I’ve ready numerous discussions about the DOS rarely being called due. Rather than hoping the bank won’t call the loan due, I’m looking for ways of how to deal with the scenario in the event it is called due.
Would anyone like to share the exit strategies in these given scenario?
thanks in advance!
If the bank calls the loan due and the original borrower is not still on the title, you have four choices. 1) sell 2) refinance 3) deed back to original borrower, or 4) Deed/give it back to the bank.
[corrected paragraph below]
Actually, 2) won’t be a viable option unless the bank is calling the loan due JUST because of a title transfer. 3) isn’t a viable option either, without also bringing the loan current. If the loan is in default, it doesn’t make any difference whose name is on the title. However, only the original borrower’s credit it negatively affected.
Of course, in that event, the loan being called due will be the least of your problems after you get sued for damages by the original borrower for screwing up his credit rating. Just saying.
P.s. Frankly, if the due on sale clause IS going to be a problem for you, for ANY reason, you should should stay away from this niche.
Perhaps you may have misread my intentions. I don’t see this being a problem for me, but rather for the seller if they are opting for a wrap around mortgage to enjoy the long term cash flow.
As a side note, how will the sellers credit go down hill if the loan is called due? If there are no missed payments, this shouldn’t have a negative affect on his credit.
Lastly, you mention the loan not being called due “JUST” because of a title transfer. The truth is, they CAN call the loan due with JUST a title transfer.
You didn’t ask about the impact on the original borrower/seller. You asked, “for ways of how to deal with the scenario in the event it is called due.”
…and…
“Would anyone like to share the exit strategies in these given scenario?”
I gave you those… :cool
Again, if the DOS is going to be a problem, for any reason, for you, you should stay away from subject to transactions.
If you search through my postings on the due on sale on this forum, you’ll understand that the the DOS was not designed to discourage title transfers. It’s original intent was to force buyers to get new, high rate loans.
Before the DOS was a standard covenant in conventional loan docs, seller’s were helping buyers bypass 18% bank rates by financing buyers at 10% with the old loans left in place.
If bank rates go back up to 18%, I’m sure banks will start enforcing the due on sale clauses again. Today, seller financing is MORE expensive, as a rule, than bank financing. So the banks are already attracting the best buyers who can qualify for their lower rates. So calling a loan due for anything less than a default is counter productive for a lender.
BTW, calling loan due is NOT the same thing as a trustee sale. There are hundreds of thousands of delinquent borrowers who’ve had their loans called due, and the banks are still reluctant to redeem the loan(s). Of course, this has a lot to do with the care of the property. If the borrowers are taking care of the property, and there’s no equity… the banks are REAL slow to exercise their options.
This brings me to my last point. The DOS clause is an OPTION, not a requirement, for the bank to exercise in the event it thinks there’s more money to be made, or it thinks it needs to protect it’s interest in a property from loss.
“If bank rates go back up to 18%, I’m sure banks will start enforcing the due on sale clauses again” - This is exactly what I was getting at. :smile I didn’t say the DOS was a problem for me, however, I just the possibility and risk to be known to the seller. With that said, I would like to be able to present the following:
Mr Seller, the DOS is where the bank can call the loan due. What this means is…
The chances of this happening are slim, however …
If the even the loan is called due, here is how we will handle that
that’s essentially what I was looking for :biggrin
If we ever have this conversation going on with a seller, we’re screwed. We’re dealing with a gear head, as it were, and evidently the seller is more interested in something beside getting his house sold.
We should be focusing on the sellers that need to sell, not the ones that have options.
Meantime, you’re describing a situation in which the seller thinks he’s got options other than to let you take over his loans, and get rid of his deed. Why would you waste time with this kind of seller?
There’s so many deals out there where the sellers are ready to hand us their deed(s) if they believe that we will make their payments that it’s ridiculous to spend time with those who don’t trust us, or think they’ve got alternatives, or are concerned over a DOS situation.
And it’s not good business to play “Mr. Professor” with a given seller and explaining all the gear-movements of a deal. All the “real” (profitable) sellers want to know is how “sure” is this closing, and how much are they going to get, and how fast. Not, “I’m so afraid that the bank will call my loan that I’m just not sure I can do this deal without over-thinking this thing to death, and contemplating and contemplating, over-thinking some more, and talking with my best friend’s boss who knows investing, and the checking things out with my Realtor buddy who once sold a house to a friend who had a niece who was an loan officer at a bank who knows about real estate loan things.” …Ummm …Nah.
Focus on the sellers that are so out of gas with a couple of failed escrows that they just need out, any possible way …and will gladly accept any alternative you offer. Leave the high maintenance sellers for the amateurs to grind on. Just saying.
I’m going to respectfully disagree. This seller doesn’t have to sell, however, they are open to the benefits that seller financing can provide to them. There are sellers who have free and clear properties as well as properties with small mortgages that don’t “need” to sell. I deal with motivated sellers all the time and they make structuring deals easier, however, this doesn’t mean we should avoid sellers who don’t “have to sell” but see owner financing as a viable solution to their needs.
