Subject To - Dodd Frank - Simple Scenario

15 Replies

Hey guys, I'm really hoping for some simple advice on a simple scenario when discussing subject to deals with respect to Dodd Frank.  I downloaded the law, it's huge, and will eventually pierce through it but very congested so I figured I'd ask the question in this forum.

Scenario: I locate a house, let's say $150,000 ARV it has $35,000 in equity, needs no work, seller decides to get rid of it for $115,000. I decide to take over his mortgage subject to his original financing. I simply take over the deed/note, start making payments on behalf of the seller and have conditions/exit strategies in place just in case the due on sales clause (DOS) clause is exercised to prevent the original seller from facing a financial crisis if it defaults. (Either sell it, assign back to owner, etc)

Should I be concerned with any language in Dodd Frank? Or is this more of an issue with Lease Options where credits are being applied to the purchase price of the mortgage on the option to buy.

I was going through a ton of Dodd Frank forums and it was just all over the place so I figured to get very specific on a simple scenario to get feedback.

Thanks,
Kyle

Hi Kyle,

The only time when you need to be concerned about Dodd Frank  is upon selling the house. As of right now, there are no restrictions on BUYING a property as an investor using creative financing, such as subject-to's.

What the Dodd-Frank Act does is provide protection to a buyer who is being foreclosed or evicted after they bought a house using any type of creative financing (land contract, rent-to-own, owner financing, etc)

If in the future you are considering selling that house using owner financing, rent-to-own or a land contract; you need to follow these three criteria:

  1. There should not be a  balloon in the note (meaning it must be fully-amortizing)
  2. The interest rate is fixed for at least five years, and
  3. You “qualify” your buyer.

Remember, you should consult with a qualified attorney in your state whenever you sell a house using any type of creative financing.

Let me know if you have additional questions.

Hope this helps :)

Liz P

www.lnlrealtygroup.com [email protected]group.com

Following on Liz's point that Dodd is confined to house sales - house purchases are exempt - its my understanding that sales to entities are likewise exempt. As long as you sell a house to an LLC rather than an individual are you not exempt from Dodd ?

All the above is correct re DF here's how to protect the buyer and seller and minimize the risk with Sub2

The Dreaded Due on Sale Clause..

First what the heck is it?

It's a clause in a mortgage, which provides that at the option of the lender, the entire unpaid balance of the loan is due and payable immediately upon failure to make required payments or upon sale of the property. Also know as an acceleration clause.

A little history lesson…

In the old days when banks loaned money and took back a 30-year mortgage that's exactly what you got.It didn’t matter if you sold the property to someone else that loan stuck with the property for 30 years and could be taken over and paid by anyone.

Well, in the early 70's banks, lenders, state governments and other interested parties were so upset that they were getting stuck with low interest rates, missing out on taxes, assumption and other sale fees, that lenders started adding due on sale acceleration clause to their contracts.

As you can imagine, a lot of borrowers thought this was unfair and brought suit against banks and lenders.Unfortunately around 1979 the United States Supreme Court found in favor of the banks, and today the due on sale -acceleration clause (usually paragraph 17) is found in most if not all conventional mortgages.

For years now buyers and sellers have been trying various ways to get around the problem. The leading real state books and educators teach the following basic approaches to buy real estate creatively.Some good and some not so good.Later I'll discuss the pros and cons of the best creative financing methods so you can determine which to use for your particular situation

Land Contracts

Options, Leases, Options to purchase

AITD's (All inclusive trust deeds or wraps)

Seller carry back deeds of trusts/mortgages

Taking subject to the existing financing

Not recording the deed, which is dangerous if not properly protected

Recording a memorandum of agreement

Trusts:Transfer the property to the sellers trust, get the bank to approve the transfer and then have the beneficiary of the sellers trust changed to the buyer.

Just transferring title into the buyers name hoping the lender won't call the loan.

Equity share

Any of these will trigger the due on sale clause and as a buyer or seller if you haven't put safeguards in place, you are unprotected against claims against the title from showing up and or the lender calling the loan due.

Are you prepared to take the chance that the seller may further encumber the property or resell to someone else?That the loan and taxes are being paid? Or the bank might find out about the transfer and call the loan due in 30 days and you lose your money and investment?It's happened. Unless you've got the credit to get a new loan or the cash in the bank I wouldn’t take the chance

What about the money?

