Seller financing vs. Sub 2 and due on sale clause
Investor Agent · Burke, VA · Member since 2014 · 243 posts · 12 votes
Hi, I know that the due on sale clause is something to be aware of with Sub2 deals. I also know that people recommend that you do seller financing ONLY on houses owned free and clear.
However, why is that? If people do Sub2's with the possibility (however vague) of DOS clause kicking in, why not do seller financing if there's an existing note?
Would it be because there's a risk that the seller will just pocket the money as opposed to actually paying the mortgage.
One other question: If the seller is paying a mortgage and they have maybe 5-10 years left, is it possible to do a hybrid scenario where you could take it Sub2 for a portion of the sale price and then the rest of the sale price as seller financing?
Any insight would be great. Thanks!
Brian, a Sub-2 is seller financing, the underlying mortgage holder is not extending that balance owing to a Sub-2 buyer, the seller is.
Equity is another amount that can be extended as seller financing, I advocate using a second mortgage arrangement with a lien filed, that does two things, generally blocks the buyer from creating other mortgages and provides recourse for the seller in the event of default.
Is there some reason, some goal to accomplish from changing horses in mid stream? Either way, the buyer is in title, so what would be the point? :)
Brian, a Sub-2 is seller financing, the underlying mortgage holder is not extending that balance owing to a Sub-2 buyer, the seller is.
Equity is another amount that can be extended as seller financing, I advocate using a second mortgage arrangement with a lien filed, that does two things, generally blocks the buyer from creating other mortgages and provides recourse for the seller in the event of default.
Is there some reason, some goal to accomplish from changing horses in mid stream? Either way, the buyer is in title, so what would be the point? :)
If the property is free and clear at the time of your closing it does not mean the Seller can not take a mortgage out in the future, for most generic Seller financing contracts allow the Seller to have debt less then the financed amount.
To @Bill Gulley point, many Sellers who is offering financing want to liquidate the property and will not jeopardize that by violating the contract.
When it comes to Seller financing anything is possible. If your is a mortgage in place odds are that no other mortgage can be created without the mortgagor consent but we all know that his opposite happens every day.
If the property is free and clear at the time of your closing it does not mean the Seller can not take a mortgage out in the future, for most generic Seller financing contracts allow the Seller to have debt less then the financed amount.
To @Bill Gulley point, many Sellers who is offering financing want to liquidate the property and will not jeopardize that by violating the contract.
When it comes to Seller financing anything is possible. If your is a mortgage in place odds are that no other mortgage can be created without the mortgagor consent but we all know that his opposite happens every day.
First, your post is very hard to read/understand, can we clean up the grammar/spelling?
A buyer in a Sub-2, wrap who is in title can encumber title without the consent of any underlying mortgage holder, if that subsequent lender is willing to loan behind the existing financing and the borrower is in title.
As to what you're saying my point was, can't make heads or tails out of that, which contract?
No, when it comes to seller financing, anything is absolutely not possible.
Posts that suggest that investors can take a casual approach in financing are just dangerous, it's not 1994, it's 2014, and even in 1994 people screwed up financing daily thinking they knew what they were doing, I know because I had to clean up the messes investors, Realtors and even lawyers left behind.
And, you can't limit someone who holds title as to their rights to draw out equity or enter into any other financing agreement, you can put in your note or your contract, but it won't hold water if push comes to shove, they own the place. No future lender is required to read the existing note or terms, other than to the amount of the lien, it's irrelevant. I know because I've made seconds from installment contracts and could foreclose, I don't need Wells Fargo's (or any lender's) consent or give them notice.
Unless you have some legal purpose of doing so that outweighs the owner's interests to the enjoyment of their property, you can't bar them from obtaining a second mortgage.
For example, you may have a reversionary deed in an estate matter where the condition of the transfer is not to further encumber title, but this isn't the norm of any seller financed transaction.
Seller financed transactions are installment sales, financing equity, not cash and they are under different requirements, you can begin studying under the Uniform Commercial Code, UCC, and how equity is treated based on a sale price unlike purchase money financing.
Contract-for-deeds or land contracts are different, a buyer who is not in title can't encumber title by obtaining a mortgage and no lender would be dumb enough to loan money trying to secure a loan with property that was not held in title by that borrower, at least I hope they aren't.
Don't know how to otherwise say this, but BP is not some local bar where someone is going to suggest things about RE financing off the top of their head passing along ideas or old ways of what use to be done without being corrected if they are off base, and most are off base, there are several here with a great deal of financing knowledge and the casual layperson will usually be a fish out of water making suggestions. Questions are always welcomed, but speaking from an advisory point of view, saying you can do this or that, is usually not appropriate unless you really are an authority on finance and the legal aspects surrounding financing, you can get people in trouble! Finance is not real estate, it is regulated many times over compared to real estate and if your "expertise is real estate and not finance, give more consideration to what you might post suggesting things to those trying to learn. Hope I tiptoed around that politely enough. :)
All great points @Bill Gulley
In terms of Authority, I have been on both sides of transactions for Seller financed deals as an Investor and real estate Broker.
In terms of legal, I would alway advise any person to seek legal council.
I think many investors will agree that they don’t need to understand Uniform Commercial Code, UCC to do Seller financing but I get your point.
Thanks for constructive criticism.
All great points @Bill Gulley
In terms of Authority, I have been on both sides of transactions for Seller financed deals as an Investor and real estate Broker.
In terms of legal, I would alway advise any person to seek legal council.
I think many investors will agree that they don’t need to understand Uniform Commercial Code, UCC to do Seller financing but I get your point.
Thanks for constructive criticism.
Your welcome, but that's not near enough experience, no offence, but it's not near enough and yes, the UCC is the beginning of understanding installment agreements and how the agreement itself is terminated upon default, unlike purchase money loans that are going to foreclosure, the seller needs to know what their legal position is under different circumstances. SF deals are actually more complicated than conventional financing if done properly. At least now, we have some laws surrounding the matter.
When you begin advising in financing issues, you're not really in the RE arena, you're entering finance and giving legal advice. Realtors in this state avoid the risks as they should, since they are not trained and the get an attorney, as all Realtors should unless the hold the applicable licenses.
No problem at all, I know you meant well, and I've noticed your other posts, some good stuff! Thanks and all the best. :)
thanks all for your input although I'm out of my depth with all the experts talking:-)
My main point was, people seem fine with doing Sub2s, even with the possibility of DOS but with owner financing they recommend that the property is free and clear.