Should I finance my buyer, and carry a large 2nd? - Posted by Sara_CA

Posted by Rick, the Probate Guy on May 20, 2009 at 07:15:38:

Well, maybe I mis-posted. I really wasn’t exactly BS-ing the attorney; I was citing law that CA specific to an out-of-state attorney.

The truth is, laws can be difficult to interpret, especially from one state to another. And, under different facts and circumstances. That’s why there are lots of attorneys in this world!

Anyway, since you’re the second poster to comment on this, I want to clear the record so that you didn’t think I was trying to double-talk my way thru this. This attorney just happened to have his act together and was well prepared to respond to my question. Also, it was a valuable response.

Should I finance my buyer, and carry a large 2nd? - Posted by Sara_CA

Posted by Sara_CA on May 15, 2009 at 15:25:07:

Subject: Should I finance my buyer, and carry a large 2nd?

I am selling an agricultural land near town. Agricultural credit agency will finance my buyer for only 33% in first position. Buyer will pay 25% down. I must finance remaining 42% in 2nd position in order to make the sale. Would you do it?

I am not in anyway comfortable about doing a large loan in 2nd position. Can someone list the pitfalls of carrying a 2nd position loan again? I do want to sell. But is the pitfalls of doing a large 2nd position loan big enough for me to walk away from this buyer.

Btw. This property is in CA near college town. Sell price is $600K.

Thanks for any input in advance. Thanks for this great board. I always learn a ton.

Re: Should I finance my buyer, - Posted by BTI

Posted by BTI on May 18, 2009 at 10:18:28:

Sara

Everyone is suggesting finance answers. I want to know if $600k is a good price. Also what is the location, is it near a college town where the college has been for several years, or near the new U.C. Merced campus where the impact is to come.

If $600k is a good price, and the collateral is good, your getting 58% cash back for raw land, not the greatest investment in this economy. I don’t know what you paid but only having to carry 42% on raw land is a good thing to me.

I would incorporate one of the other suggestions and maybe take a 2nd and a 3rd, with the second being an all inclusive deed of trust and you making the payments to the first. As for the third you have no interest limit due to it being seller carry-back, thus an extension of credit, and maybe a higher rate might encourage early payoff. If you believe in the future of the property you could just have interest accumulate on the third.

I would need to know a lot more, and I know many of the old Hwy 99 towns are hurting, so just some thoughts to work with. Make it work, raw land buyers are not standing in line at the moment.

BTI

Re: Should I carry a large 2nd? - Posted by Kristine-CA

Posted by Kristine-CA on May 15, 2009 at 17:14:45:

I think you’d come out ahead if you carry the paper for 75% in first and
only position. Hold the note long term, or season it for 12 months and
then sell the note at a discount. IMO a first position discounted note is
worth more than a 2nd. Especially on land.

Think for a minute why the ag lender on the first is willing to loan so
little, even with a good downpayment. You will be in even a riskier
position than they.

BTW, what’s the ag lender’s appraisal for the property? Have they
agreed to loan 33% of $600K or have the agreed to lend the buyer
$198K? There’s a big difference there. Have they agreed to you
carrying a second? Or are you thinking you can put together the deal
as 25/33/42? Is there any possibility the lender knows the property
value better? I remember you previously saying that your buyer (if this
is the same one) wants to pay your asking price, but that doesn’t make
the property worth 600K. And I think this is evidenced by how difficult
land loans are to get.

Again, if it were me, I carry the note in 1st position. That way if
anything happened, I’d need less capital to get the property back. If
you try to foreclose in 2nd position, you are really putting yourself at
risk as 1) you’d need money to rein-state the 1st and 2) in CA, taking
back a property via trustee’s sale violates the due on sale clause, which
means if the ag lender gets it back they can call entire loan due
immediately. These are technicalities but technicalities matter most
when you are in a junior position.

The other risk/issue I see is your buyer’s plan for the property. Do
they know what they are doing? Are they planning on attempting
development? Are they overpaying because they can afford the
monthly payment…but don’t know what they are doing? Will the
property end up with mechanic’s liens and construction liens and god
knows what else in their attempts to make the property viable for their
plans. This is why a 42% second is BAD.