Probably one of the most important issues that is never addresses in creative financing books is how the money is handled…

Money needs to be handled properly right from the inception of the deal.A buyer wants to make sure his hard earned monthly payments go to pay the loan.Sellers want to make sure the loan(s) and taxes are paid.

Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet

Here it is in a Nutshell. (This is what I use in California)

The concept is to keep the fact that the property has been transferred private.

The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement.

The transaction is maintained in the records of a settlement /escrow management company

Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record

Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property

Recording a deed or contract is not required in most states to make a valid transfer

Not disclosing the new sale to the underlying lender is not illegal in most states

Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated

OK sounds good, just how do we do it?

Let's put it all together

Seller signs a deed giving buyer ownership

The seller would agree to execute a grant deed (warranty deed, whatever its called in your state) in favor of the buyer

The deed is held unrecorded by the escrow management company until the loans in the seller's name have been paid or assumed.(If the seller doesn't like until paid try this. Buyer agrees to use best efforts to pay off existing loans that are in sellers name within five years of close of escrow.)

Protection for the seller

Buyer will execute a quitclaim deed back to the seller, which is held in escrow unrecorded

How to protect the buyer in the chain of title and potential future creditors of the seller.

For the buyers protection a lien of some percentage (I like to see at least 20%) of the purchase price in favor of the buyer executed by the seller will be recorded a "Sellers Performance Deed of Trust" The buyer will appear to be a juniors lender for public record purposes.

The seller is protected

For the sellers protection a reconveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer

This would allow the management company to unilaterally remove buyers cloud on the title by using the pre-signed reconveyance if the default was not cured as outlined.

@Liz Pineda and @Robert Carpenter excuse me if I'm missing something, but doesn't buying something involve someone also selling something?  If I'm about to engage in a seller financing transaction with a seller, shouldn't I be knowledgeable of and educate the seller on Dodd Frank and seller financing or does it not somehow apply to him/her? Are you saying these rules don't apply to selling to investors?  Thanks

Originally posted by @Bill Jones :

All the above is correct re DF here's how to protect the buyer and seller and minimize the risk with Sub2

The Dreaded Due on Sale Clause..

First what the heck is it?

It's a clause in a mortgage, which provides that at the option of the lender, the entire unpaid balance of the loan is due and payable immediately upon failure to make required payments or upon sale of the property. Also know as an acceleration clause.

A little history lesson…

In the old days when banks loaned money and took back a 30-year mortgage that's exactly what you got.It didn’t matter if you sold the property to someone else that loan stuck with the property for 30 years and could be taken over and paid by anyone.

Well, in the early 70's banks, lenders, state governments and other interested parties were so upset that they were getting stuck with low interest rates, missing out on taxes, assumption and other sale fees, that lenders started adding due on sale acceleration clause to their contracts.

As you can imagine, a lot of borrowers thought this was unfair and brought suit against banks and lenders.Unfortunately around 1979 the United States Supreme Court found in favor of the banks, and today the due on sale -acceleration clause (usually paragraph 17) is found in most if not all conventional mortgages.

For years now buyers and sellers have been trying various ways to get around the problem. The leading real state books and educators teach the following basic approaches to buy real estate creatively.Some good and some not so good.Later I'll discuss the pros and cons of the best creative financing methods so you can determine which to use for your particular situation

Land Contracts

Options, Leases, Options to purchase

AITD's (All inclusive trust deeds or wraps)

Seller carry back deeds of trusts/mortgages

Taking subject to the existing financing

Not recording the deed, which is dangerous if not properly protected

Recording a memorandum of agreement

Trusts:Transfer the property to the sellers trust, get the bank to approve the transfer and then have the beneficiary of the sellers trust changed to the buyer.

Just transferring title into the buyers name hoping the lender won't call the loan.

Equity share

Any of these will trigger the due on sale clause and as a buyer or seller if you haven't put safeguards in place, you are unprotected against claims against the title from showing up and or the lender calling the loan due.

Are you prepared to take the chance that the seller may further encumber the property or resell to someone else?That the loan and taxes are being paid? Or the bank might find out about the transfer and call the loan due in 30 days and you lose your money and investment?It's happened. Unless you've got the credit to get a new loan or the cash in the bank I wouldn’t take the chance

What about the money?

