Due On Sale?

[David Jonathan]

What is the name of your state? Minnesota (where I live) (Dayton, OH where the property is located)

(basic questions at the top of this post, detailed story behind the questions at the bottom ... feel free to skip the story unless you're bored.)

I guess I'm really asking here ...

1) due on sale - effect me or him, if I'm the property owner, loan in his name
2) due on sale - how often are these exercised in todays market?
3) is this illegal in any way? (I think* I read somewhere it is, so I'm looking more for comfirmation on this)

simple yes or no's will work for me, or a simple point into the correct direction, I'm usually good at research, but I think my first two questions are looking for more expirence, and the 3rd question is the tie-breaker.

Thanks in Advance!

--Dave.

My Fiance and I have been looking into investment rental properties - I've got LOTS of landlord expirence (been living in and working for a trailer park for a few years now) but I am curious ... (if you ever read the collections section, you'd see why this opportunity appeals to me)

how often are "Due on sale" clauses exercised. I'd hate to drop $10,000 on a property, just to have it forclosed on leaving me as being the only one out the money.

How risky is an actual investment like this?

This "opportunity" feels too good to be true, and I'm about 99% sure I don't want to look any further into it, however, I do want to conduct all* my research about it. I asked the current seller how this would work and he said ...

"The deed to the property will either be given to you or placed in escrow. You have full ownership. That's important to the formula. Your risk is low. The existing loan will still be in force agaisnt the property. You simply come in and take over the payments. You collect the rent and disburse the funds to the mortgage company, just the same way as if it were your own loan."

I however am not seeing a formula there - I'm just seeing how he'd get $10,000, have a loan in his name and no ownership of the property, and could have an active "due on sale" forclosure in his near future, so I'd be out 10g's, he'd be out of a property, and the bank would have renters to deal with. AND - if he's incorporated his business, it won't effect his personal credit ... (is this what those late-night guru's teach?)

I already found out from my tax accountant (which is why I can't afford a real estate attorney, or spelling lessons) that I'd be paying income tax on all rent's collected, and best I could do is deduct what I was paying the management company. (that was kind of a "duh" question for the accountant, but I pay 'em for that stuff) and after some calculations based on the past year NOI on the property, after paying taxes, I'd break even - I'd own the property, run the property, but I wouldn't see a dime till they were paid off.

but, all that asside - I'd still like some to look into the rental market.

 

[FarmerJ]

Dave back when I had property in mpls 2 of them were CD and the wording in them said that the balance of contract was due if I was going to transfer/ sell them to another person. so thats my take on due on sale. This isnt intended to be a lecture, but if you cannot afford the services of a real estate atty especially with a out of state property, then maybe its best to leave it alone and start looking closer to home. I would bet if you looked hard you could indeed find suitable property in Le sueur, Meeker, Mcleod, Sibley counties. Carver has become so suburbanized that its now likely just too expensive unless a buyer is planing on buying older unit & tearing down and building a mc mansion. All 4 of those counties I mentioned are just a touch farther out from the metro area BUT also have areas that have reasonable commutes, that also means there may well be more suitable homes that need work but could be bought reasonably in slightly off the beaten path places. Staying closer to home not using property management firms means you would have the money to use real estate atty.

 

[danno6925]

Got Fraud?

This sounds like a poorly conceived scheme hatched by the trailer's owner in order to avoid foreclosure. Though I don't know all of the details of the proposed transaction, the due on sale clause - also called an alienation clause - would come into the picture if the ownership on the deed were to change in any way. Plus, anyone who told me they were going to "hold my deed in escrow" for one second past escrow would earn himself a split lip!

effect me or him, if I'm the property owner, loan in his name

Affects both. Him as the seller knowingly commiting a fraudulent act, and you as awilling participant in this fraud. Hopefully you can get adjoining cells in the federal prison you're sent to for 5-10yrs for mortgage fraud.

how often are these exercised in todays market?

Every time a property is sold that has a due on sale clause, the remaining balance becomes due immediately. If you think a mortgage company is going to overlook it, think again. More and more courthouses are going online, and I know of at least one mortgage company that runs monthly checks through a particular county in PA for this very reason.

is this illegal in any way?

