Posted by Bill H on March 04, 2009 at 19:31:25:
Absolutely…Don’t worry it happens to all of us.
’
Of all the things I have lost I miss my mind the most.
Wow! Buyer’s assuming my loan… - Posted by John Merchant
Posted by John Merchant on March 03, 2009 at 16:42:26:
…so I’ll be off the hook for that loan!
Right?
Well, sorry but not quite.
I just got back from a conference with my CPA re 2008 taxes and we somehow got on the subject of how many people (otherwise smart people) do not understand that once you or I sign a bank note NOTHING is going to get us OFF that loan until it’s paid in full.
So sorry, just because some buyer qualified at your bank and formally “assumed” that loan, only means that now he is ALSO on the bank note but you are still on that note until it’s paid in full.
I’d bet that if one were to take a poll (and get honest responses) from 100 RE Agents, you’d find a fair share of those folks don’t understand that and would tell you that the original note signer is now off the hook and released.
Of course the old hands on CREONLINE know that fact of life, but there are always so many newbie REIs looking on here that I thought it’d be a good idea to remind all that once a note is signed, nobody but the payee (bank or other lender) can release that note.
So of course if I were to sell to a good looking buyer who is going to assume my note, no matter how much I’d like to get a release from the bank, no way the bank is going to sign such a release until they’re paid in full.
Looking at it from the bank’s position, why should they automatically be forced to release me until they’re paid in full?
How would you like it if you were the bank or lender and such a buyer’s assumption got YOUR note released before you’d been paid in full? Without your permission?
So please don’t YOU assume your buyer’s formal “assumption” of your bank loan is going to, in any way, release you from that note.
About 10 years ago a USAF Sgt with fairly good FICO bought and assumed the bank note on a little rental of mine and did exactly that…he formally assumed my bank loan and commenced to make its payments.
All was great until a couple of years into it his wife notified him she was divorcing him and suddenly all his business affairs went in the tank and he defaulted on all his debt including on my little rental.
In truth I’d forgotten about my still being on that note until I got word from the bank that they were now looking to me to bring them current which I had to do.
How can seller protect himself from such a calamity when sellig and having Buyer assume S’s loan?
One good way is to require ALL note payments come to you, the seller (or to your note collection co who then disburses the funds monthly) and you have buyer’s written POA to his payment records at any time.
This way you can know quickly if your buyer gets tardy and starts missing payments or dragging them in late.
But above all, just remember once you sign a note you’re on that thing until it’s paid in full…you could have all your friends and neighbors assume it but YOU are stil on it until it’s paid in full.
Re: Wow! Buyer’s assuming my loan… - Posted by Lee
Posted by Lee on March 07, 2009 at 16:23:47:
Banks will try to get anyone that they can possible can to make payments on an assumed loan even if there was a release of liability signed. The people in the collection departments are trained to be agressive and try to get money from anyone that they possible can. Many will even insult you, call you a deadbeat, question your religious beliefs, etc.
Just because a ROL was signed doesn’t mean that they won’t attempt to try to get you to pay the buyers debt. They may even threaten to damage your credit and do so even though they have no legal right to.
There is an exception - Posted by Dave T
Posted by Dave T on March 05, 2009 at 19:17:28:
VA loans issued to service members who use their VA loan entitlement do have a release of liability feature if the buyer is another service member who agrees to substitute his/her VA entitlement for the seller’s when assuming the seller’s loan.
Re: Wow! Buyer’s assuming my loan… - Posted by Jack
Posted by Jack on March 04, 2009 at 15:16:58:
Did not know that. But, why would I, it isn’t like I have any loans that are assumable, or know of any loans that I would assume.
I think if you surveyed a 100 real estate agents on that question, 30 wouldn’t even understand the question. 30 would understand the question, but not know what ‘assumable’ meant, 10 would understand what assumable meant but would not know the answer and would talk until they had changed the subject in order to avoid answering the question, 15 would understand what assumable meant and would admit to not knowing the answer, the remainder would just guess.
what about discharged borrowers? - Posted by lukeNC
Posted by lukeNC on March 04, 2009 at 13:26:35:
borrowers discharged in bankruptcy may still be on a mortgage but are no longer personally liable for them. In fact, they’re no longer reported reporting to credit bureaus any activity after the discharge.
Those loans can be “unofficially” assumed all day.
