John T Reed Due on Sale Clause Article
I was curious if any of you have read John T Reed's recent article on the due on sale clause. I was really excited to get started with Subject To, but after reading this, I'm having a lot of doubts. He raises a lot of legal, moral and ethical points that I didn't think about before. Please let me know your thoughts. http://www.johntreed.com/dueonsale.html
I read the article, I guess he has kind of a point, but not really. As an investor picking up a property subject to, yes, you would be putting a new buyer into the home using the old loan, but you would also work with them to get them refinanced in a period of time. So as far as the bank is concerned it's not like your going to use that homeowners original loan for the duration (i.e. 30 years). True, the bank didn't check the investors credit, but any investor worth his salt is not going to let that loan go into default, what would be the point? That investor is going to service that note regardless of his new buyers situation, if the new buyer misses a payment the investor makes it. The underlying loan WILL get serviced on time, that's just good business. The loan WILL NOT be in place for 10-20 years, usually there is a 36 month balloon when the investor takes it over, giving time for new tenant/buyers to clean up their credit and refinance. I don't know what this guys problem is, I'd think that the bank would be happy to have a professional (investor) taking responsibilty for the payments, of course they can't admit to that but if you look at it logically the previous owners wanted out or needed out, it's better that they work with an investor rather than throw there hands up and go into default like 5% of homeowners. Then the bank has something to whine about, another none preforming asset on their books, which ties up more assets than you'd think. Banks turn a blind eye to the due on sales clause because regardless of how they feel about it, there is nothing they can do. They have enough properties in default and going into forclosure to worry about, why would they want to create more? Just my two bits. Hope this kind of gives you the other side of the coin.
Andy
John T Reed specializes in attracting negatively motivated peple to sell his own products. While most guru's slant their position in a positive light, the most commonly use sales technique, Reed slants it negatively toward others and thus comes out looking the hero. He does it to perfection. The basis of the DOS is this.
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
Notice it says at the lender's option. It is not illegal period. It give a lender rights to protect it's interest. Banks have responsibilities to it's shareholders.
For example; Mary has an 800 beacon score and all of the parameters neccessary to obtain a 5% mortgage and does so. She then decides to get married to a guy in Norway and has to sell her property and has 2 buyers that want to buy subj. to. The first is Slick Willie. Slick has never paid anyone in his life and couldn't buy a can of Coke on time with a $1.50 deposit. Now if Mary sells to Slick, he probably is not going to pay on time and the bank, at it's option, should be able to accelerate the loan to protect it's interest. On the other hand, here comes smooth operator Ca$h. Now smooth Cash has done this 5-600 times before and has never stiffed anyone. As a matter of fact, a cashier at the conenient mart gave him back too much change and Cash gave it back. Now when he takes over her loan, should the bank have the right to protect their interest? Absolutely! Will they call the loan? Is it illegal, or immoral? Should we broadcast it to the world? It IS a CALCULATED RISK. Just yesterday I was on the phone with a banker getting info about some mortgages from a seller . I told him that I was probably going to take over the guys loan. He asked, you mean like a Land contract? I said no, we are going to set up a trust with my atty as trustee and my company the beneficiary, it's called subject to. Will they call that loan? Not likely, they already have a lot invested in me. It probably wouln't be prudent.
Should they have the right to? Absolutely! We should all be able to protect our own interests.
Good Luck,
Shawn(OH)
John T. Reed is not worth the time to read (personal opinion only). Like Shawn said, his only real goal is to get you to buy his products. Look at it logically. Would you listen to one bank telling you how sorry or crooked or outrageous another bank is and taking it as gospel? No, because their competitors.
The only point in that whole article that is worth mentioning, is the fact that you need to have a plan IN CASE the DOS is enforced.
I've sold on land contract before where my lender helped me write out the contract. Think they'll spend time and money calling the loan due because of ''a sale of interest''? I doubt it.
I know that JTR can scare the newbie, but if you're that worried about it, there are a few things that you could do. In your deals, write the sellers a promissary note for the balance of the current loan. Not really a subto deal anymore, but it gives the sellers a legal way to sue you court (that's what you're worried about right?). Please don't take this as sarcasm. I've seen a investor do this before. It doesn't really make a difference since you're planning on paying any way.