If I remember right (and I may not!) you are into that property for the
right price. The down payment should make you better than whole and
than the rest is figuring out the right cash flow strategy, assuming
there isn’t a better cash buyer. Is there a better cash buyer…like for
$350K. Seriously. Machinations to sell at the highest price are a
mistake in this market, on this type of property. Again, just my point
of view, or as Joe K used to say here, just the way I spew things.
Kristine

Re: Should I finance my buyer, - Posted by Kristine-CA

Posted by Kristine-CA on May 18, 2009 at 12:40:17:

I like the AITD wrap the best, but have concerns about the lender that
Sara is calling “ag credit agency.” Is that a federal thing? Is it safe to
wrap something like that. Safe as in DOS. Even with DOS issues, I’d do
it regardless. The down payment is decent enough. It could be used
for cash reserves and/or to pay down the first.

I doubt we’ll hear anything other than that $600K is the right price. :slight_smile:
My concern would be the experience and plans of the buyer. Just
because they are willing to pay $600K and have $150K doesn’t mean
they know what they are doing. I sold a rental SFH in 2006 using an
agent, something I had never done. She a got good offers and then a
little bidding war going. I sold that thing for way more than it was
worth, even though the market was still going. Because the buyers had
25% down from the sale of another investment property and a lender,
AND lived around the corner from the property, I assumed they knew
what they were doing. First they rehabbed and marketed, and it didn’t
sell. Then they tried short-selling. Now it’s in foreclosure. Sigh. So
when someone is willing to pay for raw land with a big down, it makes
me wonder if they know what they are doing.

Removing the due-on-sale clause in DOT? - Posted by Sara_CA

Posted by Sara_CA on May 16, 2009 at 14:50:44:

Thank you all for your insights. You all have my greatest respect in your generosity in dispensing RE knowledge selflessly. Hats off to you!

I did not mention that I have an existing loan from the same lender as my buyer for $200K. My buyer is paying $600K for the property, and lender is willing to transfer the loan to him, thus the 33% loan in first position. 200K/600K=33%. Down payment is $150K (25%), leaving $250K (42%) I must carry as a 2nd position.

I can not finance him in 1st position. But your insights have given me food for thought on how to deal with the 1stâ??s due-on-sale clause if he defaults and I had to foreclose on him. Since the lender must rewrite my loan to name my buyer as the new debtor anyway, can I ask the lender to include the language such that the due-on-sale clause is NOT on the new Deed of Trust? Something to the effect of â??should the ownership of the property change hands due to default of secondary liens, lender agree to finance the new owner by allowing the new owner to take over the loan by stepping into the position of the borrower where he left offâ???

Can this be done? Will such language in the Deed of Trust hold up in court?

Thanks again.

Re: Should I carry a large 2nd? - Posted by Sara_CA

Posted by Sara_CA on May 16, 2009 at 14:46:25:

Thank you all for your insights. You all have my greatest respect in your generosity in dispensing RE knowledge selflessly. Hats off to you!

I did not mention that I have an existing loan from the same lender as my buyer for $200K. My buyer is paying $600K for the property, and lender is willing to transfer the loan to him, thus the 33% loan in first position. 200K/600K=33%. Down payment is $150K (25%), leaving $250K (42%) I must carry as a 2nd position.

I can not finance him in 1st position. But your insights have given me food for thought on how to deal with the 1stâ??s due-on-sale clause if he defaults and I had to foreclose on him. Since the lender must rewrite my loan to name my buyer as the new debtor anyway, can I ask the lender to include the language such that the due-on-sale clause is NOT on the new Deed of Trust? Something to the effect of â??should the ownership of the property change hands due to default of secondary liens, lender agree to finance the new owner by allowing the new owner to take over the loan by stepping into the position of the borrower where he left offâ???

Can this be done? Will such language in the Deed of Trust hold up in court?

Thanks again.

Re: Should I carry a large 2nd? - Posted by Edwin

Posted by Edwin on May 15, 2009 at 23:29:39:

Kristine, are you sure about this? “…in CA, taking
back a property via trustee’s sale violates the due on sale clause.”

I could be wrong, but I always thought there was at least an informal understanding among lenders that if there were, say, two loans on a property, and one went into default and a lender had to foreclose, the other lender would not invoke the due-on-sale clause because they were simply trying to protect their interest.