Re: Wow! Buyer’s assuming my loan… - Posted by BTI
Posted by BTI on March 04, 2009 at 08:58:33:
John
Good reminder, I heard someone recently say they were going to have their loan formally assumed in a coffee shop and had to butt in.
I know it can be done because I did it for a couple of my clients over the years but the lenders were smiling and completely lying through their teeth during the process until we presented the required documentation to be signed.
Still wondering when lenders will give up on the due on sale clause and replace it with a clause I use in my lending that upon the transfer of the property the rate shall be the greater of the present market rate or the rate currently on the loan. Much better then a due on sale at payoff time.
BTI
Assumption w/release of liability - Posted by JT-IN
Posted by JT-IN on March 04, 2009 at 01:37:49:
Is the answer. Unless the seller has the grasp of the concept that they will remain liable unless they require a ROL… then the good banker (said in gest) will surely be glad to hold as many saps liable for repayment as they can, or that anyone will hold still for.
Yes John, as you said… most Realtors do not grasp the concept and will hurd folks into such deals gladly. Of course it completes the payday cycle. But, it should be akin to malpractice, getting a seller into such a deal w/o fully explaining the downside risk. Ah, the ole downside risk of a deal… knowing when to say when.
Frankly, assumptions shouldn’t be allowed to be called “loan assumptions” without ROL… just another abuse within the banking system for many years. The chickens are coming home to roost here lately, I’m sure you have noticed.
Good point John, and timely to bring this up in todays mkt/quagmire.
Re: Wow! Buyer’s assuming my loan… - Posted by Edwin
Posted by Edwin on March 03, 2009 at 19:43:28:
If what you’re saying is true, John, what’s the purpose of a buyer jumping through the bank hoops to formally assume a loan–and probably paying a few fees for the privilege? I guess it can help him build his credit rating if he makes his payments. If there is no advantage to the seller, you might be better off advertising any sale as a “no bank qualifying deal” and try to get a higher sales price. Buyer can make his payments to the seller instead of the bank. Just watch out for the due-on-sale clause, however. Although I’ve heard that chances of many banks ever enforcing that are greatly exaggerated.
Re: Wow! Buyer’s assuming my loan… - Posted by Natalie-VA
Posted by Natalie-VA on March 05, 2009 at 06:15:30:
You forgot the ones who would say, “that’s illegal, you can’t do that.”
–Natalie
funny - Posted by Kristine-CA
Posted by Kristine-CA on March 04, 2009 at 19:32:07:
Jack: while I find many of your posts a bit terse, this one was truly funny.
You can replace “real estate agents” with escrow officers, title officers,
attorneys or CPAs; and replace “assumable” with “consideration” or “lease
option” or even “beneficial interest.” There’s a lot more guessing than
anything else in my experience. Kristine
Re: what about discharged borrowers? - Posted by Kristine-CA
Posted by Kristine-CA on March 04, 2009 at 17:22:37:
Hi Luke. When you say unofficially assumed, do you mean getting the
deed and taking over sub2? Or do you mean going through the
process of “assuming” with the lender, but with no worries for the
original borrower as they are truly off the hook?
Estates pose the same issue/opportunity. There is usually no one left
to be on the hook, especially if the estate has no assets, so sub2 under
those conditions is perfect, IMO. Kristine
Re: Wow! Buyer’s assuming my loan… - Posted by JT-IN
Posted by JT-IN on March 04, 2009 at 09:14:52:
BTI:
I doubt that in this banking and economic climate that banks are going to monkey with the mechanics of the DOS clause. If they were going to do so, why not just state that if there is a transfer there would be a one time 5% charge of the unpaid balance at the time or a minimum of x% of the original loan amount. This way they are being compensated for either way, whether rates have changed or not… of course added to the payoff balance of the loan.
Let’s face it, if a loan is transferred Subj To, the situation is highly likely that the security of the loan has been compromised… either the finances of the original borrower have tanked or the mkt has tanked. When an owner is selling subject to they are likely a very motivated seller and not the most collectible critters out there… So my point is the risk to the lender has changed.
The DOS language is antiquated at best.
Re: what about discharged borrowers? - Posted by lukeNC
Posted by lukeNC on March 05, 2009 at 17:50:36:
yep…taking deed and making payments…unofficial assumption…
Re: Wow! Buyer’s assuming my loan… - Posted by BTI
Posted by BTI on March 05, 2009 at 05:50:11:
JT
At one time I thought about adding a transfer fee clause to the note and TD.
