Just like anything else in real estate investing. Nothing is fullproof. Every strategy will have its issues. Taking over existing financing is no different. There are a few things to watch out for when you are negotiating using subject to financing.
The biggest issue for property investors when dealing with subject to financing is the due on sale clause. This is usually in a mortgage agreement so that the lender doesn’t get hurt on the deal. If you have any experience in real estate investing you probably already know what the due on sale clause is. The due on sale clause says that the institution lending the money can accelerate the loan for the full balance.
Don’t get too worried about the acceleration of the loan. The lender doesn’t necessarily want to do that. It is a big hassle for a lender to take back a property. The last thing they want is property on their books. They don’t want the hassle of trying to sell the property to get their money back. Lenders would much rather work with a new investor to bring the loan current and to provide income for the institution.
That being said, lenders do sometimes call loans due. It is just a part of the business. Usually lenders will send a default letter to the person on the loan warning them that they will call the loan due and that they will give them a period of time to bring the loan current to avoid the acceleration of the loan. If the borrower cannot bring the loan current they lenders will then begin the foreclosure process which usually takes quite a while. From my experience in the lending business it usually takes 2 to 3 months. In most cases lenders will work with the borrower to bring the loan current. So don’t be afraid to call in with the borrower to discuss the situation to see if you can get the loan issue settled.
I’ll say it again….The last thing a lender wants to do is to foreclose on a property.
The good thing about this situation is that you are not on the loan. So if the lender, the borrower, and the investor cannot agree on a solution, there is no damage to you. There is no cash out of your pocket and no damage to your credit.
Assuming a loan and preventing acceleration of the loan
The easiest way around the acceleration of a loan when you are trying to work a deal with the borrower is to simply be quiet about it. Don’t let the lender know that you are taking over the payments unless you absolutely have to. If you are taking over payments for the borrower you don’t have your name on the mortgage contract, so you are not legally obligated to anything. The borrower and the lender have all the risk.
Most lenders find out about the change when property investors get an insurance policy on the property in their name. the insurers will notify the lenders of the change. To combat this many investors will go and get a second insurance policy on the property. There is nothing wrong with doing this. There may be a bit more of an expense for you, but not a huge one.
Another way around this is called a land trust. This trust is done for the benefit of another party…that is you, the investor. This does not violate a due on sale clause so you are safe there. It is kind of complicated but basically the seller will deed the property into a land trust naming the seller the beneficiary and the investor the trustee. The seller signs another document moving the benefit of the land from himself over to you.
You must notify the lender of the land trust. In these documents, the seller will notify the lender of your involvement in the property and that you will be the person to contact about the property.
I don’t know a lot about using a land trust. So that is as much as I can tell you. But I would suggest doing more research on land trusts so that you can have this tool available to you when you are trying to find some great real estate deals.
You may be wondering about the legality of the land trust and rent to own or lease purchase investing. Many real estate professionals are aware of these practices and often times they use these strategies. It is a great way to invest in real estate and use minimal money out of their pocket.
In the end, just about all lenders want you to keep they property. They don’t want the investment property, they want checks. Odds are very, very much in your favor that the lender will not call the loan due. It just does not make much business sense to do that. This is true even if you don’t try using the land trust or the insurance policy. Doing those things just increase your odds even more.
Using limited power of attorney
If you are an investor that uses creative financing techniques such as subject to financing, there may be a situation in the future when you will need a signature from the seller that you worked with. It could be a check that you need signed over to you, or it could be a title problem that needs attention. Often times these sellers have moved away and it is impossible to find them. So what do you do?
Limited power of attorney is an answer. What is limited power of attorney? This is a document signed and notorized by the seller that allows you to sign for him. The document is limited to the property and nothing else. Creating this document is a good idea just in case you have any unforeseen problems pop up in the future.