Or… - Posted by Rick, the Probate Guy

Posted by Rick, the Probate Guy on May 15, 2009 at 22:42:24:

Split Carryback into both a first and second TD. Make the 2nd for shorter term and higher interest rate than first.

Should you need cash, you could always sell the first and not have to butcher the whole cow. The discount on a low LTV first would be less than taking a discount on one single, larger 75% LTV loan.

Also, you could horse-trade the 2nd for something you really want, like a free and clear SFR that would generate good postive rent.

The point is to place yourself in a position with greater options for down the road, too.

Re: Should I finance my buyer, - Posted by Sara_CA

Posted by Sara_CA on May 21, 2009 at 21:14:23:

I will try my best to hold on to this buyer. I am negotiating with an investor who will loan to my buyer and pay off the ag credit loan. He will be in first position but he will omit the due-on-sale clause in his loan docs. If my buyer defaults and I take the property back as the 2nd lien holder. This investor will allow me to pay the arrears and take over my buyer’s 1st position loan and continue the monthly payment to him. I have done business with this investor once before. I think this will solve the due-on-sale problem. Is there other 2nd position loan pitfalls I need to worry about? Thanks a million. You gurus are the best.

As far as what the property is actually worth, it is hard to say for ag land near town. If you view it as ag land growing hay, then the price is very good. If you view it as a country custom home site - my buyer is building his dream home - then the price is under valued. Development land in the future, the price is way way under valued. He sounds like he knows what he is doing.

Thanks again.

Re: Removing the due-on-sale clause in DOT? - Posted by Alex

Posted by Alex on May 19, 2009 at 12:42:50:

There is concept in a lease called “Novation”. In this concept, a lease may be leasing from an owner. In the event this person then moves out of the leased space, the lease is assigned, and the new tenant takes over the lease. If the new tenant stops paying, the original tenant must step-in and fulfill his initial lease obligation. This same concept can be applied in your case.

Make yourself a tenant of the property you are selling. Create a paper trail of small monthly payments, of negligible amount to the new owner to show a rental history. If the new owner stops paying, you the tenant, can take over the property as part of the lease agreement. That way, you are getting a lease agreement to move around the fact that the lender is in first position. Make your lease amount equal in monthly payment to the money in first position. Have a lawyer draw it up. Nothing wrong with selling a property and leasing it back to yourself. (the fact that you are also financing it to the new owner is irrelevant). You are leasing back a property you used to own. Your lease agreement will supercede your lender’s first position, because as a lender, they can foreclose on the owner, but not evict a tenant: and that’s exactly what you are going to make yourself: a TENANT of the property you used to own. Make yourself also have a percentage of any building that they put up on this raw land, as an additional deal sweetener for yourself. that way, you get to be a tenant of the land and the structure that will be put on this land.

Omission of DOS OK legally - Posted by John Merchant

Posted by John Merchant on May 17, 2009 at 08:05:17:

“can lender agree to omit DOS clause in DOT?”

Absolutely. If that lender wants to and I see DOTs all the time that don’t have DOS clauses.

However, it may be that your “agrecultural loan” may, by its own government rules, reqruire the DOS clause to be included and for the lender to heed it and foreclose if it’s violated.

Also today as we all know, it’s very common and usual for a lender who DOES have a DOS clause in its DOT to overlook or ignore a sale of that property that technically violates its DOS.

A DOS clause gives the lender the right, but not the legal obligation of foreclosing if the DOS clause is violated.

post this on the finance board - Posted by Kristine-CA

Posted by Kristine-CA on May 16, 2009 at 18:59:06:

Sara: since you have underlying financing, you need some creativity on
this one. Post this on the finance board and maybe Ed G. or MM or
someone there will have some better ideas.

IMO, the DOS clause will remain in place as the lender has no reason to
let you dictate the terms of the loan between them and the borrower.
But don’t worry about the DOS clause so much, because I think you
should try to figure something out that gets you out of second
position.

Can your buyer find another $50K? Why not extinguish the 1st? You
could also use the 150K to pay down the first. Would the lender be
willing to subordinate his remaining $50K to second position? (not).
Hmm. I know there’s something better to be done here.

