$200K Equity Sub2 Question
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9yOriginally posted by @Curtis H.:
Thanks Chris.
Would it be a bad idea to refinance with the same lender I'm currently paying? They actually are really good. Curious if others have done this.
I think the risk there is that once you flag that mortgage as having been part of the whole 'subject to' thing with that lender, which violates the due on sale clause, they will flip their you-know-what and call the note due and payable in full.
The 'subject to' things only continues to work as long as no one explicitly brings it to the attention of the loan servicer, and if they for whatever reason don't notice. If they were to do your refinance, they'd be implicitly acknowledging 'subject to' as legitimate, which no one in my industry wants to do.
56 Replies
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Hi @curtis h.,
Yup, refinance the first position mortgage into your name, then get the HELOC.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Curtis H.:
Thanks Chris.
Would it be a bad idea to refinance with the same lender I'm currently paying? They actually are really good. Curious if others have done this.
I think the risk there is that once you flag that mortgage as having been part of the whole 'subject to' thing with that lender, which violates the due on sale clause, they will flip their you-know-what and call the note due and payable in full.
The 'subject to' things only continues to work as long as no one explicitly brings it to the attention of the loan servicer, and if they for whatever reason don't notice. If they were to do your refinance, they'd be implicitly acknowledging 'subject to' as legitimate, which no one in my industry wants to do.
- Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9yChris Mason Thanks for the honest reply. The thing I like about this lender is they service almost all their loans. So the likelihood of my loan being sold 3 times is pretty low. But I agree the risk is there and I could be flagged as a shady borrower so for this one I should just go elsewhere and use them for portfolio loans on my rentals. I am in the best shape of my life financially with high W2 income for two years and excellent credit, so I'm sure I could get good rates many places on the refinance.
- 9yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
@Curtis H. , I've seen variations of your comment, "The thing I like about this lender is they service almost all their loans. So the likelihood of my loan being sold 3 times is pretty low."
I've never understood what the big deal is when a mortgage is sold. My rate never changes, only the Pay to the Order of: section of the check changes.
What is your hesitation that the loan may get sold? I'm not trying to be combative - maybe I'm missing something...
- Investor · Bedford, TX · Member since 2016 · 24 posts · 7 votes9y
@curtis h. ,
Just another thought. You could just do a cash out refinance while rates are low. I just did this and found a lender with reasonable closing costs, especially if score is good. Just weigh your options b/c lenders are eager right now. - Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9y
I had a bad experience with my first home purchase 16 years ago where KB Homes financed and sold a whole subdivision of houses with some shady practices. I think it had something to do with the taxes not being part of the loan but not informing the borrowers. Well a few years later they sold all the mortgages to Citimortgage who immediately rolled all the back owed taxes into everyone's payment. People's mortgage went up an average of $500. On a $150K house that's a big jump. Half the subdivision went into foreclosure, it was on the news, KB got sued, etc. It was really sad to watch neighbors one by one pack up and leave. I made California money living in Texas, which was the only reason why I was able to pay the additional $500 a month for a full year and a half. From a financial standpoint, I still own that home as a rental. It has appreciated $40K or so in 15 years, which is FAR BELOW what the Austin/Round Rock area has appreciated if you bought a home there 15 years ago. In fact it's one of the worst areas because all the homes that went to foreclosure got bought by investors and rented out. So the area is 65% rentals although they are all houses. So yes, it cost me a lot of money in appreciation. I know it's not ALL because the mortgages were sold, but I'm still scarred!
The simple and truthful answer as to why I don't do a cash out refi...I don't want the temptation of $200K sitting in a bank account. I have a lot of things that can be done to my primary residence that aren't needs, but wants. If me and my wife know we have $200K at our fingertips, that can be very dangerous, and how we have seen many people get into trouble during the crash. A car here, remodel there, and boom you are in trouble.
- Investor · Bedford, TX · Member since 2016 · 24 posts · 7 votes9y
@curtis h. - Makes sense. I totally get the temptation. Sigh! It's so easy to be a consumer. I had a HELOC 7 years ago with a variable rate thru my credit union and it turned out to be a good experience for me. That being said be aware of how this could impact further lender financing if you hold a HELOC. I don't know myself but I would reas up on it.
- Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9yPaul Parker From what I read if you hold a HELOC but don't borrow against it in most cases that won't hurt you much. Like having a credit card with a zero balance. However it seems not ALL lenders report to the credit agencies this way, so you have to ask them up front if you have a zero balance how do they report to the agencies.
- Investor · Springfield, MO · Member since 2012 · 320 posts · 115 votes9y
Could you find a private lender that could payoff the sub2 loan. Title the property in a trust where you are the trustee and your lender is the beneficiary. Trustee's are the name on title, while beneficaries actually own the trust. Get and record an option to buy the property back to better secure yourself. Then get the HELOC pay the private lender a flat fee or a percentage. The HELOC lender shouldn't bat an eyelash since it looks like your name is on title.
- Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9y
I guess I could find a private lender, but remember I live in CA, so home prices are in the $500K range and that is not money someone parts with easily to someone who is not a full time investor.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Curtis H. frankly the KB example is really the issue with the American buyer.. so many just have no clue.. to blame the lender or seller because you did not pay our property tax's is a stretch..
the tax collector would have sent the tax bill to you... unless the lender set up a separate escrow to pay them.. @Chris Mason this sound feasible to you .. sounds like total cop out to me.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Jay Hinrichs:
@Curtis H. frankly the KB example is really the issue with the American buyer.. so many just have no clue.. to blame the lender or seller because you did not pay our property tax's is a stretch..
the tax collector would have sent the tax bill to you... unless the lender set up a separate escrow to pay them.. @Chris Mason this sound feasible to you .. sounds like total cop out to me.
That scenario described is a total nightmare!
If I had to speculate (CONSPIRACY THEORY TIME!!!)....
- Builder's in-house lender, by not including an accurate property tax estimate (done right, we qualify you based on our estimate of what the prop tax bill WILL be, not on what an empty parcel was historically taxed at), was able to wipe the floor with everyone else on the "what's my monthly payment?" question, so everyone stuck with the "convenient in-house lender."
- Mandatory escrow accounts all around, naturally. A lender is technically allowed to ding your rate if you opt out of having an escrow account, even if putting 20%+ down, so that's an easy sell. The escrow account at closing only budgeted for the historic empty parcel tax bill. Escrow accounts are supposed to be regularly audited, obviously a method was found to delay the audits until all the units in the subdivision were sold.
- Not only were they quoting ~$500 less than everyone else because of the above, they were likely qualifying everyone with PITI being ~$500 less, meaning they'd approve you when no other lender would.
- There were obviously some behind the scenes meetings going on.
I personally don't take part in the 'builder's preferred in house lender' scheme... too many moral hazards.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Chris Mason End of the day though everyone knows in CA tax's are 1 to 1.2 % of what you pay for the property .. and if you have a Mello Roos bond even more...
so if you bought a 500k home and were told tax's are 3k YOU as the buyer should know this is not correct.. but then again buyers just want to believe..
I have seen it and its why sub prime was so prevelant.. no one took the time to figure out the reality they just said A( whats is going to cost me a month) no other thought.. then when that changed its oh my god everyone else at fault not me.. who should have known how to do very very SIMPLE math.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Jay Hinrichs:
@Chris Mason End of the day though everyone knows in CA tax's are 1 to 1.2 % of what you pay for the property .. and if you have a Mello Roos bond even more...
But this was in Texas, not CA. So perhaps the lender could play dumb.
Your typical FTHB has no idea what Prop 13 is until I tell them. Not because they are stupid or anything, but because we don't bother teaching young people finance, accounting, budgeting, etc, any longer in high school or college. (Would the "if you're a doctor, zero percent down on a HORRIBLE mortgage!" thing be a thing if that weren't the case?)
Hell I took a course in college that included two textbooks just on Prop 13 (out of 5 for the semester long course, and this was NOT a real estate or finance course), but I still couldn't even calculate simple interest until I entered my current profession, and at no point did that upper division UC Berkeley course include a "practical application" example of the implications of Prop 13.