Probably one of the most important issues that is never addresses in creative financing books is how the money is handled…

Money needs to be handled properly right from the inception of the deal.A buyer wants to make sure his hard earned monthly payments go to pay the loan.Sellers want to make sure the loan(s) and taxes are paid.

Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet

Here it is in a Nutshell. (This is what I use in California)

The concept is to keep the fact that the property has been transferred private.

The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement.

The transaction is maintained in the records of a settlement /escrow management company

Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record

Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property

Recording a deed or contract is not required in most states to make a valid transfer

Not disclosing the new sale to the underlying lender is not illegal in most states

Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated

OK sounds good, just how do we do it?

Let's put it all together

Seller signs a deed giving buyer ownership

The seller would agree to execute a grant deed (warranty deed, whatever its called in your state) in favor of the buyer

The deed is held unrecorded by the escrow management company until the loans in the seller's name have been paid or assumed.(If the seller doesn't like until paid try this. Buyer agrees to use best efforts to pay off existing loans that are in sellers name within five years of close of escrow.)

Protection for the seller

Buyer will execute a quitclaim deed back to the seller, which is held in escrow unrecorded

How to protect the buyer in the chain of title and potential future creditors of the seller.

For the buyers protection a lien of some percentage (I like to see at least 20%) of the purchase price in favor of the buyer executed by the seller will be recorded a "Sellers Performance Deed of Trust" The buyer will appear to be a juniors lender for public record purposes.

The seller is protected

For the sellers protection a reconveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer

This would allow the management company to unilaterally remove buyers cloud on the title by using the pre-signed reconveyance if the default was not cured as outlined.

 Nice chunk of good info. Thanks!

You can buy as many properties as you want re Dodd Frank

See a registered mortgage loan originator about Dodd Frank

You could sign a statement saying that you're not going to live in the house if you're buying on terms 

Investor to investor Dodd Frank is not involved

Originally posted by @Benjamin Cowles :

@Liz Pineda and @Robert Carpenter excuse me if I'm missing something, but doesn't buying something involve someone also selling something?  If I'm about to engage in a seller financing transaction with a seller, shouldn't I be knowledgeable of and educate the seller on Dodd Frank and seller financing or does it not somehow apply to him/her? Are you saying these rules don't apply to selling to investors?  Thanks

That is not your job to educate a seller on DF or any other points of law. YOU need to know and understand what actions are legal for you to take.  I believe there is still a lot of misinformation on DF and there are a lot of attorneys hoping to line their pockets from lenders that violated the statutes. We regularly see advertisements from some asking if borrowers have been victims of predatory loans, had lenders refuse to work with them refinancing, etc. All it takes is one really bad one to cost a lender lots of time and money...regardless of who wins, intent, etc. You can buy as many properties as you want, all seller financed, and from sellers who write loans in violation of DF. If the terms are great, take the loan! Seller financing is 100 times easier than getting a bank loan.

Originally posted by @John Thedford :
Originally posted by @Benjamin Cowles:

@Liz Pineda and @Robert Carpenter excuse me if I'm missing something, but doesn't buying something involve someone also selling something?  If I'm about to engage in a seller financing transaction with a seller, shouldn't I be knowledgeable of and educate the seller on Dodd Frank and seller financing or does it not somehow apply to him/her? Are you saying these rules don't apply to selling to investors?  Thanks

That is not your job to educate a seller on DF or any other points of law. YOU need to know and understand what actions are legal for you to take.  I believe there is still a lot of misinformation on DF and there are a lot of attorneys hoping to line their pockets from lenders that violated the statutes. We regularly see advertisements from some asking if borrowers have been victims of predatory loans, had lenders refuse to work with them refinancing, etc. All it takes is one really bad one to cost a lender lots of time and money...regardless of who wins, intent, etc. You can buy as many properties as you want, all seller financed, and from sellers who write loans in violation of DF. If the terms are great, take the loan! Seller financing is 100 times easier than getting a bank loan.

 Thanks John. I just don't want to ask anyone to do anything against their best interest.  i guess I'm looking to make that "win win" situation. And I don't really understand the implications of this whole DF thing in the first place as real estate past and present in general is pretty new to me. Alright, back to digging through these threads ..

