The Million Dollar Foreclosure System - Part 15 16-8
Chapter Seventeen
DUE-ON-SALE
When buying foreclosure property it may be to your advantage to keep
any existing mortgages that can be assumed without qualifying. However, the
truth is you probably won’t find one as lenders stopped originating them many
years ago. If you do find one it will have been in place for so many years that the
homeowner should have a huge amount of equity.
Distressed owners, in most cases, have used up any equity in their
property by refinancing or taking out second or third loans. If you do find an
assumable with a large equity the homeowner doesn’t really need you because
he can borrow against that equity. If you do find one where the owner wants to
sell you will have to either come up with a lot of cash or do a creative deal where
you pay him for his equity over a period of years.
Almost all mortgages placed by conventional lenders over the last
decades contain very strong due-on-sale clauses. This clause allows the lender
to call for full payment of the loan if the property is sold. In some cases the buyer
may be allowed to take over the loan after submitting an application and meeting
credit qualifications and formally assuming the loan. At that time the lender can
adjust the interest rate and other aspects of the loan if it would be in the lender’s
best interest to do so. You will seldom, if ever, assume a conventional loan.
Aggressive investors often buy the property "subject to" the mortgage.
That’s mean you would be buying and leaving the mortgage in place. Then you
would bring the payments current (plus, payoff all foreclosure costs) and keep
them current with monthly payments. You are hoping the lender will be content
to have the default cured and be getting payments on time and not be inclined to
investigate any further.
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Understand that if there is a due-on-sale clause (alienation clause) in the
mortgage the lender can demand that you pay off the loan if they learn of a title
transfer. If you don’t pay in a timely manner they can begin a foreclosure action
against you. If your original plan was just to hold the property long enough to sell
it you may be willing to risk a demand for full payment. Lender’s seldom ask.
Look at it this way. You buy the property during the pre-foreclosure period.
You bring the loan current. That stops the foreclosure. You begin your fix-up and
search for a buyer. The lender discovers that you have bought the property and
writes you a letter demanding you pay off the loan. You stall them and hurry on
with your plan.
If you have planned correctly the chances are you will have the place sold
before the lender takes any action. By that time you should be very close to
closing escrow. Then the lender will be paid and you will get your profit.
In truth the lender seldom discovers someone new is making the
payments, or if they do they don't acknowledge the change. Syndicated real
estate columnist Robert Bruss has written in his weekly column that he regularly
buys investment homes "subject to" the existing financing.
There is also a technique you may hear about where you have the seller
transfer title into a trust and then you take over the trust. That way there is no
title change when you buy. The trust is still the titleholder and the financing stays
in place. Has this been tested in court?
Yes, these tactics are for the aggressive investor. Your alternative is to:
(a.) Have enough of your own cash to pay off the lender;
(b.) Have an investor who has the cash;
(c.) Have a line of short-term credit, so you can borrow the money for a few
weeks while you get the house sold.
Talk to mortgage brokers about short-term loans. They are called bridge
loans in home construction and you might get something similar for your deals.
In most cases you are going to flip the property for a quick profit. In your
purchase agreement you can require that the escrow not close until you have a
ready buyer for the property. Then you could have a double close. That’s where
the property transfers to you from the seller for an instant before you transfer it
to the buyer.
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It would be easier to just sell the purchase agreement to the buyer, but if
the buyer would not agree to that you could use the double close. In either case
the title transfer is so quick, before the buyer's new money paid off the existing
mortgage, that you would not trigger the due-on-sale clause.
We mentioned buying the property "subject to" the existing mortgage. Be
careful here. It means you buy the property, but the seller still has responsibility
for the mortgage loan. If you did not make payments the seller would become
responsible.
The lender could take foreclosure action against the seller even though
the seller believed he was out from under the property. If you do this to an owner
that had been facing foreclosure and the owner later sues you -any judge would
probably turn you into dog meat.
