Eghad! My username is now tarnished. Can I file a defamation of character lawsuit? 
;D
Framer, yes REI is a risk/reward business. And as with any other business, the business venture itself is âriskyâ because there are no guarantees for success. However, not planning for something that could happen, however remote a chance that you think that is, is not risky, itâs just plain stupid.
In REI, you need money and credit to truly be successful. Now, neither has to be yours, but you have to have access to it, at least at some point. Again, not planning for that isnât considered risk.
I canât go off of restartâs post of âwhat would I doâ because it simply wouldnât happen that way. Either the post is plain made up or itâs missing some very important details that we arenât allowed to see.
Also, itâs hard to say âwhat would I doâ if a loan is called because they are called for different reasons, and rarely are they called simply because the property was sold to someone else.
However, if that was the reason, then you have plenty of time to refinance, if you (or a partner) has the credit to do so. You could also try to formall assume the loan, which would be the most likely scenerio, as that is probably what the lender is trying to accomplish anyway. Here, your credit is not as important because a) youâve probably proven that you are going to be having made the payments 3-4 months anyway, and b) the original seller usually is not removed from the note, you are just added as additional borrower. You could also do the same with your end buyer.
If the loan is called, deeding the property back to the seller at that point probably wonât work. The sell already happened. You canât undo it.
Selling the house to another investor would because essentially you are doing the same as taking on a partner (getting someone to refinance the place).
There are alot of options out there, but the most important thing is to prepare for the problem BEFORE it happens and then itâs not really a problem if it happens.
Raj
Agreed.
I was looking for constructive answers to what I thought was a Valid question.
But I doubt anyone who has really done this has ever had a property called. or if they did they would not want to talk about it.
I have heard that when the bank calls a loan due they call it due in 30 days. is that enough time to refinance?
What would happen if you could not refinance? You say that you can not deed the property back to the seller. is this something that the bank would find unacceptable somehow? Would the bank really go into foreclosure on it?
Finding a money partner on a lot of the subto type houses might be hard to do. Many as I understand are the kind that has no real equity. If they called it due and it was 85% to 90% or even worse as the typical Sub2 deal seems to be then there is little room to cover the new financing costs, at least on a investor type property. All or most of an investorâs profit would be gone.
Would you let it go into foreclosure and try to offer a short sale on it? Your name is not on the mortgage but it or your company is on the deed. Would a bank go for you buying the mortgage on a discount?
That leaves the buyer you have put in there. Often the buyer is buying from you because they have bad credit. One of the things that you can offer the buyer is a chance to rebuild their credit, but this usually includes time for this to happen. If the DOSC or a foreclosure comes up in the first six months I would think that is unlikely to happen, but I am not a mortgage broker.
What triggers a DOSC. Supposedly the transfer of title. But does a bank actually look at the title? The conventional wisdom says no, unless it is real small lending institution maybe? MAYBE the flags were first raised because the seller had been continuously late and you came along and bailed him out, even made up his back payments and they were checking for title transfers? I doubt that anyone from the bank hangs out at the county register of deeds, but in this the day of the internet, they could do it from online, even subscribe to a service if they wanted to. Does First American or Chicago title have that option?
What if your bookkeeping got screwed up or you did not verify that the check actually got there. Would a long history of late payments in addition to your late payments be enough to have them check it out?
What about property taxes. If the bank makes the payment from an escrow account does the bank actually look at the name on the tax statement to double check that they are paying the right taxes.
as you said, âThere are alot of options out there, but the most important thing is to prepare for the problem BEFORE it happens and then itâs not really a problem if it happens.â
I agree. I want to know what all of the pitfalls might be, and prepare for them. That is the purpose of this post. But as we can not prepare for every eventuality what makes a good exit strategy as an alternative.
Itâs also odd that this very question was posted (and subsequently locked) on another forum by someone that likes to tout land trusts.
Now itâs being asked about here.
Except this time, a new member just so happens to chime in
about his/her 2 deals being invoked.
The olâ wizard hasnât been spotted in a while.
StrangeâŚ
The âolâ wizardâ doesnât live here anymoreâŚbut we have our suspicionsâŚ!
Keith
I have heard that when the bank calls a loan due they call it due in 30 days. is that enough time to refinance?