Up until I made "this is Prop 13" a standard part of my 45 minute FTHB "how to adult" thing, I was still getting people once in a while that would say one house is better than another because they pulled the tax bill and it was lower.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Chris Mason that's the point a good RE broker and a Good mortgage broker will point that out straight away...... buying a home Is the largest financial transaction someone will usualy do in their life time.. get with it folks.. don't blame others.
- Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9y
I agree and disagree with you. Mostly disagree :-)
I agree the buyers (including myself) should have been more aware, but to act like the seller (who was the builder) had no responsibility in this is a bit surprising. If they were so innocent they wouldn't have gotten sued (and settled), and wouldn't have been on the 7oclock news as part of a secret investigation. I will say I don't honestly remember if it was the taxes or not. Maybe they rolled the first 24 months of taxes into the loan to keep the payments low, and then after that the money needed to be put in the escrow account. I don't know. It was sneaky, no doubt about it. Not even a discussion really.
Ask yourself when you or many of your relatives were 19 and 20 if someone played escrow games on their very first home purchase would they have caught it? Most people think...I make "X" amount a month, and my payment is "Y" amount a month for the next 30 years. Can I afford that yes or no? It seems real simple. I even put 20% down as a 21 year old to avoid PMI! I was pretty damn smart now that I think about it. And they STILL pulled a fast one on me. These were 30 year fixed mortgages, nothing fancy to make the numbers work, nor was it ever implied that a monthly payment could increase or would increase.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Curtis H. first off congrats for pulling the trigger at a young age and qualifying for home.
just because a builder was sued or on the news does not make them the devil.
but regardless most of the sub prime melt down was this exact attitude.. what does it cost me today ?? with no thought to tomorrow.. now dodd frank has helped alleviate that by making you the buyer qualify at a higher rate instead of the teaser rate.. and I have no doubt bad mortgage folks exisited preying on sub prime borrowers or those that could not read the docs and understand them.. this is well document.. it has been pro offered that the GFC was primarily caused by sub prime and from my experience in it that's exactly right... giving mortgages to those who should NEVER have had them.. for various reasons.
- Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9y
In this case, the builder was the devil. Sorry.
I think what you described was EXACTLY what happened. I was looking for the news article and found it the headline and the first sentence, but you needed a login to see the rest. So the article is still out there. When I was reading your post it was like reliving it all over again. I think you are spot on. So in that case, even as you describe it now, it is STILL capable of fooling most people on their FIRST home purcahse. That's the key here Jay, this was most people's FIRST time buying a home, FIRST time seeing the word escrow, FIRST time seeing PITI, etc. I mean really, how the hell are they supposed to know? One other note. I was NOT subprime, and I did not have trouble qualifying for the loan. This was simply a case of a builder being tricky to sell all the homes in the subdivision, selling the mortgages and bolting. The only fault I see on the buyer side here is not seeing the conflict of interest of using the "in house" lender.
- Investor · Springfield, MO · Member since 2012 · 320 posts · 115 votes9y
If you have a $200K equity then you should be able to find the money. Look for someone with a big IRA or someone coming out of a 1031 exchange that needs to identify a property so they don't have to pay taxes on their gains.
- Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes9y
I don't see what's so complicated about getting a refi. You've been paying the existing lender for two years. Call them up and say "I've been paying you for two years. I want to refinance, so you can work with me or I can work with someone else". You've been a profitable customer, they'll want to keep you. They don't benefit from calling due on sale for some lofty moral reason.
- 9yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Curtis H., just curious - How did you manage to get on deed to that sub. 2 house with a secured mortgage to a different buyer?
The 1031 Investor5137 Reviews - Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes9y
It's not that it's complicated, it's just risky if I don't have another lender lined up FIRST. Let's say I call them and say what you mentioned (which I would love to do) and they realize I pulled an okie doke on them and don't take kindly to it and call the loan due immediately. If I don't have a lender ready to go with all my docs verified, I could be in big trouble and be FORCED to quickly sell a home I want to live in because I don't have time to get financing in place. Then find a new place to live with a family of 5. Not good. So yeah, it can get complicated real fast in my opinion.
"They don't benefit from calling due on sale for some lofty moral reason."
