How to protect oneself during an assumption

Question

So I am trying to help a friend piece together a deal.

She is upside down on an "investment" condo she owns and currently rents out. She owes $300,000 on it and it's probably worth $240,000 right now. She doesn't want to short sale it because she doesn't want to ruin her pristine credit. It is a negative cash-flow situation.

Now, here's the interesting part. She has come across an investor who likes the property, and has offered to take over the payments. According to her, he wants to have control of the property until the market comes back because he wants something in that part of the country and he can afford to take the negative monthly hit until the market rebounds.

So, my question is how would you structure this deal? I'm thinking a third party servicer (maybe an escrow company?) would be brought in to take the renter's rent + HIS payment to cover HER mortgages.

My first thought to her was that her credit would still be at risk if he assumed the loans.

Thoughts?

Jon Holdman · Answer

He's not going to assume the loan. Unlikely the lender would allow that. He might buy this deal subject to the existing loans. I for one would NEVER sell a property that way. Your friend would be giving up ownership of the property but would still be responsible for the loan.

She doesn't sound like a desperate seller. Selling subject to is an alternative for someone who's so desperate to get rid of the property they're willing to take the risk.

Jon Holdman · Answer

For a single condo like this, I think you really mean a lease/option. Lease the property to the "tenant/buyer" with the rights for them to sublease it. The tenant buyer takes responsibility for all maintenance. The payments are set to cover the owner's payments.

Kevin Sproul · Answer

Thanks Jon. I suspected that at the very least I was wrong on the terminology.

Kevin Sproul · Answer

What if she dose a NNN lease+Option. (I probably have all the terms wrong but how it works is like this).

1. He signs a Net lease, so he becomes a tenant, with the right to rent to another tenant.

2. If possible make his a NNN lease so he is responsible for maintenance, insurance, taxes etc... With defined penalties for failure.

3. Attached to that is an option to buy, so he locks in the current price for a number of years and at any time in that period he can pay you the full price and take ownership. You cannot sell to another person without bringing him to the table.

4. A portion of his monthly payment gos towards the down-payment.

This setup should get your friend what she wants and gets the investor what he wants. The downside is that if he gos broke, she has to start over, if the value doesn't come back up, she has to keep the property.

Of course this is just my vague amateur idea on how to do something very complex. You probably need professional help to do this properly, if it's even possible or legal

Jon Holdman · Answer

Yes, there are escrow or loan servicing companies that will do this. But what good does it do if the buyer stops paying? Either she's going to have to put money in the escrow or the payments will stop. She's relying on getting payments from this buyer. She has very little leverage over this person. If he stops paying, she has to sue.

You might look into an AITD - All Inclusive Trust Deed and doing a wrap mortgage. She creates a new loan from her to the buyer. It "wraps" the existing loan. She gives them a deed, but they give her a Deed of Trust (or Mortgage). That gives her a security interest in the property. If the buyer stops paying, she can foreclose.

Keep in mind all these violate the due on sale clause and give her lender the right to call the loan (i.e., foreclose).

Loc R. · Answer

Jon,

Is there a way for her to sell it subject-to and somehow have a third party handle payments?

A couple of other ideas I had in mind for this particular deal:

1. Writing up the deal to better protect the seller should the buyer not perform on payments (maybe she takes it back?)

2. Having the buyer come in with 3 months of mortgage payments and having it sit in that third-party account.

Thanks for your input.

How to protect oneself during an assumption

How to protect oneself during an assumption

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