No honor among thieves here… - Posted by Rick, the Probate Guy

Posted by Rick, the Probate Guy on May 16, 2009 at 07:06:42:

I used to think that, too, back in the days when all I could afford was to be in 2nd position and took back properties subject-to conventional 1st TD’s.

After all, I’m a lender more often than anything else. Apparently, there is no such “informal understanding” as I’ve had senior lenders be about as uncooperative as you can imagine after I’ve foreclosed and taken back a property subject to a 1st TD.

And, in all fairness, I’ve had a few borrowers and properties that I was pretty fed up with for which the 2nd TD holder behind me wanted to reinstate my 1st (I own very few 2nd’s) and I was not in any mood to dance or cuddle.

No, Garn St. Germain Act spells out the law of the land (so far).

I recall trying to bluff my way around an obstinate loan servicer’s supervisor and insist on “talking to in-house counsel.” I got him on the phone and he ate me up for a mid-morning nutrition break. He even faxed me over case law supporting their policy that a transfer by way of foreclosure is still cause for invoking their due-on-sale clause. I still have the scars from his wingtipped Oxfords on my back! Arrhh.

There’s been a whole new generation of players since the last wave of mass foreclosures. You won’t find many people in the game who were in this industry during the last round, either. Consequently, I think you’ll be hard pressed to find lender policy-makers that were around before and remember what their policy was.

Re: Or… - Posted by Edwin

Posted by Edwin on May 15, 2009 at 23:33:31:

Thanks for the chuckle, Rick. You wrote “…not have to butcher the whole cow.”

That’s an excellent way of describing it! :slight_smile:

Re: Should I finance my buyer, - Posted by Kristine-CA

Posted by Kristine-CA on May 21, 2009 at 22:43:30:

Glad to hear that you have the loan situation worked out. To be
honest, the DOS was just one small detail, not a major concern, when
taking back a second.

Someone building their dream home? What am I missing? That sounds
like the least likely situation in which someone “knows what he is
doing.” Wasn’t Michael Jackson’s Neverland a dream home?

In terms of pitfalls on a second…just keep track of of your payor on
both the first and second. Kristine

THANK YOU. THANK YOU. (nt) - Posted by Sara_CA

Posted by Sara_CA on May 18, 2009 at 10:27:25:

(nt)

Re: No honor among thieves here… - Posted by Edwin

Posted by Edwin on May 16, 2009 at 09:31:28:

Wow, what a story, especially about that lawyer you had you for a snack. Just goes to show you that when some people want to be a**sholes, there’s not much you can do about it but get out of their way. I’m wondering why they wanted the loan paid off in the first place? As long as it’s current and they’re making money on it, why should they care? It’s just amazing the amount of mis-information, half-truths and outright lies that are floating around regarding the real estate business. It’s nice to have places like this where we can set the story straight

Omission of DOS clause in DOT or in NOTE or both?? - Posted by Sara_CA

Posted by Sara_CA on June 10, 2009 at 17:19:12:

Thanks, Kristine.

My buyer wants to build his dream home. He is an end buyer I wish him gook luck. If he defaults on my second position DOT. I hope I get back an improved property in the foreclosure sale.

At present we are still working out the verbiage. Something like this will be inserted in the Installment Note:
"“In the event that (second lien holer-Sara) shall acquire the property, (Sara) shall have the opportunity to cure all defaults within ten days of transfer and assume liability under this installment note.”"

Is this sufficient? Since the Installment Note is not recorded, but the Deed of Trust is a recorded instrument, shouldâ??nt I put this verbiage in the Deed of Trust too?? Am I missing on the standard procedure again?

Thanks again for sharing your knowledge. I learn a ton from you and the other experts here. Thanks for this great forum.

Re: No honor among thieves here… - Posted by Rick, the Probate Guy

Posted by Rick, the Probate Guy on May 17, 2009 at 13:17:11:

The lender’s attorney was not being offensive, he just called me on my BS. He won. I lost. It was actually a beautify thing to watch how outmatched I was, except of course, to be in my shoes.

Frankly, I learn an awful lot, perhaps more, from my unsuccesses. That was just another tactic that I won’t use in the future. And, the attorney provided me with some very valuable information…for free!