Other than that, you'll have to either find a different investing niche, different funding route (main issue here), or simply decide that RE investing isn't for you because it is a little too risky (no shame here either).
good luck with the way you chose,
Roger
Jason,
The only doubt you are having is in yourself, not Mr. Reeds article. Subject To investing is done every day without incident.
Here is the Link to Bill Bronchicks article on the Due on Sale Clause, let see here he is an Attorney so if I were going to listen to someone would it be a Professional or someone hawking his own material by knocking everyone else.
http://www.legalwiz.com/dueonsale.htm
Mr. Reed's niche is being negative about 99% of course writers, let's face it if he praised everyone why would anyone go to his site. This is strictly a marketing technique to sell his own products.
Jason, you have the ability to become a successful creative real estate investor, but if you are going to listen to the doomsayers like Mr. Reed or others who just couldn't cut the musturd in this great industry then you are doing yourself an injustice.
John $Cash$ Locke
I tend to agree with you guys. I never liked John T Reed because of his negative tactics. However, the thing that scares me is the potential charges of concealment, conspiracy, racketeering, etc. I'm not sure if it is actually possible to be hit with these charges when performing subject to deals.
charges? if the bank does decide to enforce the due on sale clause, you can either try to work something out with them or refinance or just flat out sell the property, i know an investor who had it called and was is trying to work something out with the bank, this process has gone on for over 5 months now (this is still going on), if it were me i would have tried to sell it that whole time
Way_motivated,
Chances are the house is filled using a land contract, so if the DOS is called and the buyer can't qualify for a loan because he hasn't had enough time to fix his credit, what would you do?
Bginvestor
Don't know what way_motivated would do, but I'd just borrow the funds on a refiance loan (no money down) and pay off the original lender.
I know that I can do it because of good credit, but with the deed in hand and a renter/buyer all ready in place, most people would qualify for a refiance. Especially if the property were already sold on a land contract as opposed to a L/O.
Roger
what rajwarrior suggest makes good sense, i've never had to deal with the clause being enforced (since i've mostly been birddogging deals) but the investor i birddog to has this problem, he has a tenant in the house, they've lived there for 6-9 months so far, he's trying to get a loan in their name, he let the buyers know of the situation, he's tried working out something with the bank and the bank was fine with it but FHA wouldn't budge, i'm not sure of all of the specifics but thats what i know
also, regarding John Reed, i hope everyone realizes he hasn't bought a single property since 1994, i believe....i tend to take what he says with a grain of salt, i see/know of people buying houses subject to the exisiting financing all the time, helping out the homeowner who overextended themselves and know they don't have any equity, as long as people need the service i'm all for it, i don't think people who can't afford to cover the payments if needed have no business doing these type of deals, if it's done right, i'm all for it
it is good though to see everything from a different point of view, almost refreshing but disappointing at the same time[ Edited by way_motivated on Date 06/17/2003 ]
"However, the thing that scares me is the potential charges of concealment, conspiracy, racketeering, etc. I'm not sure if it is actually possible to be hit with these charges when performing subject to deals."
Have you spoken to a Real Estate Attorney? One that knows how to do Subject-To deals? I had to go through a few of them before finding one that practiced what he preached. A bonus for me is that he also understands Land Trusts!
That Reed guy is a skank. There are a lot of good people here, a lot with tons of experience. To ease your worries, find yourself a good RE Attorney who understands your needs. Discuss your concerns with them. I think you will find that you can do Subject-Tos. Besides, if you put on the purchase contract (and in fact many pre-made one have this) that you are taking the property Subject-To, what are you concealing? You've done nothing wrong.
Ho...
ps. John L. - I'm looking for ya.
HoGiHung,
I am heading your way I will be in Florida after the 4th of July, I will be doing some workshops while I am there, if it doesn't interfere with my fishing.
Looking forward to meeting all my students in Florida if nothing more than to say hello and how can I help.