In this scenario, the seller is able to collect monthly payments without the headaches of a landlord. His plan not to be cashed out but to enjoy monthly cash flow. I think it’s important for him to know the potential pit falls of seller financing (DOS), despite the small likelihood of occurring (expect the unexpected). That way there is a plan in place if things don’t work out as originally planned.
Keep in mind we are talking about someone nest egg here (multiple properties), not just one property. I think it’s understandable that he would want to know the full specifics. I don’t think they should be dismissed for wanting to know the ins and outs along with any plan B if such issues would arise.
ryanpal,
Obviously we’re talking passed each other here.
You’re now presenting specific scenarios that change the nature of the discussion. I wasn’t talking about negotiating with motivated sellers who were considering seller financing. That’s another ball of wax.
I was talking about the scenario where an unmotivated seller, as you’ve put it, was balking at the DOS clause as a tripping point in giving us their deed.
There’s not much to misunderstand about the DOS. Every hack seller out there knows if his loan is assumable, or not. He also knows that his credit is on the line if the payments aren’t made on time, or at all.
So, the only thing you have to say about the DOS is that you’ll make sure the payments are made on time. And then explain why that’s true.
If you’ve assembled a good credential book, it will have testimonials and referrals that tell what an honest, trustworthy person you are, what deals you’ve done, and your financial statement. If this is done correctly; you’ve presented your case; achieved agreement on the important negotiating points; then you should have answered the DOS question already.
I think I assumed this last thing was true with you; that you answered the DOS question as part of your pitch, rather than waiting for the seller to ask about it.
For example, when I make a pitch to a seller, I’m meeting objections during my presentation before the seller even thinks of them. I am also getting agreement along the way. If I come to an objection, then I meet that objection, table it, come back to it later, or pack up.
That all said, by the time I get to the end of my presentation, the DOS is not an issue in the seller’s mind. So the the only thing I have to do is get the seller’s approval signature. That’s simplistic, but it naturally and elegantly removes the DOS issue.
I could say more, but the bottom line is to meet this objection, along with any others you expect, as part of your pitch, and before the prospect asks.
:beer
javipa,
yes you are correct. part of my pitch was to explain all the possible downfalls, address how we would handle them and proceed forward if the seller is still on board.
that’s basically my intention for this post. to be able to inform the seller the solutions we have available assuming the worst case scenario. i didn’t want to complicate things, but there should be a few exit strategies. that’s the intent of this this forum post :cool
Ryanpal
I understand what your saying and I too have been here before. Javipa gave you the 4 methods to resolve this problem in his 1st post.
This would be the methods to consider if you or the buyer were taking the property subject 2, but you can also control the property in ways that dont violate the DOS clause and yet allow you to control the property for your benefit.
The 1st way is a lease and an seperate option. The lease will not violate the DOS if it is no longer than 3 years. The seperate option will not violate the DOS either, as it doesnt officially transfer title at that point. It only gives the buyer the rights to buy the property for pre-set terms in the option contract that is completed today.
The other way to avoid the DOS clause is to use a Land Trust…I have looked at and feel confident in Bill Gattens Equity Holding Land Trust system, you can find him here, www.landtrust.net, this land trust is just one of many out there, so if you dont like his system or fees or whatever, you can use a different one with success as well. The point is that a properly structured land trust is a viable option to avoiding the DOS clause.
To answer your question about the current owners credit in the event the lender calls the note due based on the DOS clause…This will show up on his credit as foreclosure proceedings started…and eventually if its not corrected it could show as a foreclosure on his credit. This is true even if the payments are being made on time. So you are correct to try to have provisions in place to prevent these issues…I personally disclose the heck out of it to the seller in writing and put them in the position that they are signing off and taking the responsibility for the potential problem if we are structuring a deal in that way???
I hope this helps.
Put the home in a trust. That will not put up any red flags to banks as it is a common and appropriate financial planning tool. Get a power of attorney for the trustee by the owner on record to deal with the bank loan. Then you will not have any issues with due on sale clauses.
Trust laws are most interesting and helpful. You could even file a quiet title action, then sell the trust, where the only trust asset is the house. This is not just theory, I’ve done this numerous times.
I am in the middle of another $2 million + commercial property deal and will do the same as above to resell property.
Learn trusts and apply the knowledge and you will make plenty!!
Hope this helps.
Rob
Why not get written permission from the Lender and not hide anything?
That would be called an “assumption.”
These loans are not assumable that we’re talking about here. If we were to inform a bank that, "Oh, by the way we’re taking title to a property you have a loan against, and we’re not going to assume your loan, because there’s no equity, and…it’s not assumable anyway …and we’re not interested in paying you a higher rate, or points …even if the loan were assumable. Nor do we want to pay for failed appraisals, superfluous mortgage broker fees, and put more money down just because you want want to “feel’ more secure …and just to add insult to injury, feed your loan servicing company more money” (which is the entity in the food chain that would certainly want to call the loan due to generate fees for themselves in the first place…). Uh, no.
That would be the stupid move.