Be careful how you deal with owners in distress. It is OK to strike a
profitable deal with them, but don’t leave their bones bleaching in the sun. If you
do, you become vulnerable to some future legal action that won’t be pretty.
Here is something else you should remember. As an investor you never
want to have personal liability on any debt. That means the only security for any
real estate loan will be the property and the property alone. If you fall on hard
times and default on the loan the lender can take the property, but he can’t come
after any of your other assets. You don’t plan on defaulting, I know. Just play it
safe and never sign anything where you have personal liability if you can help it.
Here in Arizona we had a governor who was a big time real estate
developer before entering politics. He had given a personal guarantee on some
multimillion dollar loans for a couple of his projects. One of the projects was a
plush Ritz Carleton Hotel.
In the real estate crash of the late 1980’s he defaulted on those loans.
Legal action was taken against him while he was in office and he was indicted
on some of the charges. Since they were felony charges he was forced to resign
from office. He now works as a chef in an area restaurant. Never give a personal
guarantee unless you love to sauté.
The truth is the only time you can avoid giving a personal guarantee for
investment real estate money is when the seller is willing to carry back all or part
of the financing.
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When dealing with mortgage companies and institutional lenders they will
usually demand a personal guarantee or you won't get the money.
Back in the good old days nearly all home loans were assumable, thereby
making the purchase of real estate fast and reasonably uncomplicated. No
more!
A loan assumption is an agreement by a buyer to assume the liability and
terms of an existing note secured by a mortgage or deed of trust. Depending
upon the type of assumption the seller may or may not be released from future
liability.
Federal Housing Administration (FHA), Veterans Administration (VA) loans
and most conventional adjustable rate mortgages (ARMS) allow assumptions by
fully qualified buyers.
"Due-on-sale" is the opposite of "assumable". One means you must pay
off the loan when you sell. The other term means you may be able to assume
the loan if you have the same qualifications that are required for a new loan
origination. The assumability of a loan may be verified if you search for the "due
on sale" clause or assumption rider in a deed of trust or mortgage.
Let’s talk about FHA insured loans. In an effort to combat defaults of FHA
loans HUD has increased the enforceability of their due-on-sale clause.
Before Dec. 1, 1986 FHA insured loans contained no restrictions on the transfer
of the property. The lender had no right to call the loan due, nor did he have the
right to charge an assumption fee, if you were to buy "subject-to" the loan. The
seller could just demand a beneficiary statement (statement of the amount still
due on the loan) from the lender. The lender was required to deliver it within 21
days and couldn't charge more than $50 for it.
We have called these loans "assumable loans". That is not quite correct. You
didn't have to formally assume the loan. You could buy the property "subject to"
the loan and have nothing to fear from the lender. But look, you aren’t going to
find any of these loans on profitable deals. If a miracle happens you now know
the basics.
For FHA insured loans originating during the period of Dec. 1, 1986 to Dec. 14,
1989, a buyer must qualify to assume the loan if:
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1. An owner-occupied residence is sold within the first 24 months after
origination of the loan.
2. A non-owner occupied residence is sold within the first 24 months after
origination of the loan.
Owners who sell in violation of the due-on-sale clause remain liable on the loan
for a period of five years after the sale. After a five-year period the loan is
considered seasoned and the prior owner is relieved of liability.
These are wonderful loans for the real estate investor, but even they are now
few and far between. It is just too easy to refinance and new loans aren't that
friendly to investors.
FHA insured loans originated on or after 12/15/89 on single-family homes carry
a due-on-sale clause restricting the sale of the secured property to only qualified
owner-occupants. The new owner-occupant must pay a fee and pass a credit
check before they can assume the loan. Private investors are not eligible to
assume.
Now the aggressive investor will be asking, "Yes, that is what the rule
books says, but will they really enforce that clause?"
Have you ever heard of one being called? Neither have we!
