Due On Sale Clause
I am interested in investing in RE using 'subject to' but wouldn't this cause due-on-sale-clauses with most lenders. Plus the issue of keeping insurance in owners name is illegal as I understand it. Am I wrong here? I have contacted many RE attorneys and they all say it is not possible as it violates the American Bar Association Model Rules of Professional Responsibility. Please let me know what others have found with this. Thank you!
Otaymesa,
Glad to meet you.
Far be it from me to want the attorneys you talked with to violate the American Bar Association Model Rules. I mean we can't go around asking attorneys to violate their rules that do not apply to us in any shape, form or manner.
William Bronchick Esq., a highly respected attorney and investor has this to say about the DOS clause.
http://www.legalwiz.com/dueonsale.htm
When you learn the correct method of Subject To investing you will just look to make money, not what uninformed attorneys have to say. Remember the confused mind always says NO. This case applies to the attorneys you talked with.
If it still bothers you then my recommendation would be don't do it.
John $Cash$ Locke
[ Edited by JohnLocke on Date 09/10/2003 ]
John,
How do you ussually handle taxes and insurance? Do you just wrap them into the payments?
A
alubeck,
Glad to meet you.
Yes, I include them in the monthly payment my buyer makes.
Whether they are included in the PITI on the orginal loan or paid seperately they are included in the monthly payment.
I find if they are not in the PITI, you are still better having your buyer pay them monthly, than hitting them at the end of the year or quarterly with lump sum amounts.
John $Cash$ Locke
JCL,
The article mentions upward moving market rates, a phenomenon the market is currently experiencing. I understand the lender will act if the spread is lost.
Does the banks' securitizing the 15-30 yr fixed mtgs even eliminate some of this risk, or is it still evident?
Thanks,
TheFox
This is just an opinion, but we're probably pretty safe for a while. They may start to get more aggressive when the costs associated with foreclosure, and the risk appears to be worthwhile. The way I see it, calling the loan due is esentially a foreclosure which could take several months for them to gain posession of the property. There are lending restrictions placed on them by the Fed. I've heard that it's something like every dollar that they have listed as a non-performing asset prevents them from loaning out $10 in new loans, or something like that. That alone could be pretty costly for them to place the property that they are foreclosing in the non-performing assets column of the P/L statement, especially when the payments are being made on time. Most of the time, you will have a buyer in the home, and new financing within 2 to 3 years. How much of a differential in potential interest rate between the existing loan, and a new one would it take to justify this? I'm thinking quite a bit! I'm sure that some of the more experienced finance people here can either confirm my figgures, or correct me, but I don't think it will make that much difference in the decisions that the lenders will make. There are no guarantees.
Good Luck,
Jeff
TheFox,
Glad to meet you.
I teach in and out of the deal in two years or less. I am not a buy and hold person.
The interest rate is not going to fluctuate enough in this time period for a lender to be concerned.
This is the great thing about Subject To investing the interest rate can go up or down, when you are working within short time periods you make money either way.
John $Cash$ Locke
John Locke,
I want to get your book but one question Do you go over in the book about how to keep the property insured and if the insurance stays with the original owner and if so how does one communicate with the insurance company etc etc
Thanks for the reply,
lyn
LynLinz
The paperwork is in the manual to cover the inurance question.
John $Cash$ Locke
Call me a naysayer, or what you will, but this "subject to" is a illegal fraudulent practice where you are simply attempting to pull the wool over the lenders eyes ans well as the insurance carrier. In a earlier post john mentioned "Do not talk to insurance" Do not talk to lender" I have good returns on my foreclosures and rentals and actually buy the properties in order to control them.
Quote:
On 2003-09-17 09:44, jksal wrote:
Call me a naysayer, or what you will, but this "subject to" is a illegal fraudulent practice where you are simply attempting to pull the wool over the lenders eyes ans well as the insurance carrier.
This is whay everyone has there own way of investing. I have no urge to take out 2 million $ in loans, and have a liablity head ache. Some people do it the original way some have a (IMHO better) different approach.
Now as for Illegal... There is nothing illeagal about it. Next time you goto the bank ask your banker if they like to call loans due. It is there "Option" to call the loan.
Just my 2 cents,
Sire
Maybe not illegal, but shady to say the least. I agree that we all have our own expectations/tolerances/styles.
jksal,
Illegal? Shady? That's pretty harsh and I find it hard to believe that an experienced investor would utter such words about any investing techniques, at least without thoroughly researching it and being able to back up the comments.