@Benjamin Cowles you can make a win-win regardless if the seller violates DF. If you like the terms and they work for you, take the financing. There has been a lot of discussion on overhauling DF. It has created some issues with lenders and have caused the credit markets to tighten. I fully agree that people should understand WHAT they are signing. I agree they should have the ability to repay. At some point, though, we should all be responsible for our actions..and if you don't understand something, get advice BEFORE you accept the deal! We don't need a nanny state from the day we are born till the day we die!

Allow me to touch this up a bit.

I can agree with John as to educating a seller if the seller is the one making the offer to seller finance. But there is a twist for investors who approach an unsophisticated seller and then get them involved in seller financing. 

There is also some poor advice above, sorry, but it is, I think the guru left the forums, but the DF act isn't that simple and if you don't have a finance background I seriously doubt you'll interpret it correctly, real estate attorneys are pulling their hair out trying to figure it out. 

Also need to understand that the DF Act refers to the "maker of any loan" the "maker" is not the lender but is the borrower!

Commercial transactions are exempt from the DF Act. However, commercial lending is not exempt from predatory lending aspects, and, when you deal with unsophisticated sellers in financing, you as a buyer can have liabilities. You brought the offer, you originated the contract, you as the maker made the loan, not the seller. So, if you put a seller in violation of law, the seller's attorney can be looking at you, so will regulators. 

Now, if you are dealing with another investor, someone who can be seen as commercially aware, then you have no obligation to inform a more sophisticated seller.

The very best words for a Realtor to use are "see your attorney" unless they are one.

Those are also the best words for investors or operators to use as well.  

 So, @Benjamin Cowles Dodd Frank is federal law and just as any other law, it is published as required, just because it's public doesn't mean the public can interpret the law, it is difficult reading, complex and the general public (including small lenders, real estate attorneys and closing agents) will have a difficult time, they won't really be nailing the intent or application of these laws. Best you see a finance attorney, not a real estate attorney unless they have studied this Act through appropriate training.

And yes, I'm sure there is going t be an increase in the "predatory lending" arena by attorneys, fines and judgments can be higher than negligent death case and no one gets killed in financing, they may with they had when it's all over with. :)  

@Bill Gulley

thanx a lot. If you get a chance try answering my other question I quoted you in in the other DF thread if it wasn't too confusing. Thanks

Originally posted by @Benjamin Cowles :
@Bill Gulley

thanx a lot. If you get a chance try answering my other question I quoted you in in the other DF thread if it wasn't too confusing. Thanks

 How about a link so I don't have to hunt for it :)

Originally posted by @Bill Gulley :
Originally posted by @Benjamin Cowles:
@Bill Gulley

thanx a lot. If you get a chance try answering my other question I quoted you in in the other DF thread if it wasn't too confusing. Thanks

 How about a link so I don't have to hunt for it :)

 Sorry. Figured you got notified but I guess you get a lot of notifications from this forum right? You're a good service. 

https://www.biggerpockets.com/forums/83/topics/152199-rent-to-own-help?page=2#p1601656

Originally posted by @Benjamin Cowles :
Originally posted by @Bill Gulley:
Originally posted by @Benjamin Cowles:
@Bill Gulley

thanx a lot. If you get a chance try answering my other question I quoted you in in the other DF thread if it wasn't too confusing. Thanks

 How about a link so I don't have to hunt for it :)

 Sorry. Figured you got notified but I guess you get a lot of notifications from this forum right? You're a good service. 

https://www.biggerpockets.com/forums/83/topics/152199-rent-to-own-help?page=2#p1601656

 Did you read my last post? I thought I did address your concerns :)

Originally posted by @Bill Gulley :
Originally posted by @Benjamin Cowles:
Originally posted by @Bill Gulley:
Originally posted by @Benjamin Cowles:
@Bill Gulley

thanx a lot. If you get a chance try answering my other question I quoted you in in the other DF thread if it wasn't too confusing. Thanks

 How about a link so I don't have to hunt for it :)

 Sorry. Figured you got notified but I guess you get a lot of notifications from this forum right? You're a good service. 

https://www.biggerpockets.com/forums/83/topics/152199-rent-to-own-help?page=2#p1601656

 Did you read my last post? I thought I did address your concerns :)

 Ah, great. Must have missed it. Thanks. Let me go contemplate on that for a while...

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