Sub 2 & the Due on Sale Clause - Posted by Luke Hoppel

Real Estate Investing
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Posted by Kevin - WA on June 04, 2006 at 18:35:19:

Luke,

I suppose that what you say is possible, just unlikely.

I would find it hard to imagine that Countrywide would call a low-interest note due, one that is performing, in hopes that you will re-finance at today’s higher rates. If you do that, you will likely choose Chase or WAMU. So, they would give up a low-interest note for a no-interest note. That would not make much sense. There are far too many lenders out there for this decision to be made, I would think.

But, having said that, I have seen some dumb banking decisions…

K

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Sub 2 & the Due on Sale Clause - Posted by Luke Hoppel

Posted by Luke Hoppel on June 04, 2006 at 01:55:55:

Ok, back to the oh so famous topic of buying Sub2 and getting around the Due on Sale clause.
I understand that you can put in a land trust to avoid this but I also understand that a lot of people are just saying “screw it” and hope the banks don’t call it due. My question is for the later. Are you actually doing this? Are you recording the deed and getting insurance and hoping the bank doesn’t call the loan due?
I have no problem with this because from my understanding the banks rarely call the loans due.
I just want to hear from people who are doing this and the ratio of loans actually called due and if it seems to be a certain lender the majority of times.
Also are you concerned that with the rising interest rates, the banks will call more loans due to create new loans at a higher interest rate?
Oh, one more thing. Do you know if banks release data on loans called due? How would one get it? Perhaps there is a way where we can analyze the data from different lenders to see which ones are more strict on the due on sale clause…Just a thought.
Any input is always appreciated.
Thanks,
Luke

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Re: Sub 2 & the Due on Sale Clause - Posted by gerald(tx)

Posted by gerald(tx) on June 04, 2006 at 12:59:19:

I know a local guy who has done 280 and never had a loan called. J. Locke has done over 500 and never had a loan called. A couple of dozen myself and never had a loan called.

In fact, I only know one live person who had a loan called, only because he worried the s**t out of the lender to accept his documents. I have heard of other fictitious anecdotes spread by gurus trying to peddle their asset protection courses. When called to task, they could not verify their stories.

As said by the other posters, there is a risk, but so miniscule one should not bat an eye over.

gerald

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Re: Sub 2 & the Due on Sale Clause - Posted by Eric (MI)

Posted by Eric (MI) on June 04, 2006 at 11:59:34:

I don’t know of any resource you can look up to find out what loans where called, by whom and when but I could be wrong. I have never heard anyone mention anything about it anyway.

As JM101 said it is a calculated risk and not much of an issue if you only have a couple and have the means to refi or get a new loan. But what would happen if you have 10, 20 or more and rates start rising and lenders decide it is better to call all the 5-6 percent loans due that have unauthorized transfers and such in favor of new higher interest rate loans? You should always take steps to protect yourself.

I am not an expert but that scenerio does not look promising to anyone in that situation regardless of the odds of it happening.

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Re: Sub 2 & the Due on Sale Clause - Posted by JM101

Posted by JM101 on June 04, 2006 at 04:32:12:

Luke,

It is not just a matter of saying ?screw it? and hope for the best, but then these DOS ?scare tactics? are really blown out of proportion.

I am one of those who is not concerned with the bank calling the loan due, and here is why. Is it a risk ?yes of course it is, but a calculated one.

If and when a lender decides to call a loan due, he better have a good reason to do so. He has investors who are expecting to make money with him and he has to answer to them as to why they are not making money on an up to date performing loan.

A loan that is in default should be called as the lender is in trouble along with the person who has defaulted on that loan. A loan that is current however is something different. Why would a lender call a performing loan and lose money for his investors? That makes no financial sense. It costs the lender money to foreclose on a house, then the waiting time to re-lend those funds, holding costs for that house, repairs needed, commissions paid, etc.

So what does happen if a loan is called? You or your seller will get notices that the lender is accelerating the loan and it must be paid off by a certain date. This is No Big Deal, as you won?t have to pay the loan off tomorrow or the next day?you have time to rearrange for new financing on the house. If you need more time, just contact the lender and ask for it. You have to remember that the lender?s only alternative, if not paid, is to foreclose on the house, and depending upon state law could take quite a while and is quite costly on the lender?s part.

So when I say it is a calculated risk, what I mean is to ensure you always have a way out.

I always make sure that when I buy a property Subject To that I have a way to refi it, if by any slim chance the lender does decide to call the loan, either by having the cash available to pay off the loan, a lender to get it refinanced in a timely manner, or even another investor to help out.

Hope this helps

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Re: Sub 2 & the Due on Sale Clause - Posted by Eric (MI)

Posted by Eric (MI) on June 04, 2006 at 17:05:07:

“As said by the other posters, there is a risk, but so miniscule one should not bat an eye over.”

It is miniscule for sure and investors aren’t the ones who are typically worried about it from my experience. I was suprised once I got off the couch and started talking to homeowners who had their property for sale and the “Due-on-sale” clause came up probably about 50% of the time by them. Maybe that was an anomaly but it did suprise me.

I also have a low tolarance for risk right now. I have three children 3 and under and I don’t want to put myself in position where, if everything falls apart, at best I lose everything and can’t feed my children or at worst get locked up for some sort of fraud (no, I do not think that will happen btw) so I try to keep things as low risk/high reward as I can. So my answers will always reflect that personal bias for the time being.

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Re: Sub 2 & the Due on Sale Clause - Posted by Luke Hoppel

Posted by Luke Hoppel on June 04, 2006 at 14:13:40:

All good points. Thanks for your well thought out input.

You mention “Why would a lender call a performing loan and lose money for his investors? That makes no financial sense. It costs the lender money to foreclose on a house, then the waiting time to re-lend those funds, holding costs for that house, repairs needed, commissions paid, etc.”

My concern here is that the lender will call the loan due to create new loans at higher interest rates. The interest created over 30 years at even 1 or 2 points higher is huge! Would that offset the cost of actually foreclosing and re-selling? I’m not sure but perhaps if the lender called the loan due you could “threaten” back by telling him that you can easily continue to make payments but you would be unable to foreclose. That may be enough incentive for the bank to let it slide. I’m just kind of thinking out loud here.
I think it’s great that you bring things up from a banks perspective though.
Great Stuff!
Thanks,
Luke

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Re: Sub 2 & the Due on Sale Clause - Posted by TomC (MD)

Posted by TomC (MD) on June 07, 2006 at 16:39:36:

I think the days of lenders calling loans due to get higher rates is pretty much over. This is because most lenders don’t hold the loans!

What they do is re-sell the loans to Fannie/Freddie and retain the servicing function. They earn a monthly fee for their servicing.

If they call the loan due, they lose out on the servicing revenue. So it’s in their interest to keep the loan in place as long as it is performing.

TomC