Sub2 may not be your preferred choice of buying and that's okay. However, labeling it with negative adjectives borders on childness, especially when you seem not to know much about the method.
Illegal? Hardly, it's been proven time and again that it is perfectly legal. Why on a HUD-1 statement is there a place for 'Subject to existing loans'?
Shady? You'll have to elaborate more here as to why you think it's shady. Is owner financing shady, too? Borrowing funds privately instead of thru a bank?
Roger
jksal,
Glad to meet you.
So you prey on the downtrotten people who are being foreclosed on.
When you give a view that something is illegal, or how someone does business, you can understand the first paragraph.
There are many more investors out there who are not in your postition to use their own money or credit to enter this great industry, so you are telling them if you don't have money then you must be doing something illegal in your investing method.
Choose your words carefully, when you want to attack a person or their method of investing, or are you someone who can cast the first stone?
John $Cash$ Locke
John $,
Excellent choice of words....
jksal,
My 2 cents..... look its a way to bail people out of a situation and stop a foreclosure in some cases...you are helping people
making a little money...
and not doing a anything wrong.... if you were....half of us would be in jail right now!.....
dont like what being served... find another place to eat
investing "subject to" is neither illegal nor immoral. i've been in a situation myself when i wish someone would've taken the payments and loan off my hands. there are many, many more out there in the same situation who need our help. also, if you look on a hud-1 form under line #203 it reads "existing loan(s) taken subject to" this is a us dept of housing and urban development form. so it's very legal. it's just another way to invest. i've also spoken to people who think that buying forclosures is immoral. i disagree with them as well.
two things,
1. This site is 'the creative investor', not 'the conventional investor.'
2. There is no law that says the DOS clause cannot be violated. The only repurcussion is that the bank might call the loan due. That would be a big pain in the rear, but still NOT ILLEGAL.
Ronnie
For being "shady" I have had a LOT of thanks yous. One of our local banks know I am handling there loan (a subject 2) and there are glad to see me every month.
I will gladly accept the thank yous and appreciation for my "shadiness" as others like to call it.
Sire[ Edited by sire on Date 09/18/2003 ]
Where can I get an explanation of "subject to"?
I don't know what this means or what it entails.
Hi, DKRoff.
In short, you are buying the house 'subject to' the existing mortgage (In the seller's name.)
For bits and pieces explaination, go to the forums tab at the top of the screen and then go down to the 'subject to' forum and browse through some of the listings.
For the expert advice, buy John Locke's book. ($159 w/shipping.)
Ronnie
[addsig]
DK,
You take over the sellers payments (not assume the loan or ANY liability, taxes, insurance, mortgage, etc.) and find another buyer for the property. IF you can find one of these and someone will agree to it, go for it. In theory it sounds good, in practice good luck. finding someone to sign the deed over to you and keep teh mortgage in their name.
PSSSST. If you don't pay the payment that is o.k BC it is not your obligation on the mortgage. The seller is still obligated to teh payments and has given you the deed to his house!!
It is NOT OK if you don't make the payment.
1.) You're morally and ethically obligated to take care of the mortgage. You have given those people your word!
2.) Ask the folks in NJ who just got busted for doing sub2 deals and not making the payments. I'm sure the jailor would be glad to hand them your letters.
Ronnie
[addsig]
Triggering a due-on-sale clause may not be illegal or immoral, but concealing the fact that such a clause has been triggered could possibly be both. Various gurus urge different methods of concealing the transfer of ownership and/or occupant. I quote right from
Bronchiks site:
"The "due-on-sale" clause is probably the most talked about, feared and misunderstood topic in real estate. This article will dispel any misunderstandings you may have about the due-on-sale and suggest a simple, yet effective strategy to get around it "
He is telling students how to "get around it"
Each of those methods probably requires one or more parties to the deal to breach ethics or to commit crimes or violate common laws like fraud or breach of contract.
The motive for "getting around it" - however noble, is not justification.
But as you say - different methods for different poeple.
[addsig]
Just a little note & my 2 cents <IMG SRC="images/forum/smilies/icon_wink.gif"> which of course is just my point of view on the matter.
Subject tos have been done for longer than a long time, whether you know it or not. It is a prespective of the "context" of your understanding of the concept.
When someone sells their home on a contract for deed or owner financing but still maintain their original loan while the "new" owner makes payments to them that is a subject to.
