Prove my professor wrong

[AIR]

Well I just got back from class and I need someone to prove my professor wrong. We were going over a chapter on Real Estate Financing, in the book it talked briefly about subject to and assuming mortgages. Well during the lecture the professor skipped right over it saying "subject to & assuming mortgages don't exist anymore so we do not need to learn about them." WHAT??? I could hardly contain myself, I asked him to repeat what he said... He explained that ALL mortgages have an Alienation Clause making it unable to assume or purchase subject to.

[Burke]

I believe this "alienation clause" is the often talked about due on sale clause (DOSC). If you Google it, that is what you get. As has been discussed many times, the DOSC does not make the act of Sub2 or assuming a mortgage illegal. It just gives the bank the option to call the loan due. Ask JimFL how often that has happened to him or any of the numerous other Sub2 investors.

Depending on my relationship with the instructor, I would also be tempted to ask why the National Association of Realtors is selling a "How to" guide on Sub2 if it is illegal. http://www.realtor.org/prodser.nsf/products/141-170?OpenDocument I realize that that in itself does not prove it legal but it is very interesting that his association is selling something that tries to educate it's members on an "illegal" activity.

I tried to find my DOSC a year or so ago on the house I used to own in Texas. I was not successful. Maybe I didn't know what I was looking for but I couldn't find anything that looked like a DOSC. I had a VA loan so maybe they don't include it in their documents.

Have fun and let us know how this turns out.

[Jim FL]

Air,
Have the prof. prove they are right.

They won't be able to.

Then, take a look for my long post on subject to, the steps, etc, and print that out to bring in.
Here is that link:
http://www.magicbullets.com/forum/showthread.php?p=11950#post11950

After that, take these articles by William Bronchick, he addresses this as well, and frankly, does so from an attorney's point of view, which seems to help convince some naysayers.

Take a look here:
http://www.creonline.com/articles/art-071.html

And, if the prof wants, I'd be more than happy to even speak with them direct.
Give me a shout for a phone number, in email, if you want.

Also, isn't this a RE class for licensure?
If so, ask the prof if he is a member of NAR?
If so, on the realtor.com website, and in NAR newsletters, Matt Chan and others, (beleive it or not, we are all from the same class in the late 1990's from another websites convention).......
Anyway, a couple folks, specifically Matt Chan, sell a product, to Realtors, and its listed at, on, and endorsed by NAR.

Another thing, take a look at the hud-1 form, lines 203 and 503, where it says, "loans taken subject to".

Now, the prof may say, "They do exist, just not done anymore"........he's still wrong.
I signed up one this week.........that's pretty recent.

HTH,
Jim FL

[haynesm]

Air
I had, just about 2 hours earlier tonight, gone to the site JIM FL is directing you to and read about the “due on sale” clause by Bornchick. I ordered JIM FL’s class a few days ago and have been reading / studying it. Seems to me both authors are saying the same thing about the “due on sale” clauses. Seems like the “get around” is alive and well. JIM FL – Lots of good stuff in your course. Can’t wait to finish it and get started. Have already put out a “feeler” on a property.

[AIR]

so basically you can't assume the mortgage if there is an alienation clause because the lender makes you pay the entire amount before they convey the property which means you need to secure different financing. I dont have time to look into it right now since I am at a convention for work but once I find the time I am going to build my case and present it on wednesday. Thanks for the input and anything you guys can add to make my case stronger would be apreciated.

[mike_mn]

so basically you can't assume the mortgage if there is an alienation clause because the lender makes you pay the entire amount before they convey the property which means you need to secure different financing. I dont have time to look into it right now since I am at a convention for work but once I find the time I am going to build my case and present it on wednesday. Thanks for the input and anything you guys can add to make my case stronger would be apreciated.

"can't" is the questionable word here.

The proper questions are:

Can a seller transfer the deed to their house to another person or entity without paying off the mortgage? Answer is yes.

Is the Seller in breach of contract based on the mortgage they signed in doing so? The answer is yes.

Can the lender legally call the entire loan due when the seller does this? The answer is also yes.

However, what is not being referenced here is why would a lender call a performing mortgage due in this market? Lenders don't want REO's on their books, so there would be no purpose in them foreclosing based on the Due on sale clause. It would only hurt their position with the secondary market and their ability to lend out more funds. Last I heard, for every dollar of a foreclosed loan on a lenders books, the lender is cut off from $8 to lend out until the foreclosure is off the books. This is info from another person I believe to be accurate, but I have not verified this.

[Jim FL]

Air,
There is a difference between buying subject to the existing financing, and assuming the existing financing.
Most modern day mortgages (those originated after the late 1980's) have the 'due on sale' or 'acceleration clause', sometimes called other things.
Before that, many mortgages did not have that clause and were freely assumable. Anyone could take ownership and transfer the loan into their name, without having to qualify/get approved by the lender.

After interest rates went WAY up, lenders saw folks assuming old loans with lower rates. This is when the acceleration clauses came about, basically forcing folks to get new higher interest loans to buy.
There is law about it, as per the articles referenced earlier.

Now, there are some 'assumable' mortgages around these days, originated after the 1980's, however, most are 'qualifying assumable'.
This pretty much means the buyer has to jump thru the same hoops they would as if they were getting a new mortgage, only to take over the existing one.

