All Forum Posts by: Account Closed

@David Burling

The clause in your loan you're referring is called a due on sale clause. And you're right, the lender generally will find this out when you change your insurance. What happens is that the computer kicks it out when the insurance doesn't match the name on the loan. BTW, your insurance agent doesn't have to call them. And if he thinks he does I'd fire him! He's not the due on sale cops! Either way, when you change the insurance, the insurance company will send the new policy to the lender. 

Once the lender knows the insurance and the loan don't match, they will probably send you some letters. In the end though, while they have the option to call your loan due, they don't have to. 

The time honored method of avoiding the due on sale clause involves deeding your property into a land trust, and then making your LLC the beneficiary of the trust. Putting the property into the trust is an exception to the due on sale clause under federal law, the Garn St Germaine Act. You then title the insurance in the name of the trust, and it's beneficiary as its interests may appear.

Now, I would not suggest you do this without a lawyer who knows the technique, and many of them don't. 

Personally, I would keep the property in your own name for now. Educate yourself on the use of land trusts. 

BTW there are commercial lenders that would allow you to deed the property into an LLC, and at the same time you would be required to personally guarantee the loan.

If I were you, I'd speak with a good real estate lawyer. They're an important member of your team.

@Rich Hupper First, you say that Neil added Anne to the deed before he died. What you don't say is how she was added. If she was added as a joint tenant, the property would not be part of Neil's estate. Because of the joint tenancy Anne would own the property, no probate would be required. That's one of the advantages of joint tenancy.  

The due on sale clause is a separate matter.  The Garn-St.Germaine Act of 1982 was the law that entitled lenders to enforce the due on sale clause. However it had six exceptions that set forth situations where the lender could not enforce a due on sale clause. If I were you I would google those exceptions, because several of them apply to this situation. You can't exercise the due on sale clause against a surviving joint tenant. It would violate the Garn St. Germaine Act. Further, you can't exercise the due on sale clause against a related person who gets title by inheritance. I doubt this one would apply, because it sounds like Anne was a joint tenant. But just in case Anne was not a joint tenant, but maybe a tenant in common, it would apply.

Rich, it's possible you don't know all the details. One scenario that could have happened is that Neil didn't make some of the payments prior to his death. So when Anne tried to pay later, the lender refused it because it did not bring the note current. Anne would have had to pay all the back payments, late fees, and other costs if they have foreclosed.

I would suggest a real estate lawyer. He could contact the lender directly, and find out what she owes. She'll need to pay it all, because they won't accept a partial payment. If they have called the loan, it is more than likely because she is in arrears since 2014.  If they called the loan based on a due on sale clause, they have violated federal law.

Jim Piper

I like the ideas @Curtis Bidwell has given you.

A few other comments.  Since the organization will in the end be responsible, I'd want to see information on their finances.  This would include an income statement, which I would go through so that I had an idea where the money was coming from to pay your rent.  Make sure that their net income is 3-4 times minimum your rent per month.  I would also check their balance sheet.  This should give you an idea of how solid this organization is in case their are damages.  It should also give where their bank account is, and if it doesn't I would want that information.  

I would want to know how long the organization has been in business.  If its brand new, your risk in renting is going to be higher than if they're an established organization with ongoing income.  The newer they are, the higher my deposit...just understand that your deposit needs to protect you.  If it's a new organization, that may also effect the quality of that income statement.  Again, the newer, the less reliable.

I would want some business references.  Someone they had done business with on an ongoing basis that showed a favorable pattern of payment.

 I would not give up my right to screen tenants.  In other words, it's fine if they're responsible, but you still need to know who you're renting to. 

Finally, if this is a new organization, I would want a personal guarantee from one of the principals.  And I would get all the information on him, and screen him so that I know my guarantee has some value.

In short, I would require many of the things a bank might require, a similar sort of criteria.  I'd use common sense, something the bank is sometimes short on.  But you need to check this organization out just like you would an individual.  In the case of an individual, I was to see check stubs.  In this case, I want to see the income statement.  And in either case, I want to know how long, because length of time in business is going to tell you a lot about stability.  Most businesses fail in the first few years.  This is why in the first few years, a bank is typically going to require a personal guarantee.

BTW, I want to see who the financial statements are prepared by.  If it's by a well known accounting firm, that one thing, but if they're preparing them theirselves, you might want supporting documents, for instance, a couple of months of bank statements.  Those bank statements ought to show the flow of money through the account that would be consistent with the income statement they prepared.

Good luck with it. 

I'd take a look at MrLandlord.com.  They offer a service where you can pull credit report, criminal, eviction, and sexual predator.  I've used the service many times over a few years. The credit report is Transunion.  It also gives a credit score.  Too many of the available services do the screening for you.  This service gives you the information...you can order one report or all the reports.  You decide.  I would not rely on someone else to tell me whether a tenant is good or not.  The only issue is that you have to be approved by Transunion.  They come out to inspect your office area, see what your security is, they want to see a paper shredder.  It's a simple process.

@Account Closed  Hi Sue, thanks for your comments.  As I said in my post, they've applied the payments correctly, and at least right now, I have no reason to think that there will be a problem when the loan is paid off.