It just not in the same format as the subject to when purchasing someone's home subject to a loan in thier name. One difference is that you make the owner aware what a subject to is......... and the investor having the proper ethics are essential and required to do this in a manner as not fall into the catagory of an "illegal" activity.
But the principals are the same. The difference is the loan is now basically held by a third party.
If you sell a property on a contract for deed or a owner fi and you still have a loan on it the pricinpal is technically the same as a subject to, the loan still has to be paid and the bank can call the note if they feel froggy.
But personally I have never heard of a bank in good times or bad doing so if all the payments, insurance and any other issues to maintain the loan in good standing are met.[ Edited by Dreamin on Date 09/24/2003 ]
GFous,
If you read the article by William Bronchick, Esq., the Esq, means he is an attorney. You will note he cites cases and learned opinions about the DOS clause. Your remark about "probably" what will happen I am sure comes from your training in law.
If you also take note this site is The Creative Investor not The Conventional Investor. So you may be posting on the wrong site.
You, I can tell have never been in front of a family who needs help, or watching an investor sitting with these folks with a win/win answer to thier dilemma, like to save them from the Sherriff coming to throw them out on the street, or save thier credit, or giving them money to get there life started again.
Ethical or moral, where have all the good guys gone, they are out their with Creative Investing Ideas to help people.
I would suggest you keep buying land and building structures that are built by the lowest bidder, I wonder how many shortcuts the lowest bidder takes in construction to become the lowest bidder? Oh well I save that one for another post.
John $Cash$ Locke
John,
You said:
If you read the article by William Bronchick, Esq., the Esq, means he is an attorney.
John, Thanks for your comments. I seem to have hit a nerve with you and I sure am sorry to read your response. From your previous posts I expected a more balanced response. Yes, I know he is an attorney. Did you think I did not know that? Being an attorney certainly doesn't mean he is moral and ethical, nor even correct - although he indeed may be all of these things.
You said:
You will note he cites cases and learned opinions about the DOS clause. Your remark about "probably" what will happen I am sure comes from your training in law.
What I said was: Each of those methods probably requires one or more parties to the deal to breach ethics or to commit crimes or violate common laws like fraud or breach of contract.
I stand by that. One of the parties, the mortgagor certainly, would have to ignore the intent of the DOS clause. To me, anyway, this is question of ethics.. to lie about it is misrepresentation.
You said:
If you also take note this site is The Creative Investor not The Conventional Investor. So you may be posting on the wrong site.
To me conventional investors work with straight mortgage deals or invests in investments other than real estate. There are many ways to be creative with out asking the other party be in breach of contract. I have been a creative investor for years.
You said:
You, I can tell have never been in front of a family who needs help, or watching an investor sitting with these folks with a win/win answer to thier dilemma, like to save them from the Sherriff coming to throw them out on the street, or save thier credit, or giving them money to get there life started again.
Again, however noble the motivation, that motive should not justify all actions.
[quote]
Ethical or moral, where have all the good guys gone, they are out their with Creative Investing Ideas to help people.
[quote]
Please don't try to imply that I am not a "good guy" or indeed that all creative investors are out to help people.
[quote]
I would suggest you keep buying land and building structures that are built by the lowest bidder, I wonder how many shortcuts the lowest bidder takes in construction to become the lowest bidder? Oh well I save that one for another post.
[quote]
John, I can't help thinking that I have misjudged this forum and it is not an open fourum but more a vehicle for you to sell your courses and books.
I am dissapointed if that is the case, because I have learned and shared on these forums.
[addsig]
Actually Gregg,
Mr. Locke probably has the same problem with your post that I do, and like all of us at times, John can take things a little personal.
Now my problem with your post (like jksal's above also) is that you do not speak from a position of knowledge or experience. You're simply giving an opinion. And while that's okay, you're implying that it's fact, which is not okay.
You said, "Triggering a due-on-sale clause may not be illegal or immoral, but concealing the fact that such a clause has been triggered could possibly be both." - First, how could it possibly be both. How could "concealing" it be illegal? Do you know? Actually, how could you conceal a "triggered" due-on-sale clause, which brings me to my next point, the term "triggered."
Triggered does not mean sold. In order for the DOS clause to be triggered, the lender has to notify the seller that they have violated the clause, and at the lender's OPTION, they have decided to call the loan due. The term "triggered" then means that the loan has been called. How exactly can you conceal that?