If you come across a property in default with this type of loan remember
that the lender had to get permission from HUD to begin the foreclosure on the
homeowner. Now you are going to cure the default by bring the payments
current and keeping them current.
If the lender learns that you have purchased the property "subject to" the
FHA insured loan will he go back to HUD and ask for permission to foreclose on
a loan that is current? And, if he does, will HUD allow him to foreclose? Does
HUD really need another vacant home in their inventory? Especially one where
the loan payments were current!
There is a body of opinion that says go for it! Buy the property "subject to".
If you so choose you could order a beneficiary statement through the escrow.
This puts the lender on notice, but it prevents any claim that the transfer was
hidden or the loan amounts are incorrect.
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Additionally -post 12/14/89 loans may face minimal interference from HUD, as
long as the loan is kept current and the assumption fee is paid.
Some "conventional" loans, especially those originated before 1980 have no or
very weak due on sale clauses. Be sure to read all mortgage documents and
understand exactly what the requirements and limitations are. Buy property
"subject to" any mortgages if you don’t intended to pay them off.
VA loans originated before 3/29/88 can be taken "subject to" without
qualification. VA loans originated after that date can only be formally assumed
by qualifying, passing a credit check and paying an assumption fee. You do not
have to be a veteran to qualify. Could you take the chance of buying property
"subject to" a VA loan? Could you just bring the loan current and then keep the
payments up to date without the lender knowing the property had been
transferred? Maybe?
Under any circumstance the action that usually tips off the lender that
there has been a transfer of ownership is the change in the fire insurance policy
beneficiary. When you buy a property and ask the insurance company to put
your name on the policy the lender will be notified.
Lenders are always co-beneficiaries on the policy and receive notice of
any change of beneficiary. Whether they will do anything about it is another
question.
With assumptions it is even more important to be aware of any liens
affecting the property. You don't want to unknowingly assume delinquent
property or income taxes.
Taking over existing financing can be a powerful strategy. The truth is you
will seldom find loans that can be assumed. They were the basis for all of those
old "No Money Down" and "Get Rich Tomorrow In Real Estate" books. It was
wonderful while it lasted.
If you can’t take over existing loans you must come up with the cash, get a
new loan, bring in an investor, but “subject to” or work a lease/option deal. That’s
what you will be doing most of the time. You still make lots of money you just
use different tactics! All the tools for winning are in this manual. You can do it
just as many others are doing it right now!
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This chapter does not advise you to take over any property without paying
off loans if the mortgage has a due on sale clause. We are simply pointing out
some options that some aggressive investors sometimes use. (Now there is a
sentence packed with weasel words!)
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7
Chapter Eighteen
LEFT-OVERS
When you are reviewing the Notices of Default you will be looking for the
names of the individuals who have the power to sell the property to you. The
Notice of Default will list the name of the Trustor or Mortgagor. This is usually
the person who owns the property and probably is currently living there.
What if the Trustor/Mortgagor does not live at the property and is not the
owner? This does not happen as often as it once did, but there is still a chance
you occasionally might run into the situation. Here’s why:
The person who buys a home and finances the purchase with a loan
secured by a trust deed or mortgage is the Trustor or Mortgagor. If he later sells
the property and allows the new buyer to assume the loan, or buy the property
"subject to" the existing loan, his name will remain on the records as the
Trustor/Mortgagor.
The only way the seller would be released from the loan is if the buyer
were to formally assume the loan after qualifying to the lender’s satisfaction.
Then the seller could ask to be released from all further responsibility and the
buyer’s name would appear in the records as the Mortgagor.
If the formal assumption procedure is not followed the original
Trustor/Mortgagor’s name remains on the loan and in the records. If the new
homeowner stops making payments the lender will file a notice of default against
the original Trustor/Mortgagor, not the current owner.
All this means is that a letter sent to a name you find on a Notice of
Default may be returned, because that person is no longer the owner of the
home and does not live there.
As we said, this does not happen often anymore, but if it does you must
find the name of the current owner. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
