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All Forum Posts by: Timothy Asp

Timothy Asp has started 1 posts and replied 3 times.

Quote from @Andrew Kiel:

Ahh, subject to transactions.  My favorite way to buy real estate!  *Disclaimer: I'm not an attorney nor do I play one on TV, this is solely my opinion having done dozens of subject to, wrap, and owner financed transactions*

First, I believe the trust model is very flawed.  This is not a workaround to the due on sale clause.  The moment someone else becomes the beneficiary, you're in violation.  As I understand it, the exception to a due on sale clause by transferring into a trust is: "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property"

The moment you are no longer the beneficiary is the moment you're in violation.  If the loan gets called because you moved it into a trust - the burden of proof will now fall on the owner to prove they did NOT violate.

Let's just pretend you got summoned to court and had to explain yourself to a judge.  Could you convince a competent judge that you structured this transaction for any reason BUT to hide it from the lender?  That is intent to deceive and could be considered fraud.

The bigger issue I have with the trust model of taking a property subject to is how it is often taught by the so called experts.  If you prepare a trust document for someone other than yourself (aka the seller on a deal you're working on) that's practicing law, the first no-no.  Second, you have intent to deceive.  Finally, if you sell one of these to a third party (where you're not the original seller) and they default - really bad.  Do this a few times and you'll almost certainly have your local attorney general breathing down your neck.

Let's take this one step further - in the example given above you sell your house with the beautiful 2.7% 30 year fixed mortgage to a new buyer by doing a wrap or a straight subject to transaction.  Lender calls the loan.  Now what?  You've sold the house - big mess to refinance as you don't own it.  Your buyer will be forced to cash you out OR you must have enough cash to pay off the underlying loan.  If you and your buyer know this in full disclosure - great.  If not, don't do it.

Now, with that said, I've "violated" the due on sale clause many, many times. However, I do it "openly and notoriously" by recording the warranty deed (or in the case of a VA loan, the agreement for sale/contract for deed). When we record the deed, there is clearly no intent to deceive (the lender). Could the loan get called? Yes. Here's the real question: if the loan gets called, can I handle it by refinancing the property? In my case, this is an easy yes. If it's a "no", you may not want to do a subject to transaction.

So again, my opinion here, but in summary: Subject to transactions are great - but do them knowing full well you are in violation of the due on sale clause and you may someday have the loan called.  If you can't easily refinance or this causes you to lose sleep at night, don't do them.  That simple.

Great points Andrew! Lots to think about.  I like your idea of just ignoring all that trust nonsense and just doing the transaction subject-to and handling the fallout if it ever happens (which is unlikely).  

Regarding refinancing if the note is called - my limited understanding of these trusts is that the trust becomes the owner of the note, and thus responsible for payments, refinancing and whatever liability happens from the due-on-sale enforcement.   Refinancing would then happen through the trust and the new beneficiary of that trust (the buyer).  Am I wrong about that?

Also regarding if you get caught - it wouldn't make sense for a lender to sue over this, since they have mechanisms to just call the note due and force a refinance. Lawsuits are expensive.  Like you said, everyone does this with transfers of rentals to LLCs and trusts for liability protection and other reasons, so lenders are going to have a hard time claiming harm to their business when this happens constantly without enforcement.  I think the legal term is "laches" - if you don't enforce or delay too long in enforcing a right or privilege, you lose that right.  


Quote from @Nathan Gesner:
Quote from @Timothy Asp:

It's possible, but why would you do it? If you have a performing asset with a low interest rate, why would you want to get rid of it? Sure, you could cash out and walk off with some nice equity thanks to the crazy sales market, but you'll have even more equity if you hold onto it for another 10 - 20 years. Plus you get rent income each month and tenants pay down your mortgage, you get tax benefits, etc.


Not looking to sell now - Just interested in understanding the options available if I'm forced to sell due to unforeseen circumstances. 

The huge price appreciation and taking cash off the table is always in the back of my mind - it takes a lot of years (risk adjusted) to hit the gains we've had in the last couple years in residential rentals, and selling would lock in those gains and give some optionality going into this new market (both in RE and other markets). 

This is something I've been thinking about quite a lot now that we're in a high(er) interest rate environment, and I'm interested in hearing from the BP community on what they think.  

Disclosure: Not a mortgage broker, lawyer or agent, and not licensed in any related field. I'm probably wrong, but discussions are fun, and that's what forums are for :)  

Like I'm sure many of you, I've got a home with a 2.7% 30yr fixed mortgage with lots of life left on it.  I'm dreading ever having to sell this home as that would mean giving up this wonderful rate.  It's not entirely logical, but it also grinds my gears that I'd essentially be giving the banks what feels like a gift by converting a low interest loan on the property into a market rate loan (assuming the new buyer is using conventional financing of course).  

So why not sell the home with the mortgage?  Let the new buyer assume the mortgage, and do a wrap-around mortgage for the remaining balance between down payment+existing note and sale price.  Big win for the buyer, and win for you since the affordability on your home for buyers is a lot better than one that would be sold with only traditional lending.  

Except this isn't possible...(?). Almost all loans (except FHA, USDA, and maybe some others) have due-on-sale clauses which allow the lender to call the note if title is transferred. From what I can tell, current rules were set in 1982 with the Garn-St. Germain Depository Institutions Act and the supreme court case Fidelity Federal Savings and Loan Association v. de la Cuesta, 102 S.Ct. 3014, (1982) which upheld the rights of banks to enforce these rules. 

Garn-St. Germain gave some carve-outs to the Due-on-sale enforceability, including transfers and sales to family members, trusts, second-liens, etc. This is with respect to loans secured by residential real property containing less than 5 dwelling units, so no commercial.

From this, there's been a number of seemingly-reasonable and smart folks writing about the enforceability and practicality of getting around the Due-on-Sale clauses.   Here's the best sources and discussions I've found discussing the issue and laying out ways of getting around this clause:

- Bill Bronchick - "There is no Due on Sale Jail"

- CRE University - "How to beat the due on sale clause"

- Robert Bruss - "The six pillars of assumption"

- Richmond Law Review -"The due-on-sale clause: A marriage gone sour - a checklist for the practitioner" This one is an actual published law review, but it's old.  Pre Garn. 

So TL;DR;

It seems like getting around the due-on-sale is possible, and selling the home bundled with a mortgage is possible using Land Trusts and roughly the following process (From CRE University)

STEP 1: Sammy Seller signs a trust agreement with you as trustee of his trust. Sammy is named as the “beneficiary” of the trust.

STEP 2: Sammy Seller transfers title to the trustee (no violation of the clause)

STEP 3: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record. Sammy moves out and you move in.

STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.


It seems like Lenders aren't paying attention to the details on performing loans - there are no spies at the title company, and almost all loans are sold off and handled by servicers these days.  

Now why would I want to deal with this legal headache of lawyers and trusts and all this? Is it worth it? 

With rates double what they were 6 months ago, we're talking serious savings for homebuyers if the seller was willing to do something like this.  Plus the seller would benefit by improving the desirability and affordability of their home for conventional buyers.   Lastly, maybe there's a way to turn your low interest rate mortgage into an asset by arbitraging the difference between what the trust pays for the note and the payments to the trust by the new beneficiary (buyer). 

So what do you think BiggerPockets?  Ethical?  Morally Gross?  Too Risky?  Worth it?  Let's hear it.