I’m glad I made you feel patriotic! I like the fact that when I do these types of deals the old owners love me, the bank loves me and most of all the new tenants in my L/O love me! They are grateful to pay me back all of my initial down payment on the L/C as their non- refundable deposit so I guess that this qualifies as one of those nothing down deals that we all love to hear about. Something about an infinite return on my nothing investment just makes my heart palpatate. Of course I lay awake at night staring at the ceiling hoping the due on sale cops don’t show up if I go to sleep. Then I’d have to get a mortgage of my own on the property. Let’s see now I need a mortgage on a 60,000.00 property and I owe about 36,000. I think I could manage that somehow.
If I purchase a house for 75k that is worth 100k with normal mortgage financing and then resell the house with owner-financing, how do you get around the due on sale clause in most mortgages. To protect myself I would think I would record my buyers contract with me, can’t the bank find out about this or is this something that they do not concern themselves with as long as they get the payments. Any info would be appreciated.
Posted by Sydney on November 08, 1998 at 06:33:31:
Alternative: you can sell this property with a note, and offer it with owner financing. Example, if your buyer has less than great credit, he will qualify for an 80% note. The note buyer pays $75,200 for that note. You pay off the $75K purchase price and make only $200. BUT … the buyer owes you $40,000! If he has only 10% down, you make $20,000, plus a second for $20,000. At 10% interest for 10 years, that is $132.20/month for a decade (this is an infinite rate of return since you have no money in it!) If he has 20% down, you make $40,000! You don’t own the property and have no legal obligation of any kind. You can even sell the second for approximately half price and make another $10,000. Sweet deal.
Re: Selling with Seller-financing - Posted by Craig_NOLA
Posted by Craig_NOLA on November 04, 1998 at 17:50:35:
I’m assuming from your post that you’d be reselling the property using a “wrap.” If this is the case, it would indeed trip any due-on-sale clause stipulated in the underlying financing, and the lender would have every right to accelerate the mortgage. As to whether they would actually discover the new sale or choose call the loan if they did is a question I’ll leave for some of the financial professionals out there.
One way to avoid the problem altogether would be to sell the new first lien note that you create for cash, pay off the underlying mortgage, and keep the balance as your profit on the deal. In fact, this could all be done at the same time via a simultaneous closing.
Some considerations: As John Behle often recommends, never create a note that you intend to sell without first securing a buyer for the new note. If you do, you may find that the note you’ve created is either unsaleable or will only sell at a substantial discount. You may also want to write into the purchase agreement that the sale is contingent upon selling the note to a third party at closing for $XXXX.
Also, the new buyer’s credit and the size of their downpayment will certainly effect the saleability of the note. In particular, it will effect the discount amount and the LTV that the note buyer is willing to accept. If the buyer does have so-so credit or a small downpayment, you may have to take some or all of your profit on the deal in the form of a second lien note (which to me still seems preferable to doing a wrap).
I hope this helps. If any of the above is unclear or if I can answer any specific questions, feel free to e-mail me.
Re: www.the horse is dead quit beating it.com - Posted by Rob FL
Posted by Rob FL on November 04, 1998 at 19:50:53:
When you take subject to a mtg and ignore the due-on-sale clause, have the lenders ever tried to force you to assume the loan or raise the interest rate or make you pay points or anything like that. I was thinking they might try go after you in some other way as opposed to foreclosing. I would like to hear what you or others have to say about that. Thanks.
Okay quick story-
I walked into **ons bank in Utah and told them I had been paying on a loan that I wrapped for over a year and wanted to know what they were going to do about it.
The bank manager had no clue and finally sent me to the mortgage department. That guy actually asked me “Why are you telling me this?” I said it was a violation of the due on sale clause and wanted to know when I should expect them to start enforcing it.
His answer? “Well it’s right before the holidays and we are really busy, I mean I am sure we will get to it eventually…”
Read: Quit bugging me with your special weirdness.
That was a year ago. I WAS going to refi but now that I have such a clear conscience about it- Scre* the banks and their stupid rules.
Karp, I love your posts AND your hairdo. What a cool style!! Goes good with the boots too.
I just wanted to throw my 2 1/2 cents in here about due on sale crap. I recently bought a house that was about to be foreclosed on. The lady was very behind in her payments. She inherited the house, lives 30 miles away and didn’t want it. I did a land contract, had it recorded, caught up the back payments, called the mortgage company and TOLD them I was the new manager and wanted all correspondence sent directly to me. They said okay, no problem as long as the owner sent them a letter stating that fact. I then got my own insurance and cancelled their old policy (saving me 150.00 a year), covered the mortgage company with it and we have been merrily rolling along. I pay the mortgage directly with my company check and they cash them happily. They are back to current and they could care less. I L/O’d the house and make about 300 a month profit so I’m happy. Her credit is saved and that made her happy too. Everyone won. What a country!!!
John, sorry the hair is back to normal-ish. I have to fly to London and Moscow and act all professional. Blech.
But the real thing here is that you postured your way through a situation where the bank couldn’t solve their own problem without you! I think that rocks. I think the way you handled it was very professional and supports my theory that investors ARE the ones who make the markets in real estate.
I am waiting till I have more money stashed so my wife doesn’t beat me, then I swear I will begin lobbying for an amendment to the god-forsaken Garn-St. Germain Act…