However, it's clearly not a scrivener's error.  I mean, the entire name on the mortgage was changed from the original borrower to the name of a trust with a corporate trustee.  Now, as I said, I have not experienced anything negative, at least not that I know of at this time.

But like you said, it's hard to see how they are "defrauding" me, they just changed the name.  But I would guess that this was completely improper, there probably is some type of penalty for it, maybe from the regulators.   And I think there are ways I could have been damaged by this change, I just didn't happen to experience it.

Back in 1995 or so I informally assumed a mortgage.  By "informally" I mean "subject to".  The property was deeded to me and I started paying the mortgage.  I got insurance consistent with the deed, and named the lender as beneficiary on the policy.

The lender at the time was Chase. The loan was an FHA loan originated in 1987. If you will recall, these loans were freely assumable, that is, could be assumed by anyone without the need to qualify. There was no due on sale clause in FHA loans at the time. That later changed in late 1990. I didn't do the assumption because in my earlier days I did not want to be responsible for the loan. So I simply left it in the other persons name. I had the deed which was all I wanted.

Well Chase hated this situation.  So after sending me a letter demanding that I assume the loan, which I ignored, they eventually sold the loan.  I went through this process with yet another lender who sold the loan, until the mortgage ended up with Midland Mortgage.  They hated the situation too, and therefore they threatened to call the loan.  I told them there was no due on sale clause, which they ultimately agreed with.Periodically they would sent me a letter asking that I assume the loan, I always ignored them.

At some point, the letters stopped.  I don't recall when it was exactly, but at some point, someone with Midland Mortgage simply changed the name on the loan.  Lol.  If they couldn't get me to change my insurance to match their loan, then they decided they would simply change the name on the loan to match the policy.  I just ignored it, I was busy with other things and it didn't especially make any difference to me.

So a number of years went by in that status.  I now have about 2 years left on the loan.  Today I received a letter from Midland Mortgage which said my policy did not match the name on the loan!  So I looked, it appears they simply dropped part of the name, perhaps mistakenly.  I checked my policy, it reads as it always has.  And their loan reads the same way online at least, so I imagine it's just a mistake.

But I was irritated by the letter for some reason.  So I got to thinking, what right did they ever have to begin with to change the name on the loan?  So that's the purpose of this long winded post, is to  get some opinions as to whether the lender could/should do this, whether it was legal for them, and what type of consequences are there to having taken this action, if any.  I'm going to call my lawyer Monday, but I'm interested as to what you folks have to say about it.  I'm not worried about the deed, they've been applying my payments correctly for years.  I just wonder about the propriety of changing the name on the mortgage.

@Jim Hopsin Basically what you're doing is putting $15K in repairs into someone else's house.  You can write an agreement up, but to enforce the agreement you would have to go to court.  This is going to be time consuming and costly.  This is not the way to go.

I have no solution for you.  I have not had an insurance even look at a water heater recently.  My insurance company is Shelter.  Don't know if they sell insurance in Florida.

That said, in a more philosophical note, you got 21 years out of a hot water heater.  Congratulations!  I've never had one last anywhere near that long.  If it were me this is not a battle I'd go through.  I'd just replace it.  In all likelihood it's on it's last legs anyway.  This way, you make it on your terms.  If you have to replace it later, it will be at a very inconvenient time, it will disrupt the tenant, and you'll be what I'd call a "motivated consumer".  That's not where you get the best price for either the water heater or the installation cost.  I'd be a little proactive here and just replace it.

I would not include cap-ex (capital expenditures) in my net operating income. Strictly speaking these are not expenses, but rather expenditures that either will improve the property (like a new roof), or an asset expenditure (like a washer/dryer). They are all depreciable, but depreciation is removed from the net operating statement. If you included the cost of a new roof in your net operating statement it would serve to reduce operating income and therefore reduce cap rate and the value of the building all during one period, and the next period that did not have a new roof expense would then have a sharply higher NOI and therefore value of the building. That's why cap ex is removed from the NOI.

Some people like to show a reserve account for the eventually capital expenditure that will take place.  But again, it has the effect of understating, although at least it is a uniform type of understatement applicable to all periods.

If you're wanting to see capital expenditure, I would do a cash flow statement.  I just wouldn't use that to calculate a cap rate, or a value for the building.

Finally, in my opinion I don't think the approximate value of the building calculated by using  the cap rate should include "acquisition costs".  Obviously these could easily vary from investor to investor.  I think the cap rate is used to calculate an approximate value for a building so that it can be compared with other buildings.  Acquisition cost would not be a part of this.

Just my views.  

One question is whether the duplex is already priced to reflect the fact that it needs a new roof.  As far as a "seller's concession" goes, that term is usually used to reference the seller paying some of your financing and/or closing cost.  A roof goes quite a ways beyond that.

Another option is the seller puts a new roof on.  I don't care for this because you never know what the seller may do in order to save money.  And of course, the seller may not want to do that, especially if he already has it priced that way.

Depending on the loan type, perhaps you could do a credit for the roof, or escrow some funds for the roof that would be released when the roof is completed.  Sometimes the lenders are gun shy about putting too much in the buyers hands, so they want the escrow.

Since you haven't made your offer yet, I'd speak with your lender and ask what they will permit.  Then I would make that part of my initial offer.  If they don't accept, and it's a deal breaker, you walk and go on to the next deal.