Sure it is. First, because itâs due in 30 days doesnât mean that you only have 30 days to get them there funds. You get 30 days to pay it off BEFORE they start the foreclosure proceedings, which could take from 3-9 months depending on your state guidelines. Second, if youâve planned for this, you should be able to refinance no problem within 30 days. Personally, the fastest refi I have done is 5 days.
What would happen if you could not refinance? That depends greatly on WHY you could not refinance.
You say that you can not deed the property back to the seller. is this something that the bank would find unacceptable somehow?
No, I said that it PROBABLY would not work. I donât know. Iâve never had to try something like that. However, it could very well work. Itâs an option to try at least.
Would the bank really go into foreclosure on it?
Again, depends greatly on WHY they are choosing to call the loan due in the first place.
Finding a money partner on a lot of the subto type houses might be hard to do. Many as I understand are the kind that has no real equity. If they called it due and it was 85% to 90% or even worse as the typical Sub2 deal seems to be then there is little room to cover the new financing costs, at least on a investor type property. All or most of an investorâs profit would be gone.
Finding a money and/or credit partner might be hard to do IF you wait until you actually need one. Plan ahead! A sub2 deal can have lots of equity or negative equity. Thatâs all up to the investor and their personal risk tolerance. Me, I wouldnât take a sub2 deal if it had less than 15% minimum equity in it.
Would you let it go into foreclosure and try to offer a short sale on it?
Again, another possibility. However, at that point, you may also have to face the seller and their attorney for letting the sellerâs credit go bad.
That leaves the buyer you have put in there. Often the buyer is buying from you because they have bad credit. One of the things that you can offer the buyer is a chance to rebuild their credit, but this usually includes time for this to happen. If the DOSC or a foreclosure comes up in the first six months I would think that is unlikely to happen, but I am not a mortgage broker.
Bad credit buyers is a possibility as well, but that isnât the only reason buyers choose owner financing. They may have good credit, but just moved to the area and donât have a job so they canât qualify for financing. They may be self-employeed and hard to prove income. In short, there are a number of reasons that you may have the buyer that you have.
Also, if youâve planned ahead, then you should have a mortgage broker/lender that works with bad credit buyers. Iâve had buyers that were one year out of BK with a 550 credit score get 100% financing. Again, if the buyer is paying the monthly, itâs very possible that the existing lender will simply add them to the note and continue on, too.
What triggers a DOSC? The âtriggerâ is some person in the bank that has determined for some reason that because the property that this loan was based on was sold that it is in danger of becoming ânon-performing.â
Some lenders may look at titles from time to time. Some have recorded instruments that say if the title changes, that the closing agent is legally required to notify them. What usually causes a note to be called is payments are missed AFTER the transfer of deed, insurance lapses, or some other incident that the investor simply should not have done ( or should have paid) which âflagsâ this note as dangerous.
Most scare-mongers on this subject say that more and more lenders will start calling sub2 transactions due because they can then âre-lendâ that money out at a higher rate now that interest rates are rising. Maybe some lenders are that short-sighted, but it costs banks alot of money to foreclose. Itâs simply not good business to foreclose a performing note. Itâs simply stupid business to foreclose on a note that maybe wasnât performing and now it is. Would you evict a tenant because the check came from someone else?
It would be much better for the lender to allow you to deed the property back to the seller, if that works. It would be better for you, the end-buyer, or both to simply be added to the loan and even the rate/terms to be adjusted with a loan modification rather than a foreclosure.
Raj
Yet another good post by Raj.
To add to this, bear in mind that most lenders receive a servicing premium for the loan but the actual interest rate that they lend the money out has been paid by the secondary market.
To that end, if rates are increasing then they donât necessarily make more money âlending out money at a higher rateâ. The way the secondary market works is this:
Lender loans borrower say 100k at 6.5% interest. Lender sells that note on the secondary market and gets a yield spread of say 1% of the total loan value (in addition to the principle) and retains servicing rights (between .25 and .75% of the loan value). Lender receives payments from borrower and âpasses thruâ principle and interest payments (less the servicing premium) to the final investor.
If rates increase quickly a lender can lose a good deal of income from the yield spread (the difference between what rates the final investors seek and the rate of the actual loan). But, in all fairness, if rates go up and the lender lends money at 8% instead of 6% two years earlier the yield spread is likely the same so the lender does not necessarily make more money. Typically a lender makes more money if rates go DOWN because the value of the note generates more yield spread. However, in general the actual rates matter very little to the lender/servicer, itâs the total dollar amount that matters.