John $Cash$ Locke
ps. His web site (John T. Reed) is awefull! Nice to see he spent so much of all his earnings on such a nice site.
Ho...
Hi Jason,
Just thought that I would chime-in and say that in two subject-to deals that I have discussed with two different attorneys (MA & CT), both were impressed and enthusiastic about doing it. Both are very cautious by their natures as well, but the law's are on the side of subject to investors and they were clear about that!
wgheisler
Thanks for the overwhelming encouragement on this topic. I'm starting to get that excitement back that I had after reading Ca$h's manual. Talking to a real estate attorney is probably a good next step for me, to put some of these fears to rest. I am working on a cash out refinance on my personal residence so that I can have backup funds available for making the payments if something falls through or doesn't sell right away, as well as to have cash for closing fees and PA transfer tax. So, I'll soon be putting all of this great encouragement to practical use. Thanks again!
Quote:However, the thing that scares me is the potential charges of concealment, conspiracy, racketeering, etc. I'm not sure if it is actually possible to be hit with these charges when performing subject to deals.
jasonspencer,
If Subject To is illegal, then why does a government form used universally for real estate settlements include settlement items for "Existing Loan(s) Taken Subject To"?
Check lines 203 and 503 on your HUD-1, then ask yourself whether Subject To is illegal/racketeering, or, in such common practice that the federal government even incudes Subject To items on its preprinted settlement form.
DaveT,
Don't let Mr. Reed know about this, let's keep him in the dark otherwise we will be 'subject to' more rhetoric.
John $Cash$ Locke
hey Jason,
I live in PA and I'm a Newbie like most people already know. I was just wondering if you knew of any PA real estate laws that I may need to be aware of that might be different from other states.
Thanks
Brian
Brian, so far the only thing I've found to be different about PA is the transfer tax. The buyer and seller each have to pay 1% of the sale price or the appraised value of the property (in the case that the sale is only $1 or some minimal amount). This means there is no such thing as no money down for a deal. You will need at the very least money for the transfer tax. I haven't done any deals yet, and haven't hooked up with a real estate attorney yet, so I'm not sure if there are any other obstacles in PA yet. What part of PA are you from? If you are near Philly, check out http://www.digonline.org for the local REI group.
I was thinking about this John Reed guy last nite. He hit the nail on the head with the obvious. But he also included several really good teachers that have made investors millions. I think what he is doing is taking one obvious example and extending it to the good people. What he is doing is using fear to sell his books. None of them has good material try me I am truthfull and honest. Sad part is that the investors that buy into this miss some of the best and well utilized material ever written.
If you DO NOT want to become involved in this business read John T. Reed.
He (I believe) is a lawyer and as we all know the only way to find a good lawyer is to get a shovel and start digging.
He loves to argue, is constantly negative, and just like many lawyers doesn't have the faintest clue as to what he is talking about. He would probably be a lot more believable if he wasn't trying to hawk you his book on investing in land (wow that's revolutionary).
Don't waste your time and kill your hopes with his negativity.
There seems to be a lot of talk about the due on sales clause here. I was under the impression that if you had a land trust with an LLC as the beneficiary then you would avoid any possibility of triggering the D.O.S. clause. Please correct me if I'm wrong.
Tratt,
There is virtually no way that you can guarantee that DOS won't be excercised by the lender if they find out that the property was transferred without paying off the existing financing when the sale occured. However, there is a disproportionate amount of energy spent trying to avoid (as you say) "triggering" the DOS. There are investors that have done literally hundred's of deals and never had a loan called. I'm not saying that you should forget about it, but rest assured, you have more apprehension about this than the lender will, as long as the loan is kept current.
Good luck,
Jeff
Anyone know of a good RE Attorneys in the Metro Atlanta area, who is familiar with Subject To's.
Thanks,
Isaiah
Does anyone know a good RE attorney in Northern California?
Well welcome to TCI cynthiabrewster1
So tell us what you know about old JR and your level of success you have had by following his teachings.
I sure hope my spelln is ok because while typn this I lost my last toot! We be not good with proper english but we sure do a lot of real estate transactions around this place.
[addsig]