"Due On Sale" strikes again - Posted by Scott B

Posted by JohnBoy on August 10, 2002 at 22:00:19:

No. YOU as the investor lease optioning from the seller would refinance by exercising the option and getting a new loan to buy the property. That is if you want to keep the property.

“Due On Sale” strikes again - Posted by Scott B

Posted by Scott B on August 10, 2002 at 17:58:09:

Had a great lease option del put together this week end. Owner is moving out of town and needs to sell in a couple weeks. We talked to him about doing a lease purchase and subletting his house out and he had no problem with that. Anyway, he contacted his morgage company and told them what he was about to do and the told him a lease purchase is illeagle and he would be violating the “due on sale clause”.

Really isn’t that false, because it really isnt a sale, when we are leasing from him. Can anyone enlighten me with the truth on this. What can I tell this guy to change what he is already been told. He really wants to do this but his morgage company has him scared to do it.

Thanx,
Scott

Relevant true story… - Posted by William Bronchick

Posted by William Bronchick on August 12, 2002 at 11:09:46:

One of my students recently entered into a contract with a seller for a subject-to transfer. The seller’s father decided to run it by an attorney, who suggested the seller ask the mortgage company. The mortgage company (a major-league, nationwide lender) said, “yes”, so long as the buyer either pay off or formally assume the note within 24 months.

The contract was re-written to include the 24 month clause. When the parties asked the lender to “put it in writing” (regarding the 24 month due-on-sale waiver), the matter was submitted to higher management. After going up the chain of command several times, the final answer was “no,” we won’t sign anything to that effect."

The parties went ahead and did it anyway, and the lender did nothing about it . . .

But you all are missing the important question… - Posted by Earl

Posted by Earl on August 11, 2002 at 07:59:37:

which is, how does Scott (or you) put the seller’s mind at ease about all this? If you don’t do that, there’s no deal at all.

I agree with Jim that nothing illegal has happened. And I agree with John-boy that the chances of the bank invoking the due-on-sale are slim, and besides you should be ready and able to refinance if needed anyway.

But none of that is any good if the seller is too scared about it to follow through. And if you whisper to the seller to say nothing to his lender, and show him how you’re going to hide it from the lender, that doesn’t seem to be a good idea to me.

But is there some short, written (perhaps canned) paragraph that you wise sages could dream up to put into an agreement that says in the proper legalese, “hey, Mr. Seller, don’t worry, if the due on sale clause is invoked I will accept full financial responsibility.” And then, maybe even be very open about it. What would be wrong with that? And what would be wrong if the seller showed that to his lender?

I tried this once, and a funny thing happened. The seller was so scared about the due-on-sale that he made it a condition that I ask the lender’s “permission” to take over his (very conventional) mortgage. And so I did. I tip-toed very politely into the lender’s office figuring I had nothing to lose and I politely begged. And the lender not only said ok go do it, but bent over backward to cooperate with me. Obviously I’m always ready to refinance at any time if the lender comes back to me.

Our biggest problem with these isn’t the seller, it’s some of the idiot lenders and lawyers who scare the seller into refusing this. Can’t we just reassure the seller somehow?

Re: “Due On Sale” strikes again - Posted by JohnBoy

Posted by JohnBoy on August 10, 2002 at 18:36:07:

Doing a L/O is NOT Illegal! It does violate the DOSC in a mortgage, but that is NOT illegal. It’s just a breach of the mortgage agreement that gives the lender the “right” to call the loan IF they choose to exercise their right to do so. IF the lender chooses to call the loan then the lender must file suit to sue for foreclosure if the borrower ignors the lender by refusing to pay off the loan. IF the lender was to actually follow through with calling the loan and actually pursues it by filing suit to foreclose, then you could refinance and pay the loan off, or, sell the property out right and pay the loan off, or, possible get the lender to allow you to assume the loan or write you a new loan.

It is VERY costly for a lender to follow through and actually sue to foreclose on a property. So it is unlikely they would ever actually do it if the payments are current and have been made on time. They would cost themselves more money than what it is worth to actually foreclose on a perfectly good performing loan. Although, that doesn’t mean a lender will never follow through. Some lender may be stupid enough to actually do it, but in the end they will lose money by doing it, unless their was a ton of equity in the property where they could cover all their costs to foreclose.