Also note that it's the lender's option to call the loan due. Nowhere is in the clause does it say anything about illegal, immoral, against the rules, etc. It does say that, if determined that the clause was violated, that the lender has the OPTION to accelerate the lien and call the loan due.
Finally, you said, " Each of those methods probably requires one or more parties to the deal to breach ethics or to commit crimes or violate common laws like fraud or breach of contract."
This is the comment that offends me the most. The reason is that you have NO clue as to what these methods are, much less whether or not they are legal or ethical.
However, by simply typing the words, you are trying to pass it has fact. The tell-tell giveaway is the term "probably" that you used. Probably means that it could be, but I don't know. You see, I used it at the beginning of this post because I was ASSUMING what problem Mr. Locke had with your post, however, I have no way of knowing for sure unless John tells me.
Opinions are fine, Gregg, but when you start saying things let, "this method is illegal, immoral, etc." it tends to upset those you have been doing it legally and morally for years. You had better be able to back up your words.
Also, suggesting the Bronchick is giving bad advice may be okay, but suggesting that his advice is illegal isn't only not okay, it borders on slander (libel since it's in print). That, my friend, unless you can back it up with FACT, is illegal, so tread carefully.
Good luck,
Roger
Gregg,
You have made a little over 100 posts, so you think you understand what this forum is all about.
I receive around 200 private messages every month here at TCI from posters who need help. I answer everyone of them without every saying buy my materials, or without getting a email address to spam them with junk.
I have received well over 5000 emails from students and non students over the past year from various boards, again answering every one personally regardless of whether they had my material or not.
I have close to 2000 posts here on TCI to help and answer questions, but once in a while some conventionally thinking person tries to interject their theory about creative real estate investing.
They have never been out in the trenches face to face with sellers and buyers, so they have no clue what this great industry is all about. No matter what you think, I post from personally having been there and done that.
I post from resolving thousand of problem questions from those who need help, which has keep me up to date in this industry, I think of it as educating myself as well as helping others.
Raj, is right sometimes I do take it personally, however I did not make statements as you did without knowing what is happening with the vast majority of posters who post here. Some do not have the money to develop land and build buildings as yourself, they are only looking for a better life.
John $Cash$ Locke
Gentlemen -
You are right, I do not know what this forum is all about. What I did state IS my opinion.
I appreciate the opportuity to dialogue about issues and apprectiate you allowing me the opportunity to do so. Thank you.
As to due DOS clauses - I will just stay away from them. There are certainly other ways to do deals.
Good Luck and good investing.
[addsig]
Gentlemen -
I would like to add a few things. I do believe I do speak from experience. I have bought about 35 income properties over the last 10 years, certainly not the 500 that John has, but some very creative deals. I bought and flipped only about 6 but mostly bought and held. I have been a sf landlord, a multi family landlord, and a commercial landlord. Now I am buying and accumulating as wellbuilding. I have done lease options, co-tenancy, owner financing, options, assignments, and sold contracts.
You make a very good point about why you guys take this personnaly, you have buying subject to for a long time with no legal issues etc. I understand this. My apologies. I certainly do not have experience in subject to. I looked at it years ago and decided it was not for me.
Thanks,
Gregg
Gentlemen -
I would like to add a few things. I do believe I do speak from experience. I have bought about 35 income properties over the last 10 years, certainly not the 500 that John has, but some very creative deals. I bought and flipped only about 6 but mostly bought and held. I have been a sf landlord, a multi family landlord, and a commercial landlord. Now I am buying and accumulating as wellbuilding. I have done lease options, co-tenancy, owner financing, options, assignments, and sold contracts.
You make a very good point about why you guys take this personnaly, you have buying subject to for a long time with no legal issues etc. I understand this. My apologies. I certainly do not have experience in subject to. I looked at it years ago and decided it was not for me.
Thanks,
Gregg
[addsig]
I think im in the right dept here...
ex lives in our home
ex wants me off the morgtage
I dont want OFF the mortgage
ex is going broke
bank is threatening
how do I convince ex to let moi do something constructive when ex doesnt/cant/wont think outside the box, so we dont ALL end up with nothing anyway?
I'm thinking sub to is the only way for us both to have our cake and eat it to.
I'd need to get my own LLC right?
How much is this process?
All suggestions welcomed.