Not a large one, just one which would cover some expenses and my time.
Only once did a seller or buyer ever contact me to let me know of a sub2 situation. I think they just assumed there was a due on sale clause.
Thanks to your post I’m going to revisit that thought and maybe have another little item due at payoff time.
I have found that the risk changes are minimal and I have found that in most of my cases the strength of the sub2 buyer was better then the current strength of the original borrower(who is still liable).
BTI
Re: Wow! Buyer’s assuming my loan… - Posted by Tai
Posted by Tai on March 04, 2009 at 12:08:40:
in commercial assumable mortgages, it is pretty common
that the lender will charge a 1% assumption fees (1% of
the outstanding balance of the mortgage being assumed),
plus lender’s lawyer fees (around $1000) to draw up the
assumption document. these are non-recourse loans, so the
seller is off the hook unless there is fraud involved.
Also, the new borrower/buyer has to be qualified by
the lender to be able to assume the mortgage.
Speaking of DOS clauses - Posted by Kristine-CA
Posted by Kristine-CA on March 04, 2009 at 09:44:15:
Hi JT. Until reading this thread I was thinking of removing the DOS
clause from the trust deed when I am the borrower getting seller
financing. I was hoping this would enable me to more easily wrap the
note on a re-sale.
Two questions:
-
I agree that the security of the loan could be compromised upon a
transfer/sale. If I were to remove the DOS clause from a trust deed, or
even use specific language that states that there is no such clause, and
the sellers/benes sign such a doc…would that hold up if there were a
problem? Would a judge or court see the lack DOS as taking
advantage. -
I’d never thought about charging for the transfer and/or
assumption. Sounds good when I’m the note holder, doesn’t sound so
good when I’m the borrower. But I’m wondering if a clause that
includes some kind of compensation isn’t cleaner.
Lots to think about here for me. Thanks, Kristine
Re: Speaking of DOS clauses - Posted by BTI
Posted by BTI on March 05, 2009 at 06:16:53:
Kristine
What your thinking of doing, not having a due on sale when you buy with seller financing is one of the things I do. Why would you want to wrap a loan with a due on sale if you don’t have to, the threat of the underlying loan being called is always there if it has a due on sale.
And generally if the note becomes non-performing what good is a due on sale if you have to foreclose on it?
I would rather have someone making timely payments, and if interest rates go up I have that covered, and if interest rates go down I may get paid off. Which brings up the prepayment penalty clause, another item to consider.
Yes there are other considerations but none I have found worthy enough to change what I’m doing in that area.
BTI
Re: Speaking of DOS clauses - Posted by BTI
Posted by BTI on March 05, 2009 at 06:16:18:
Kristine
What your thinking of doing, not having a due on sale when you buy with seller financing is one of the things I do. Why would you want to wrap a loan with a due on sale if you don’t have to, the threat of the underlying loan being called is always there if it has a due on sale.
And generally if the note becomes non-performing what good is a due on sale if you have to foreclose on it?
I would rather have someone making timely payments, and if interest rates go up I have that covered, and if interest rates go down I may get paid off. Which brings up the prepayment penalty clause, another item to consider.
Yes there are other considerations but none I have found worthy enough to change what I’m doing in that area.
BTI
Re: Speaking of DOS clauses - Posted by JT-IN
Posted by JT-IN on March 04, 2009 at 19:33:07:
“would that hold up if there were a
problem?”
Sure, it would hold up… but more importantly, the lack of a DOS clause doesn’t in and of itself release you from liability. If you sign the note and DOT, sans the DOS clause, and later assign or convey the property to Buyer B, you are still on the hook. It is really the same as a sub2 deal, but it isn’t violating the terms of the DOT… the seller can’t call or accelerate, but the orig buyer, (you) are still liable for repayment of the note. Of course whoever you sell to on a wrap is still responsible to you, even if they spin it off to another party.
I like the owner financing with no DOS clause… because then you can theoretically obtain more $$$ for the property… it is a monetizable feature; it has value. I just don’t use it as a seller; too much of a control freak. But it does allow you to write in the clause about transfer… and fee for transfer, either payable at transfer or at the time of payoff. There is always the LARGER FEE that will allow the seller to be off the hook of liability… always negotiable… haha.
Living thru the late 70’s and early 80’s in the RE biz… with 18% int rates, forced one to be creative and work with some of the dynamics we are discussing here.