Trust and Subject to Existing Loan Transaction

[wantabeguru]

Hi Gary,

Thanks for the responce, I am hopeing that John will respond also as to how he handles the insurance issue aswell. I am new to the sub -2 but thank you for your help. so you primarly rent them out or LO them after you take the over would you do a sub-2 for a flip as well?
Ted

[BoboTheKing]

Unless you have a ton of equity, the DOS clause is a non issue 99.9% of the time. As long as they get the payments, they don't care....that's if they even notice title transfered. If you try to invest worried about every little thing, you will never make any money. Something that happens about as often as pigs fly isn't worth being concerned about. The DOS being called is a very rare occurence.

[mtnwizard]

Hi Ted,

I never flip -- I hold.  Once I acquire my property "subject to",  I triple net lease the property to my tenant/beneficiary and include an equity share whereby I share future appreciation 50/50.

As to ignoring the DOSC, I firmly believe that is reckless advice, especially since interest rates are continuing to rise.  Many people weren't around in the '70's when banks fought so hard for the Garn-St. Germain Act of 1982, the law that allows them to invoke the DOSC.  They called loans often back then, haven't lately due to the low interest rates, but will resume once it becomes financially feasible for them to do so.  Good luck.

Da Wiz

[wantabeguru]

Hi Bo,

I am not woried about the due on sale clause, THe question is are you transfering the insurance in to your name or are you leaving it in the sellers name? If you are leaving it in the sellers name, than I see some problems with that.

1. it is no longer occupied by the seller there for if there was a problem ie: fire the insurance company would not cover this loss due to breach in the insurance contract.

2. you are not being totaly up front with the morgage company. In my view if you are trying deceive them I beleive that you have a higher chance of the dosc being exicuted.

I am just trying to get some of this strait in my mind.

Thanks for the responce may be you can elaberate on this more for me.
Ted

[BoboTheKing]

I will not leave insurance in the sellers name, mainly because I have heard of people having problems getting insurance money if a claim was filed. Some have not had this problem, but I'm not taking any chances personally.

With regards to the DOS, I am not concerned about it enough to stop me from doing deals, but at the same time, you have to be aware of it. These little rate increases aren't going to be a factor...it's not like they have skyrocketed. If they go up 4-5%, then I might be concerned. But I plan on being out of my deals in 2 years so I am not concerned at all. If they decided to call it, it won't happen for a while. They arent the sharpest tools in the shed. The DOS is a non issue 99.9% of the time. If the .1% happens, then I will have a backup plan.

All you have to do is to work out any worst case scenario, and try to use your creative mind to solve any potential problem. I can guarantee if they called it due, and I wanted to keep it, I would find a way to refinance it. But the chances are so slim, I'm not concerned at all. Just be aware it can happen, and be aware of the reasons they might call it. Rates are not going up fast enough or high enough right now to be a concern. They arent expected to go up drastically enough to affect a 2 year deal.

Now if you are in an area with high short term appreciation, you have to be prepared in case the slim chance happens. If it does, the extra equity from the appreciation will allow most people to refinance, or if not, find someone to help you.

If you are creative and can solve problems, and be prepared, you will do fine.

[wantabeguru]

Thanks for clearing that up, you have my thoughts on the matter exactly. I was reading a lot about the insurance issue and that is a concern to me. I to am planning on changing the insurance into my name strait foreward and honest is always the way to go. if you are deceptive I beleive you will scare the morgage company into calling in a loan that they would of not other wise called in before.

Ted

[BoboTheKing]

I don't really think the insurance thing makes a difference to the lender with regards to the DOS. As long as they are getting the payments, you should not have any worries in most cases. The insurance issue by itself will not cause a loan to be called due. Just keep sending the payments on time every time and put the ball in their court. You don't have to notify them of anything. It's not in your best interests. They will not even find out about you having the deed for a few months, and even if they did, as long as they receive the payments on time, they really don't care, in most cases. No sense telling them before. Just make the payments on time and go to the next deal.

[mtnwizard]

"They will not even find out about you having the deed for a few months, and even if they did, as long as they receive the payments on time, they really don't care, in most cases. No sense telling them before."

Why risk hiding information from the lender?  If you're not worried about the DOSC, why hide?  In my opinion, that's a risk not worth taking unless you are prepared to payoff the note in full in 90 days.  There have been several recents DOSC cases, one of which was caused by the insurance issue.

I'll gamble at the casino -- but not with my properties, or with my tenant/beneficiary's.

Da Wiz

[BoboTheKing]

I could care less one way or the other about the lender knowing, it's not my job to tell them. I am not living in fear of the DOS. I don't have any obligation to the lender about anything. I could care less what they know or don't know. I am not hiding anything from the lender. They get notified of changes in insurance, if it takes them a few months to really notice, WHO CARES? I don't care about anything having to do with the lender. They know title transfers, they know insurance is changed....after that, I could care less what they do. Nothing is hidden.

The DOS is a non issue 99.9% of the time. For every story about them ATTEMPTING to call one there are 10,000 that don't get called. They will try to scare the stuffing out of you, but they rarely follow through as long as they get payments. I just keep sending payments and unless they refuse them, i don't give it a second thought.

[mtnwizard]

Interest rates are climbing dramatically.  What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That's the highest such rate in the country.

Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won't be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan's research.

The losses to the banking industry, he estimates, will exceed $100 billion. That's less than the damage from the savings-and-loan crisis in the 1990s, which cost the country $150 billion. "It will sting the economy, but it won't break it," he says.

http://www.usatoday.com/money/perfi/housing/2006-04-03-arms-cover-usat_x.htm

When the banking industry starts losing money, look out for them to start making up for their losses by invoking the DOSC in cases where they have an opportunity to lend money out at a much higher rate.  Just be prepared.

Da Wiz

[BoboTheKing]

Rates would have to go up a lot more than 1 or 2 % for a bank to consider calling a loan due. They are not going to go up that much. Most of the loans going into default have very little equity. The costs to foreclose would make them lose money unless rates went up a lot more. They are not going up enough for a lender to consider calling a good loan due. As long as payments are current, they don't have any reason to make a good loan bad. They already are tied up with the bad loans they cant do anything about, and they arent about to make more bad loans. They will lose money. Now, if rates REALLY went up drastically....like 4-5%, maybe things would be different. But for a traditional sub 2 deal that might be 2-3 years, the DOS is a non issue 99.9% of the time, unless rates skyrocket, or unless there is a ton of equity.

[mtnwizard]

Ordinarily I would agree with you but rates don't have to go up that much when there are so many ARM's floating around at 3-5%.

Da Wiz

[BoboTheKing]

Ordinarily I would agree with you but rates don't have to go up that much when there are so many ARM's floating around at 3-5%.

Da Wiz

The ARM's are short term, and most won't have problems until they adjust up. And once they adjust, there will be no incentive for a lender to consider calling it due, because the adjusted rate is not much different from current rates....certainly not enbough for them to spend the money it takes to foreclose. It has to make finacial sense for them to call it due, and even then, they still probably won't because they have enough bad loans already. The housing market is a lot slower too, and they dont want to be calling a bunch of loans due to add to the already growing list of properties for sale. There are exceptions of course, as I stated before.