The way I see it, they do. $400K is owed on the loan, and they can sell this house in a week to an investor for $600K, and a homeowner for $650K. Unless I'm missing something, they stand to gain quite a bit from calling the loan due.
I simply looked for homeowners who were about to go to foreclosure sale, and started knocking on doors. The first couple houses I was a bit nervous, but kept at it. This was probably house number 5 or so, and they actually were willing to listen. They were listed with a realtor by the time I knocked on the door, so I told them I didn't want to bother them, but would love to email them my idea that would help both them, and me. I told them I had to talk to them personally because their realtor won't tell you about my offer because the deal is better for you than them, but I will contact your realtor no problem if you are interested in my proposal. I am not trying to cut him out. They gave me their email, were interested in the offer, and I called their realtor and told him my exact offer. He was livid, but also was a slime ball trying to rake them over the coals for a full 6% for sticking a sign in the yard. He told them he could stop their foreclosure and then stuck a sign in the yard as their realtor and they never saw him again.
- I had the owner call their lender with me on the phone and gave them permission to talk to me. I got all the info about how much was needed immediately to stop the foreclosure, etc. I negotiated that to half now, and the other half added to the monthly payments over 12 months. The bank agreed.
- I had the owner sign a contract
- Contacted a real estate attorney referred to me by a BP member to email me an iron clad Sub2 addendum he already had in a word file (cost $325) and had the owners also sign that.
- Called the lazy and angry realtor and said I'll give him 2% commission for doing nothing. If he declined and the home went to auction in two weeks he would get nothing. He agreed to take the 2%, which was about $10K. I had budgeted for 3%, so I took the last 1% and gave it to the owners as walking money because they were in a tough spot, and I really did feel bad for them. It was their family home since they were born. They were in their 40s and 50s.
- Did a title search (IMPORTANT!) and found out there was a $2000 unemployment lien on the home. Surprise!
- I had an inspection done by a contractor to make sure nothing was a dealbreaker
- Called an escrow agent to handle all the funds to be wired to the bank, commission to the agent, money to pay off the lien, and walking money to the owners.
- I went to escrow office and signed all the paperwork one day. The next day the owners went to the office and signed. Escrow agent records the deed. I'm now the new owner and there is nothing the original owners could do to take the house back. It was mine.
- Whole process took less than two weeks.
- I gave the owners an extra 3 weeks to get their affairs together and find a new place. Then asked them what they needed at their new place. They said a fridge with icemaker and television. So I bought a fridge off Craglist for $150, picked it up in my minivan and dropped it off at the house. Gave them a gift card for $500 for a television, hired them a moving service for $250, told them leave the junk in the yard and attic, I'll take care of it, and wished them well. They were extremely appreciative.
Sorry to be long winded but I thought some other people may draw inspiration from this experience. It was my first creative deal, and now it's my home in the hottest area in my city. I otherwise couldn't afford to live here. All that, and never once did I have to apply for a loan, get my credit checked, etc. I just needed access to cash to reinstate the loan, which I had in savings and 401K. So I'm looking for my next deal the same way. Looking for anyone about to go to auction that is behind more than $25K and less than $100K. Anything below $25K behind in this area and usually the homeowners can figure out a way to get the money to save their house so I won't bother. $50K and above is usually tough to come up with in weeks, so those are my targets. It is really tough now because the area is appreciating so fast, they can put on the market and unload to investors within a week. So I have to find them before they get realtors if I want to save $10-15K. The two main advantages I had to win this deal was that I was pitching them that this would be a house for me and my family to live in, and that I would MAKE SURE they transitioned ok. That REALLY helped, and it was the truth. Also, I offered THEM the extra money the realtor was trying to pocket. 2-3% commission on a $450K home is more than enough for sticking a sign in the yard. 6% is robbery, and that is what the realtor was trying to get. In fact, I did all the paperwork and had the signings with the owners. Me nor the owners ever saw the realtor. I couldn't tell you what he looks like and he made $10K.
- Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes9y
@Curtis H. ah, sorry, I'm in a power of sale region so the bank wouldn't gain a damn thing by forcing sale.
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