How To Avoid Due On Sale Clause W/seller Financing?
I am currently buying a sfr for $49k that is appraised at $68.5k. I know I have several options, what I am interested in doing is selling it and financing it myself. How would I do this and get around the due on sale clause that is in my mortgage. I know this is similar to the sub2 method, but I don't want the buyer paying my mortgage, I want them paying me. I have searched for this info. and haven't found anything that addresses it, thus the post. Thanks for any input. I also considered lease/option but like the idea of holding a note where I don't have to pay for the maintenance or property tax like a landlord does.
Scott
Look up "Contract for Deed" or "Land Installment Contract/Sale"
Either one will allow you to accomplish what it is that you want, however, if you read the DOS clause carefully....it does state that if the interest transfers, then they have the right to call the loan due. So, if you sell using either one of the contracts above, the bank will have the right to call the loan due if they found out.
I am not trying to scare you, just trying to be totally honest with you. I invest the sub to way and make payments directly to the banks with my name on the checks. I am not all that concerned with the DOS personally, but it seems that you are. I have not heard of a case where the loan was called, but you have to make your own decisions. The DOS scares some while others are not all that concerned with it....I am part of the latter.
Would a wrap-around mortgage work also? I'm not very familiar with it, but I think the buyer pays the seller, then the seller pays the bank, right?
JohnCl
Scott,
If the buyers are making to payments directly to you, then I highly suggest keeping track of all payments made. You should keep track of the amount paid, date paid, late fees (if applicable), etc. You have to treat this like a business transaction, so the buyer's feel more secure about making payments to you. And please don't do what some seller's do and that is keep the money and not pay the mortgage! You don't want to get a bad name from the buyer's for doing them wrong. You especially would not want it to come back and bite you in the butt...
Tanya
In Alabama I'm familiar with a bond for title, like a contract for deed. I've been told by a lawyer that the courts have some trouble knowing how to handle these in some cases. This lawyer will close on them, but refuses to record them other than they're on file in his office. The buyers never get the deed but they still can claim the deductions, etc. (but not a homestead exemption in their name and yours will have to be removed). There are a couple of mortgage companies that will do a mortgage on them if by proof of payments, cancelled checks, after a years on-time payments can be shown. The property taxes would remain in your name, but your contract could make your buyer responsible. I've heard of cases where whom ever makes the property taxes may have some additional claim on the property. Perhaps they could be included in your buyers payments to you.
My feeling is a bond for title is a much less risky thing for a seller - you really haven't sold the property until the contract is fulfilled. But it's not something that would appeal to all homebuyers. I know of a man who bought some property by this method...he had a dispute with the power company and could not proceed because he legally did not own the land.
And like was mentioned, a wrap-around may work depending on the wording in your mortgage, and the buyer will get the deed that way and you will hold the note. But that does imply transferring the deed.
There's a lot of wisdom in nebulosed post...many, many successful folks here use subject to's and I've "heard" (no proof) of only one instance (not to say there can't be more ) where a loan was called due.
There is a contract for deed form at uslegalformsdotcom. I'd check with a lawyer about your state's regulations toward these.
Good luck,
Terry
P.S. You can also stipulate any terms you want in a lease option, like any repairs under $100, whatever, are taken care of by the tenant, applied toward their option, etc.
Thank you everybody for your input.
Nebulous, I was doing more research and I was thinking "contract for deed" sounded like the answer. Thank you for confirming it for me. I will still check with an attorney first, but the input I got from everybody is a real confidence booster that I can accomplish it this way. I don't really want to be a landlord. I know it has its beni's but not where I want to go right now.
Thanks,
Scott
also look into loan servicing company's to handle the loan payments and you won't have to do anything.[ Edited by nebulousd on Date 02/21/2004 ]
In the past when I have gained a property and have merely continued to make the payments on the existing mortgage and/or Trust Deed. I first observe the interest rate. If it is above 6% I do not worry as to the due on sale problem. Most lenders are very happy to have a note that is paying 6%. or more.
When I sell the house for a profit, most in paper, and thus wish to continue the existing mortgage. I merely expose the situation to the new buyer. He gives me his small downpayment damn wish it were bigger. I execute and record a Wrap around Mortgage/Trust Deed. Usualy for a higher rate of interest. Say 7%. I set the payment so it delivers a higher rate of monthly payment then what I am paying out.
I advise my friendly (I hope) Buyer that this will continue for a period of say five years at which time we will then refinance the property at whatever market rate of interest is then applicable. He will at that point be in title, probably at a lesser rate of interest.
Why do we go thru all this stuff? Very simple he has bad credit, a recent BK or he is recently failed in a business, killed an associate or recovered from a bad case of the temporary bad luck in life. He has five years in which to clean up his act. Play the part of the medium class homeowner, water the lawn, pick up the paper, raise kids and in general conform conform conform.
It works out and it is profitable. It allows those who cannot be financed to own housing and raise their families.
Over many years I have had only one problem. This gentlemen was involved in a rug cleaning scam and went to jail. His family continued in residency, his wife (dear angel) working at two jobs. When he got out and became a night watchman at a bank, now thats a kick! He could not qualify for any form of loan. So I increased the interest rate to 10% and sold the note to a private investor so he achieved an 8% yield. I gave a full recourse on the note, that wife was a winner and I knew she would make the payments. All went well and in a few years he graduated from night watchman to head of security and they at last obtained proper financing. I had long ago made my profit and we celebrated the occasion by establishing a new record on adding a room and a bath. 30 days start to finish. Why? New child arriving. They still live there. His lesson was learned.
To succeed in life. Pick a good wife and, never get caught...
Cheers Lucius
They can catch you ....just as long as they cant proof it!!