What state are you in and how long does a typical foreclosure take to get a property back? Some states can take a minimum of 9 - 12 months and longer. That would cost a lender a lot to mess with calling a perfectly good performing loan due over a L/O.

If you TELL the lender they will almost always threaten to foreclose if they know about it, but when push comes to shove the odds are they will actually end up doing nothing about it if they are ignored and the payments are current and being made on time.

The question is, can YOU refinance the property IF you had too? And if you can, is it worth still doing the deal IF it came to that??? If it is, then don’t worry about it and do the deal anyway. Explain to the seller that in a worst case circumstance you would just refinance and pay the loan off IF you had to.

If you can’t qualify to refinance and/or if the deal wouldn’t be worth doing if you had to refinance, then don’t do the deal! Otherwise just do it and tell the seller they need to keep their mouth shut unless they want to run into problems with the lender!

Re: “Due On Sale” strikes again - Posted by JoeKaiser

Posted by JoeKaiser on August 10, 2002 at 18:20:30:

There are few things in this business we cannot anticipate. The seller contacting their lender is not one of them. If you don’t make it clear where things stand and what each party needs to do from here, they’ll contact their lender every time and your deal is as good as dead.

Joe

Re: “Due On Sale” strikes again - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 10, 2002 at 18:14:38:

Scott B–(Somewhere)----------------

Live and learn. The mortgage company gave correct advice to your seller.

You need to advise your sellers in the future to not call their mortgage companies.

A lease for less than three years does not trigger the due on sale clause. An option does.

Now, you may want to practice your sales skills trying to talk the seller back to the deal. What is he going to do if he does not do this with you? Show him how you are going to hide the sale from the lender so that they will not know of the change. Hope he did not give them his name and loan number!

Good Investing**************Ron Starr**********

But you all are missing the important question… - Posted by JohnBoy

Posted by JohnBoy on August 11, 2002 at 11:05:27:

I would not put anything in writing that tells the seller I would accept full financial responsibility if the lender was to find out and invoke the DOSC. That would only give the seller the incentive to contact the lender and TELL them about it just to force you into refinancing and paying off their loan!

If the seller TELLS the lender then it becomes the seller’s problem to deal with. If possible I would just place my tenant/buyer into another home and cancel my agreement with the seller for breaching our agreement by causing the lender to invoke the DOSC. On the other hand if the lender was to find out some other way then I would do whatever I had to just to protect everyone’s interest.

If a seller wants to ask their lender for permission then tell the seller to be sure to ask their lender if they will cover the payments for him/her for any months they can’t afford to make them until they can find a qualified buyer to buy the home out right.

Bottom line. The lender is not going to make their payments. And if the seller can’t make the payments they will lose the home to foreclosure. So which is better? Fall behind on payments, ruin your credit, face foreclosure and end up with a judgement against you, OR, get those payments covered and take your chances that way that the lender will never find out and/or that they won’t actually do anything about it IF they did find out some how??? Seems like a no brainer to me! One way you are &%$@#& for sure! The other way you only run a very slight risk of getting &%#@$&.

It’s a lease option, so HE wouldn’t … - Posted by Adam (Austin)

Posted by Adam (Austin) on August 10, 2002 at 21:47:00:

It’s a lease option, not a subject to… so he (the guy who made the original post here) wouldn’t be able to refinance… that would have to be done by the owner, right?

And if the owner has poor credit or cannot qualify for a loan at the current time… or is in the hospital… whatever… he won’t be able to refinance, and will lose the house.

Am I misunderstanding?

  • Adam.

With all due respect… - Posted by Jim FL

Posted by Jim FL on August 11, 2002 at 02:05:47:

Ron,
With all due respect sir, no, the mortgage company DID NOT give him the truth.
A L/O is NOT illegal.
and NOTHING “Triggers” the DOS clause.
Every due on sale clause I’ve ever read gives the lender the OPTION to call the loan, meaning it is not mandatory for them to invoke it.
It is a choice they have.

Just wanted to clarify that for those who might read this, because I’m sure you know that already.

Take care Ron, and have a GREAt day,
Jim FL