Not something I ever want to do, and frankly, not something that is needed.
Hence my method for buying subject to, as explained previously.
So, no, your assumption that when a loan/mortgage has what you called an 'alienation clause', means you must secure new financing, is incorrect.


As for what Mike said, he's pretty much right on the money.
In this market, lenders will not call a loan that is performing, at least, institutional lenders.
The ONLY loan I've ever seen called due, was a privately held one..........and I was the owner of it who called it due.
Over recent years, when the market was HOT, lenders still did not call loans due.
I've NEVER EVER seen a case where the loan was called due in a subject to transaction, based on the due on sale clause.
Sure, some subject to investors have had lenders foreclose, and claimed it was because of the DOS.........however, after looking into each and every claim I heard/read about, all, 100%, had missed payments somewhere along the line..........therefore the foreclosures were from default, not d.o.s. violations.

I also cover the ratios etc in my course somewhat, about how and why lenders will not call loans.
It is 'up to 8 times' the amount of the mortgage in default that lenders are limited until the non-performing asset is removed from their books.

I also have a tendency to combine 'subject to' in the traditional sense, with other things along the way.
We often buy subject to, and negotiate with lenders at the same time for discounts, releases, new terms, etc.......making it all happen at once.
Many times extinguishing junior notes for pennies on the dollar, and keeping nice fixed senior notes in place as we take title.

Anyway, my two cents, keep the change,
Jim FL

[Jim FL]

Mike is correct, the likelihood of a lender calling a performing note due in this market is almost zero.

But, remember, this only applies to consumer residential financing. If the financing on the property you want to assume is commercial in nature then it is a whole different ballgame.

Most commercial notes include verbiage allowing the lender to call, or adjust, the note if they become nervous about the underlying collateral or their likelihood of getting paid. Therefore, you could assume it sub2 the existing financing which you thought carried a fixed rate for say 15 years and then get a notice from the lender adjusting the rate up, maybe even double, and tying it to some market rate and reducing the term to 24 months.

I watched that happen recently to someone who did not believe the lender would do it. Now they are really scrambling because once that hit their D&B profile other lenders saw them as a much higher risk with the associated increase in rates, fees and reduction in allowed LTVs.

It is a whole different world with different rules and in the past sub2 was common in all aspects of real estate transactions. Today, it is relegated to a small corner of the market.


Tim,
Thank you.
Excellent points, and of course, all correct.
I have bought a commercial property subject to before, in another state, some years ago.
The property was a small strip mall, with some apartments above the stores.
4 stores, and 4 apartments, really out in the middle of nowhere.........but the businesses (video store, pharmacy, drycleaner, and a taco hut) did well, because there was nothing else for rural residents.
Anyway, we took that one, with some money upfront, and buying subject to.
The lender was a local bank, and I knew the Bank president. He knew I was buying this way, and did not change the terms etc.
Probably because the seller was sort of a relative. (via a previous marriage).

I frankly assumed Air was speaking about smaller residential deals, as I recall from somewhere the course was for a RE agent license?

You will certainly be one of the brains I seek out for picking when I finally decide to move forward and buy more commercial property.
I do see that and paper as a large part of my future.

It's just hard to get away from SFH's when I've done it for so long, and frankly, it comes easy after so much practice.

Take care,
Jim FL

[AIR]

I'm not JUST trying to prove him wrong, I was kind of insulted on behalf of JimFL. I don't know Jim personally but I believe that he does Sub2 deals. So by him stating over and over again these type of deals DO NOT EXIST AT ALL kind of ticked me off.

I would also like to know for myself, this seems like an excellent method to invest after I obtain a few properties since it might be tougher to get financing. I can't imagine if I was a little less experienced and the professor told me "sub2 and assuming deals DONT EXIST" I may just write it off and never think about it again.

[The GUY]

Well I just got back from class and I need someone to prove my professor wrong. We were going over a chapter on Real Estate Financing, in the book it talked briefly about subject to and assuming mortgages. Well during the lecture the professor skipped right over it saying "subject to & assuming mortgages don't exist anymore so we do not need to learn about them." WHAT??? I could hardly contain myself, I asked him to repeat what he said... He explained that ALL mortgages have an Alienation Clause making it unable to assume or purchase subject to.

Also, mortgage assumptions are not a thing of the past either, well not in the commercial realm. Typically it is much more cost effective to assume a mortgage in a commercial transaction rather than obtain a new one. This is also very typical in stock purchase agreements and buying out companies. Mortgage assumptions in that realm are always subject to the mortgagee approval of the new principle. It is also not uncommon for one bank to purchase another banks paper to utilize the assumption clause.

Bottom line perhaps is these are tools used by those who know how to use them. And what's that saying...if you don't know...teach?
:double0sm

[Debbie]

I'm not JUST trying to prove him wrong, I was kind of insulted on behalf of JimFL. I don't know Jim personally but I believe that he does Sub2 deals. So by him stating over and over again these type of deals DO NOT EXIST AT ALL kind of ticked me off.

I most certainly can understand where you're coming from, Ryan.

It's how I would feel in your shoes. Jim is among the several people I highly respect and like. It's the loyalty thing, ya know.