Due On Sale And A Wrap.need Help!
I thought I would put this in the sub2 forum since the DOS thing comes up in here often.
Lets say you have gotten a NOO loan for a particular piece of property. Obviously if you rent out the property you would not have a problem. But lets say you wanted to specialize in selling your houses to people that could not qualify, meaning selling on a wrap (making me a leinholder too). In order to sell on a wrap you would need to record the deed into your new buyers name and the mortgage. This would or could trigger the DOS clause right? how do you get around this risk?
Other options other than lease option or contract for deed please.
What I am trying to say is I am the investor who got a NOO loan in my name and i bought the prop in my name. Since I have great credit and big income and deal with a small bank. i can get 4.7% for 15 years. what I am wanting to do is market these homes to people with not so great credit but are in a better place than, say 3 or 4 years ago. Now I am going to sell these or advertise as no qualifying...blah blah. My interest rate to thes folks will be 7.5% to 9.9% for 30 years depending on MY criteria for credit worthyness. I do not want to offer a baloon because With a reasonable rate and price I hope it goes to term. I want to use a LSC so the escrow and the interest 1099's dont get screwed up.
you see the houses I buy or I should say have bought are 75% of FMV. I will sell for 95% to 110% of FMV. this way if it goes to term i am big winner but if they re-fi im okay too.
you see if I deed the property to the new buyer I shift liability to them in the event of a lawsuit. If the wrap is recorded then there interest is secured in the event something happens to me (as opposed to CFD). AND the property is leined to the max value.
How would you structure the wrap as not to trigger the DOS since my loans are at such a low interest rate the bank might want to have reason to this? especially if interests rates go up
[ Edited by WheelerDealer on Date 01/30/2004 ]
You could try this.
Place the property in a Trust.
As your Trust is then creating the wrap, all that needs to be done is to assign the beneficial ownership to the "buyer".
There's no need to issue a new Deed.
I would always make it a 3-year balloon.
Regulations can change, and if need be you can always adjust your conditions at some point.
Hope this helps.
[addsig]
Yes, it could trigger the DOS, just like any other method of owner financing, including L/O's and CFD's.
CFD is the safest way (for the seller) to create a wrap around because title stays in the seller's name. IF by chance the DOS was enforced, both the seller AND the buyer could be trying to locate new financing. Not so if you actually deed the property to your buyer.
IF L/O and CFD's are out, then their are two methods that come to mind.
One is selling subject to the existing mortgage (SUBJECT TO METHOD). You'd either collect a downpayment or a 2nd note (or combination) for the difference between the existing loan and the sale price.
The second method would be to create an actual lien/mortgage/deed of trust against the property. If you did this, your deed of trust could be for the full amount, but it would still have to be a 2nd lien, junior to the existing mortgage, which means that IF the original lender would foreclose, you'd likely lose your $$$.
Roger
I expanded the original post to include what I wrote here. Sorry guys start from the top!![ Edited by WheelerDealer on Date 01/30/2004 ]
I of course here in California sell such situations on a Land Contract and note.
The note terms, not as harsh as yours about 6.5% for same period of time as your existing loan on the property. I adjust the payment to reflect the higher interest and may in fact take $100 over the normal payment. You do not want to go upside down on your due date. I may hold the Land Contract unrecorded or recorded depending on the bank who has my note. A small bank that does not do a periodic check of titles under loan I would record.
A Wrap around in my mind is used in a slightly different situation. I actualy pass title and it is recorded to the new owner. they pay my wrap around which has a higher interest and a higher amount and a higher payment. I again pay on the first and an agreement is made as to tax payments etc.
Thats it. These are the instruments I use or did use the most. There are some esoteric ones but I do not suggest as they are cumbersome and only applicable to a few situations.
By the way have you spent the 700K yet?
Cheers Lucius
Harsh??? You should see the interest on car loans per regulation Z up to 26.0% or 15% ad on.
You are very generous. Most cant get a 6.5% loan. Heck my loan before I refi'd was 7 3/4%
yes, I have spent it several times. At least once a month. But, they just keep giving it back to me!![ Edited by WheelerDealer on Date 01/30/2004 ]
Wheeler,
There is absolutely no way to do what you are trying without "triggering" the DOS, short of a) finding a loan without one (good luck), or b) not having a loan on the property in the first place.
The DOS is triggered anytime there is a change in ownership or interest in the property. It is up to the lender to decide if they want to enforce the DOS or not. Even if they find out about the sale or transfer, and they don't choose to enforce the DOS at that time, they can change their mind at any time in the future and do so.
So, IMO, it would be unwise to give away the title until you've either paid it off, or the end buyer can buy you out.
As far as liability goes, that's what insurance is for. You should require that your tenants or buyers keep and maintain a contents and liability insurance on their home. That's the first line of defense. You should have fire/dwelling policy and a blanket liability policy. That's your second line of defense.