Yup, I'm pretty sure it would be illegal to stiff the first position lien holder by selling the property and not paying them a dime. Also, you would need a "good or valuale consideration" in order to transfer ownership of the property. Once that's been done, alienation has ocurred, and the remaining balance on the mortgage becomes due and payable. If you have the cash, buy the property of debt and start with a clean slate.
Not sure of the exact statute, but your proposed transaction would intend to circumvent the terms of the mortgage, and that's a bit of a no no. What you want here is a loophope, which this due on sale scheme certainly is not.

 

[lcannister]

FRAUD!

The deed to the property will either be given to you or placed in escrow. You have full ownership. That's important to the formula. Your risk is low.

Do you honestly think such a transaction would hold up in court if someone GIVES the collateral way and then the bank has to foreclose on the property? Think again. If you having full ownership is important to the formula think again and see the last sentence.

Then of course you are going to have to find fools dumb enough to get involved in owing a mortgage but not the property!

 

[LindaP777]

David, I'm a real estate investor in Ohio (30 minutes south of Dayton). I only buy properties outright and never get into "creative financing", however, the rule of thumb when buying is to always have the deed in your name, but when selling retain the deed in your name. I know those rules seem to contradict each other, but those are the rules for your best interest (depending on if you're the buyer or the seller).
Do not buy the property unless you will be on the deed. If you will be making a payment (as in owner financed), make sure the terms are clear (interest rate, fixed or adjustable, number of years, payment amount and if taxes escrowed or not). If you make payments, the interest should be tax deductible. If you get into a "lease with option" and you sublet to another tenant, you do not get the tax advantage of deducting interest on a loan. (So your positive cash flow drops).
Real estate investing can be risky, especially if you don't use professionals (i.e. attorneys, title companies & mortgage lenders). My gut says this deal would be a "no".

 

[David Jonathan]

Thanks Folks!

I was asking some simple questions, before I spend a couple hundred on an attorney - this deel just felt akward, and based on the answers, I'll just turn down the offer of creative financing on this deal, and walk away. I like the idea of investing, even tho I know it's not really profiltable until the properties are paid off (IE: mortgage payments, income tax, etc.)

I have found other good investment properties, local to my area (st. cloud) but this one fell in my lap, and it "looked" as if I could become an overnight investor with only a li'l money down (stuff you see on TV) the greedy part of me said go for it, but the common sense part said no way, why would someone turn over their property for only 10k - I figured asking some simple (intelligent) questions would be the way to go.

The deal was going to be 3 duplexes, in Dayton, ranging in price from 60k to 68k for each property, with current mortgages ranging from 50k to 58k. Each unit rented from 350 to 400 per/month. Total of 10k down and takeover the mortgage payments on all three.

You can see why my warning bells were going off. I asked why the owners were selling, and he said "because the owners were tired of being landlords" but with that limited ammount of equity, I wonder how long they'd owned the properties.

Thanks again!
--Dave.

 

[LindaP777]

Just wanted to comment, Dave. You can buy property with little or no money down (just like the infomercials - I'm one of Carleton's success stories!). The best deal I ever had I walked away from the closing table (buying) with a check for $40k (to be used for improvements). To get this type of financing, you have to be a seasoned real estate investor. (FYI - I put another $10k above and beyond the $40k, and sold the house for a $50k+ profit.)
And . . . renting out property can be very profitable even with properties with mortgages. I currently own 19 houses, mortgages on 17 of them, and my positive cash flow is over $4000 per month. In 10 years, I hope to have at least 10 paid off (I'm paying down mortgages with the profit). So my income will dramatically increase as the mortgages are paid off.

 

[David Jonathan]

Linda, Thank you again for your reply!

Seriously, I do know that you can invest with little to no moeny down, I've seen the ad's, I've spoken with brokers, etc. It's the "Creative financing" that scared me on this deal - I did a li'l more investigating, and found that selling houses like this where you put the title into escrow, or into a deed trust can actually trigger the due on sale clause, and if you attempt to hide that fact (putting the property in a trust, and selling the trust) could be a violation of 18 USC § 1001 - Concealment ... not something I want to have to start dealing with to say the least.

I'm going to keep reading up on stuff, and I thank you all again for your help!

--Dave.

 

[lcannister]

Until and unless someone is willing to open up their portfolio and financial statements to prove what they allege do not believe tales that are to good to be true, and that even if true it does not mean it is for you nor that the same would apply in your area of the country!