All Forum Posts by: Robert Carpenter

I believe the Due on Sale clause is BEST interpreted as a strategy on the part of banks to scare people away from buying a home by way of the REI market. Naturally if youre a bank you'd much prefer home buyers go through establishment financing i.e. get a bank loan they can make money on. Now if there were some REAL financial or economic reason to accelerate repayment when title changes then banks would ALWAYS insist on it. As it is DOS is dangled out there as a sort of vague threat, which of course is counter to the banks actual financial interests. Ask yourself this: If YOU had a performing note on a house would YOU want to kill that income stream just to be able to start paying out property taxes ?

1.  What makes you think he WOULDN'T  be receptive to sub2 ?  And there is market research showing that one third of higher end homeowners WILL seller finance, even if they're free and clear.

2. Are you not really saying that there's close to zero chance YOU would take back a no interest no payment 2nd ?  The real estate investor should not try to project what he would do onto what other people would do.  Let THEM tell you what they will do.

3.  The contagion of fear surrounding this due-on-sale business defies comprehension. The underlying assumption is that banks can't wait to kill performing loans in order to take on houses for the great  privilege of having to now PAY often quite considerable  property taxes.  Do banks really want to turn assets into liabilities ? 

4.  I take it you are referring to Dodd Frank when you say that you can't put a balloon on a loan to the buyer.  If that is a concern then of course you need only sell to an entity rather than an individual. 

I don't consider it a harsh at all to pose what are very legitimate reservations.  One must always think very critically about hidden traps lurking in a deal and yet avoid the dreaded 'analysis paralysis'. 

In a RISING real estate market banks MIGHT have a slight economic incentive to exercise their right to accelerate loan repayment when title changes.  However it must be kept in mind that forcing   houses into foreclosure has a decidedly NEGATIVE effect on a rising market.   Forcing more houses onto a particular real estate market ( the Chicago real estate market in this case apparently )  DEPRESSES  that market.  The effect is  to  collectively REDUCE the total quantity of money banks can loan on that particular market and thus acts to REDUCE the  banks cumulative  loan revenues.  

Thanks for your insightful analysis Nathan.  I totally agree. My whole game plan here is   to try to tap into the very large percentage of higher end buyers who HAVE money but DO NOT HAVE credit.  As is, the only way I would close on this deal is if I   had a buyer to seller finance already lined up.  And only if he'll put down no less than $75,000.   As long as he puts down at least $75,000 he's either going to cash me out in 3 years once his credit is repaired OR its fine if he wants to continue  to make the ~ $3,000 monthly payment in which case when the seller's 3 year $ 150,000 balloon comes due,  I can either extend it, or start paying him interest, or even sell his note to someone else  if necessary. 

I absolutely agree though, that if lining up a buyer prior to closing proves difficult, the only way to take the deed is to purchase the house at a significant discount of ARV.

Thanks Katharine, Mary, Ned, Ana, and Mark :)  Good to hear there's at least some small chance of getting taxation WITH representation of price, even in New Jersey.

Suppose you pay $120,000 for an REO with an ARV of $300,000 which needs $80,000 in repairs. Will the county reduce your property tax to reflect your $120,000 purchase price ?

Or you could sweeten the deal Curt proposes pulling out $ 150,000 on a non recourse private money loan. That should be well below 65 % of [ARV - Repairs] and it gives you $30,000 the day you close. Put the $40,000 reno dough in escrow only to be spent on repairs. To save on capital gains you could put a tenant buyer in the house with a 3 year option and maybe even negotiate a strike price of $300,000.

My seller has an FSBO house with an ARV of $530,000.

He wants $520,000. He owes $290,000 with a payment of $2,400 PITI.

He   wants a Down Payment of $75,000 and a two year balloon.

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My offer: $490,000 Sub2 with a DP of $50,000.

I'll give him a carry back mortgage for his equity of $150,000 with no interest and no payment. And I'll give him a three year balloon. 

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I'll turn around and put the house on the market with seller financing for $ 550,000.

I'll collect a DP of $90,000 with a monthly payment of payment of 2,900 PITI and balance of $ 460,000 in a wraparound mortgage with a three year balloon.

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Is this a good deal ? 

What does rentometer.com say you get for it ? 

Imagine a town with only one house and one bank. The bank makes a loan for $250,000 on a house in 2000 at 5% interest. Now by 2006 the house value has risen to $400,000. If the house is sold the bank naturally wants to get back the balance of its original loan, and make a new 5% loan on the house for $400,000.  In this way it can increase its revenue by 60%.  On the other hand say a bank made a $400,000 5% loan in 2006 but today that house has a market value of $250,000.  If the loan were paid off and the bank lent $250,000 on the house at 5% its revenues now decrease by 38%.  The point is the bank has an incentive to call the loan due on sale   while the housing market is rising but has an incentive to keep its  loans in place while the housing market is declining or so it would seem to me. Is this line of reasoning sound economics or pure nonsense?