All Forum Posts by: Luis Herna

 The reality is many of these are not deals because the sellers will not do subto.Its like asking a married person to marry you and leave their spouse. Well yes technically they can do it but they will not. The number of subto deals is extremely low (far less than 1%). 

My question is if you do not have $ or a partner and do not know the numbers or how to calculate them, then why are you wasting your time with this? You could spend a lot less time finding a traditional property and go that route. But again, real estate takes money. If you do not have it, 99.9% of us start with it by earning it.

Yes, the entire $300K can be structured as an interest-only loan, depending on what you and the seller agree upon. However, it's important to understand that while an interest-only structure can reduce your immediate payments, it doesn't avoid taxes. The seller will still be responsible for paying taxes on the interest income they receive, and when the principal is eventually paid, there may be tax implications for both parties, depending on how the deal is structured. It’s advisable to consult with a tax professional or real estate attorney to ensure the arrangement meets both your needs and complies with tax laws.

In a seller financing deal, once you start making payments, any equity you build in the property does indeed go to you, not the seller. Essentially, the seller has agreed to let you pay off a portion of the property over time, so as you pay down the loan, you’re increasing your equity stake in the property. The seller’s equity was essentially converted into a loan to you, which you're paying back with interest. If you’re managing this process, using a platform like Agecroft Capital can help streamline the tracking of payments and equity as you go.

As far as the risk? Yes, being in a second position is generally considered higher risk because the first mortgage takes priority if the borrower defaults. In the event of a foreclosure, the lender holding the first mortgage is paid off first, and the second-position lender, in this case, the seller, only gets whatever is left. This can be particularly risky if the property's value drops or if the sale doesn’t cover both loans, leaving the second lender with a reduced recovery or possibly nothing at all. Additionally, if the borrower faces financial difficulties, they’re more likely to prioritize payments on the first mortgage to avoid foreclosure, which could lead to missed payments on the second loan. Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss. It's important for both parties to fully understand these risks before entering into a second-position loan agreement.

 1. you could structure it as interest only, and the lender would pay ordinary income tax rate on the interest paid. even if interest rate was 0% they would still pay around 4% (FAR rate) in taxes.

2. If you are paying interest only, you are not paying down the mortgage. on the $700k you would be, but equity depends on whether its a land contract or traditional note  - depends on structure.

3. good template google fannie mae security instruments.

Also, my question is if you have not money for a down payment, how can you afford a $700k p&i payment along with $300k I/O payment?

So for those a little “fuzzy” on “due on sale” let’s state it clearly

When a property is transferred either through warranty deed, contract for sale, leasehold interest for more than 3 years, or any other method meant to transfer fee Simple property rights, the lender has the RIGHT, (not obligation) to “accelerate” the note, in other words call the note due.  The lender still has to follow foreclosure laws of the jurisdiction (state) the property is located in.  This means the lender must (1) reject any payments from that point forth (2) comply with providing proper notification (3) allow a certain amount of time for the borrower to pay the loan in full and (4) auction the property off in non judicial states.  In judicial states the lender additionally must file suit and have a judge sign off on a foreclosure sale.  This takes 2 months to 3 + years.  The borrower can pay off the remaining principal balance, unpaid interest earned, legal fees, etc. At any time up to the foreclosure sale and would retain ownership of the property.   

In the past, two things (there are many others) kept lenders from foreclosing when a property was sold without the loan being paid off and without lender approval.  First, it was difficult for lenders to identify which of their loans were being sold subject to as county recording information  was  not easily accessible. Second, interest rates have been in a general decline for 40+ years and so lenders could only replace a paid off mortgage with one that yielded them less. Now, deed information is on line and easily accessible, and interest rates have risen the last 3 years.  

The Garn - St Germain Act was originally intended to prohibit Federally Insured institution or Federally guaranteed loans from being non assumable.  This was because when mortgage rates hit 18% in 1981 all real estate transactions, except for cash sales, would have stopped without the assumability of 6 -7% mortgages written 10 years earlier.  The banking industry and mortgage industry put on a full frontal lobbying assault with the result that the Garn - St Germain Act was GUTTED.  What remained was that institutions could not enforce the due on sale clause under only 2 specific scenarios; (1) the “transfer” was from the debtor to a living trust he remains in total control of, and (2) the transfer is between two spouses as a result of a court order divorce decree. 

In a “subject to” transaction the parties have additional risk higher than a traditional sale. The buyer risks having the note accelerated and having to come up with the cash to retire the note to keep from losing the property.  The buyer also has the risk that the seller will sue him if such does occur and the buyer is unable to retire the note.

The risk for the seller has to do with the fact that the seller is liable for a note secured by a property he no longer owns. So, all the normal options of selling the property, getting a tenant, negotiating lower payments, restructuring  the note, modifying the note, etc. are no longer available to the seller/borrower should the note be called due. 

Although there are numerous safeguards, contracts, escrows, that can be used to mitigate the additional risk, that risk can not be eliminated. Each participant in the transaction must decide for themselves if the benefits outweigh the increased risk. 

Yes, but with just a promissory not with the seller you could sell the house and then refuse to pay the seller! Very difficult to force collection on a debt not secured by an asset.

The suggestion is you need to have the ability to come up with that down payment to pay the seller off in an emergency OR just sell the property and pay everyone off!

This is investing, not gambling. If you don't have the ability to cope with issues you are just hoping things work out instead of making sure they do.