note,the company always has the option of calling the note due in full, so caution is advised.

Personally, I do subject to’s on a fairly regular basis, and have never had a problem. But, if you are concerned that the note will not be paid or that the lender will accelerate the note, I would make sure that you have the ability to refinance the existing note if necessary.

I hope this helps, and I wish you the best of luck!

Kristin


#5

Why is it a “no-no” in California ? - Posted by Bill

Posted by Bill on November 29, 1998 at 08:22:33:

???