Liabilities for accidents around the house falls on your tenant/buyer. As far as being sued, don't do things that would make people want to sue you.
Roger
Actually, if you (or your entity) is the deeded owner, your non-owner occupied, or "landlord" policy is the "first line" of liability protection in most cases. Raj is right, though, let the insurance serve it's purpose. The article below may help clarify the insurance issue as well:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=472
Hope it helps, and good luck.
That was a very informative article! Thanks very much for taking the time to post it.
Thanks again,
OnTheWater
No problem. Glad it helped.
I know you are all skirting around the edge of the Due On Sale Clause now present in most mortgages.
A small while ago. I sold the property rescued from the grips of a Simon Legree type foreclosure. The loan had gone on as a 95% of house value.
Due to the times the value had increased to the point that the loan was now about 75% of True Market Value. The interest on the loan was 6.2% and it had been written for a period of 30 years.
I sold the property to a nice couple and I at their request applied to the loan holder to accept the new owners.
They made the usual threats and statements with which we countered by saying submit your demand for payment in full and we will re finance and you will of course lose a now very good loan. They wanted two points and we ended at one point which yours truly payed.
The young couple recently renegotiated one more time and the interest rate is now 5.2% and the payment plan 30 www.years.Their cost was a waive of all cost other then one point. Yes they waived the title cost too. Now you know the title company extended them an update on title policy as an accomodation.
I list this incident as something that can be done given the right circumstances. It does not mean that you must for ever hide from the dreaded DOS clause. Once again the one necessary ingredient. The ability to Negotiate.
Cheers Luicus
Well all.
Here is an update. I had a meeting with my banker and this is what will come of my question.
First I will get a line of credit to purchase propertys and to use $$ to do any rehabs. The property will be collateral to access the LOC. After I max out the LOC the dollar amounts will be converted to a 15 year ARM on each property. I will in turn resell these property's on a 30 year ARM to my buyers. My loans from the bank will NOT have a DOS in them just mine to the buyer I sell to will.
Someone said I could not avoid this. I did.
This is great news for me. If the interest rates get to high then my buyers will refi and I get cashed out. If they do not then I will scoop the difference in payment all the way up the ladder. If I get the property back that is okay too, because I will not have any of my props financed for more than 50% of current TMV anyway. Either way it will be win/win. I get to help out people with not so great credit. And they get to help me with cashflow.
_________________
B.G. & Wheeler D. LLc Inc. and Trust
(A division of: Half Vast Enterprises)
"Most american millionairs today (about 80%) are first generation rich"[ Edited by WheelerDealer on Date 02/08/2004 ]
Hey Wheeler
The financing that you mentioned, does a line of credit have the same guidelines as a first mortgage loan would have? I thought that if you were to get a line of credit, it was to do what ever you wanted to do (with the cash)
The property is the back up in case you don't perform. If you took out a regular 1st mortgage, would that have the same criteria as a line of credit (when it comes to the dos clause?)
Just curious
In some instances you are correct. For example I have a 30k line on just my signature.
However,
A line of credit as big as the one I got needs to be collateralized. So in order to act fast and not have to go through any closings including appraisals etc. I can access the money and then convert to a mortgage later.
Remember, LOC's are not forever. They go up for review before the board and the auditors to be looked at to see if they are a good risk for the bank periodicaly. So, the bank could descide to call it due for no reason other than they want to.
However a mortgage is a different story, You and the bank are locked to a contractual period of time but does not provide the ease and access a LOC does. On the LOC I can make interest only payment if I choose, untill I sell it, wich will lower my holding costs along the way. I only pay one point for the LOC so if I choose to flip propertys the more I do the less my cost is per transaction. So in this case I would never convert to a mort.
This is less costly to the bank and then of course to me because when i swap the type of loan (LOC to Mortgage) I will have no closing costs because the bank already has the collateral.
And to answer your last question the answer is NO. That is the part that I negociated!! So, it is my and the banks interest for me to convert quickly.
_________________
B.G. & Wheeler D. LLc Inc. and Trust
(A division of: Half Vast Enterprises)
"Most american millionairs today (about 80%) are first generation rich"
[ Edited by WheelerDealer on Date 02/08/2004 ]
WheelerDealer,
Just one clarification please. When you sell the property, is your buyer taking the property Sub2 or is he assuming your 15 year Mortgage? I assume its Sub2, Correct?
Neither, I am going to sell on a 30yr note with an interest rate 2-3 points over my interest rates based on credit criteria that I am in the process of setting up. I will transfere title and record the wrap. No sneeky business here. After i have accumulated several property's i am going to visit with some credit brokers and get the people referred to me that they cannot get "done"