Thank you in advance
Lets look at the big picture. What effects the upper management of a mortgage company. A fraction of a percent of there houses being taken subject to or a 4+% forclosure rate. Upper management has stock to worry about "the bottom line" not a handfull of investors take over notes. This was told to me by a branch manager of a local bank which we have taken the loans suject to. When it comes down to it its not the loan but the money that matters. If the bank is glad we helped and the owner is glad, where was the wrong doing? I see both sides but until you have ask the banker and ask the borrower, please try not to judge.
Here comes the hate email.
Best to you in which ever way you invest,
Sire
I agree with DaveREI...
It will cost the bank about 20% of the value of the property to foreclose. Not to mention that they prefer to being in the lending business rather than the forecloseure business as they make more money that way.
The seller will most likely loose the house, sell it at a fire-sale price, or end up making mortgage payments with a credit card or something similarly drastic. None of which are pleasant options.
Suddenly in walks "Mr. Sub. To Problem solver". The bank keeps getting paid, the seller gets this terrible burden lifted from them, and you walk away from the table with a smile on your face, a warm fuzzy feeling, and a thicker wallet.
How is this illegal or unethical??? I would love it if you could answer that. Sure if you were to call the bank and ask the peon who answers the phone and has been working there for 6 months they'll clearly give you the generic answer that the loans can not be assumed. Do the banks really care who the check comes from as long as they get their money when it's due? Nope.
Unethical….I don’t think so!!!
I just closed on a subject to I bought last year. The lady that sold her house was two payments down and headed for foreclosure. The tenant/buyer was a hard working man that got hurt on the job four years ago and needed help to qualify.
1. Seller saved from foreclosure- credit saved……..….WIN!!
2. Buyer loves house could not buy any other way…..WIN!!
3. Bank receives payments on time, paid in full……WIN!!
4. I make three people happy plus some fishin $$$$…WIN!!
I rest my case,
Beachboy
not to mention you're helping the bank. the mortgage gets paid on time every month on what would have become a non performing asset and they dont need to spend more money to forclose.
isnt that would any good samaritan would do???
I'm not an attorney and I haven't done any deals yet but from what I can gather from my research it seems to me that the main ethics & morality issue about the DOS deal is a non-issue IF full disclosure and intent is made by the buyer to the seller. When this happens and the seller understands the risk involved and is in agreement, there should be no moral dilemma. It would seem that the main problem arises if the buyer withholds information from the seller. I would think that this could also put the buyer legally at risk (for fraud?). But why withhold information and put yourself at risk if you can make full disclosure and still do the deal? I would think it just takes a little educating and selling by the buyer. The issue with the mortgage holder appears to be simply a matter of financial risk on behalf of the seller. If the seller stands to gain and is willing to take a calculated risk to do so then who is being hurt (let's face it - the mortgage holder never really loses)?
If the lender wasn't all for sub to why don't they require notification of sale instead of reserving there option to accelerate?
My guess is since they know ALL about what is going on they hold the option to call the loan if and when something goes wrong with our buyer without getting themselfs caught in the loop.
As far as the grantee not holding to the banks reserved intention, The lenders did not intend to drop intrest rates on credit cards stretching the card holders bad credit out for years while making less than agreed payments. Yet those national ad's run on TV all the time.
This morning there were 30 members and 60 guests on this site, any chance one of them might be a lender watching our "shadyness" looking to call some performing loans???
Since there are so many cents going through here, I will add my own.
I had bought a house last year, the mortgage company wasn't keen on having my LLC on the title. Every payment I have made though is a check from my LLC - as far as I can tell, banks don't care a plug nickel who pays them, so long as they get paid.
My $.02 - of course, I never have actually asked them
I recently purchased a home sub-to with a balloon pm to previous owners and thus have title now. This property was a pre-foreclosure with almost $4k in past due payments.
My point is banks are more aware than we think, and if a bank had any interest in enforcing a DOS clause it would be on a non-performing note that is in default. In this case I like usual had the owners sign an Auth for me to represent them, and have been negotiating with a national lender. They proboably have figured out what is taking place, but his only priority is to try and get me to pay the past due payments which I want to pay over time once I have the property filled.
This banker requested from me a written letter signed by the borrowers stating there why, what, how much, etc. Quite annoying and frustrating.
continued: the DOS clause is not a concern or issue but in a pre-foreclosure situation where it is only additional motivation for a lender to call the loan.
Just my million cents.. Chris
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