What is YOUR take on brokering property "subject to" existing loans which have a due-on-sale clause (for a long-term hold)?
It has gotten to the point that I am beginning to see FRANCHISES, for goodness' sake, for specializing in these kinds of deals.
Some local lenders are trying to endear themselves to Realtors by giving classes in taking long-term title to properties subject to existing loans (again, loans that have due-on-sale clauses, as permitted by federal law... Garn St. Germain, in particular).
In short, the practice seems widespread...
As a practical matter, per federal law, an option longer than 3 years, or an option of any duration, coupled with the homeseller vacating the property, triggers the due-on-sale clause.
If the bank calls the loan, and if the property cannot be refinanced by the person who "bought" the property with an option (likely, since if they could have financed it, given today's interest rates, they probably would have financed it), then they could lose their up-front (option) money and any payments they made which were more the fair market rent for the property (assuming they were occupying or renting out the property).
The seller, whose credit rating is held hostage by the transaction, would likely be powerless to do much under most agreements of this nature if the bank calls the loan. Even if there were reversion provisions covering the loan being called, the "seller" may not be able to refinance, either, for a variety of reasons. So, the seller could lose whatever equity had not been collected by the time of the loan acceleration by the lender, plus end up with a foreclosure on his credit.
As a legal matter of potential concern for agents, I wonder what the liability might be of a licensee who knowingly conspires to hide the transfer from the bank (the usual approach, through the use of trusts and the like to "cover up"). Even if the agent is not conspiring to hide the transfer (say, if a simple AITD/wrap-around is used, for example) would it still not be the case that the agent is conspiring to assist the breach of contract between the bank and the original borrower?
And, here is the $64,000 question (perhaps literally a "$64,000 question"):
Might the courts find the agent liable for the losses of the lender by virtue of the cover-up/assisted breach that the agent participated in? Interesting question, no?
At some point, rates are going to rise. (I spent most of my career wishing for 10% rates.) At that point, if the number of distressed properties has declined, it may be VERY worthwhile for the lenders to have attorney strike forces hunt down all the unauthorized transfers... could be an interesting time.
What are your thoughts on the matter?
Terry
In some cases... Yes!
Seller financing might very well make sense to both a buyer and a seller where:
For most families, their home is their largest financial asset, and deciding to sell it is a big decision that involves a lot of preparation and work. When you're ready to sell it's important to have an experienced real estate professional handle the details involved in the successful sale of a home.
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It seems that virtually EVERY ONE of my transactions have similar, smaller issues…but this one is MAJOR!
My typical procedure in my transactions is to ALWAYS get a 2nd opinion for termite clearance when the seller provides one.
Here's exactly why….
Transaction Situation: Seller's agent delivered a clear termite report (in California, that means free from drywood termite, subterranean termites, and dryrot). According to my normal procedures of "trust everyone, but cut the deck" :-) , I had my own trusted inspector check it out. He found evidence of ALL of the Big Three... dryrot, drywood termites and subs... Wow! A grand slam!
Cost to my buyer, if I had just assumed that the seller-provided report was accurate? It appeared that the MINIMUM cost involved will have exceeded $10,000. Maybe someday my buyers would have found out (hopefully before even more hidden damage). Maybe someday my buyers would have been able to go after the termite inspector, assuming that the termite company were still in business, and assuming that the statute of limitations hadn’t run out. But at what cost in time and legal costs for my buyers?
Meanwhile, TODAY, my buyer is $10,000 ahead from where they would have been without the 2nd opinion. The inspection cost the buyer $85… a pretty good return, I’d say!
Some agents are incensed that I “bring my own”, but I come from the “old school” that puts my fiduciary responsibilities to my buyer clients above “going along to get along”. It is regrettable for the seller that HIS property has termite problems (and no cap on repair costs in the contract with my buyer). However, it would be MORE regrettable if the problems had been shifted to my buyer by my lack of diligence!
It amazes me that most agents would never dream of relying on a physical inspection done by the seller’s chosen inspector (gee whizz… perhaps a clogged dishwasher might be missed :-), but accept termite reports (where the BIG money is) done the same way, and accept them without a quiver.
My answer to one agent who exasperatedly asked me why in the world I wanted my own inspection, when she already had one was a two-part answer to her. The first part of the answer was verbal “… Why don’t YOU? And, the second part came when my termite inspector found 15 slats with dryrot in the patio cover, slats that were replaced at the seller’s expense.
‘Nuff said…
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