|Why We Don't Worry About "Due-On-Sale" in
"Subject To" Deals
(Book excerpt from "The TurnKey Investor's 'Subject To' Mortgage Handbook")
There are many reasons why we are not overly concerned with due-on-sale. It does not mean we
are unaware or do not care. Our confidence comes from our knowledge and ability to deal with it if it
Most institutional lenders have a department devoted to properties they own through
foreclosure actions. Those foreclosed properties are generally known by lenders as "real estate
owned" or REOs. Most of these lenders try their best to minimize REOs. It is not in most lendersí
best interest to intentionally cause a REO. That is why we continually emphasize the importance of
making continued payments and having the ability to financially cover those payments when vacancies
occur. Lenders are generally happy if payments are made and the loan is current.
"We Donít Care Where the Money Comes From"
When I first started out doing "subject to" mortgage transactions, one of
the things I quickly wanted to find out was to separate the theory of a lenderís invoking
the due-on-sale provision and the practicality of their enforcing it.
When I called lenders to fax in the Power of Attorney (POA) our sellers signed
for us, I discovered it was actually a common occurrence for lenders to receive
documents with instructions to give third-parties access and control over the account.
Lenders are very accustomed to third-parties such as property managers,
attorneys, accountants, insurance agents, and other professionals accessing loan
information. They are also used to receiving instructions for address changes, statements,
coupon books, and insurance changes. And when there is an arrearage on a loan, the Collections
Department (sometimes called Loss Mitigation) is often gratified that someone is calling for
instructions to reinstate the loan.
I have found that once you provide the necessary written authorization by the
borrower, such as a signed and notarized POA, lenders are often more than happy to
deal with you. They are happy to cooperate in making address changes, getting you
coupon books, and providing current loan information as long as it is in the spirit of
servicing the loan.
When we deal with sellers to buy with a "subject to" mortgage, they
sometimes enter the early stages of foreclosure. The lender is no longer handling the account and
it has been transferred to a real estate attorney.
In many of those conversations, I often speak to the attorney or the clerk
handling the account and ask them if they have any problems with us (a third-party)
reinstating the loan. Sometimes they will ask why we would reinstate the loan. I tell them
directly that we are a property management company that has been contacted by the
borrower to negotiate on their behalf and perhaps to reinstate the loan.
However, we will not issue funds to reinstate the loan unless our financial
interests are protected.
I then ask: "Do you or the lender have any problems that the borrower and I
have an agreement whereby I have a financial interest in reinstating the loan?"
You know what they say? No problem. They say it makes sense that we
would have an agreement with the borrower to have a financial interest if we are the ones
issuing funds on their behalf to reinstate the loan.
In fact, nearly everyone I spoke to in each case did not care. To paraphrase their
response, "nothing would make us happier than to receive the money to reinstate the
loan and to stop the foreclosure." They don't care who pays or who the party is so long as
they receive certified funds.
When I am on the phone with either the lender or the attorney, I try as much as I
can to take a human approach. I position myself as the outside third-party being
called in by the borrower because I have the expertise and the funds to solve the problem.
In all cases, I make it understood that I am not doing this as a "favor" to the
borrower. I am doing it because it is my job and that I have a financial interest in
profiting from this transaction. The lender and the attorney easily accept my position.
In their minds, no company would reinstate the loan unless they could profit from it.
They never ask the nature of the transaction, and I do not give them specifics of the
"subject to" mortgage transaction I intend to complete.
The foreclosure attorney represents the lender at this late stage. They simply
want the money, and they don't care who pays it or where the money comes from.
This is evidenced each month when lenders accept our checks month after
month, and it is clear that the borrower is not making the payments.
© 2005 Matthew S. Chan. All rights reserved.
Matthew Chan is the author of
"TurnKey Investing with Lease-Options",
"The TurnKey Investor's 'Subject To' Mortgage Handbook", and
"The TurnKey Investor's Lease-Option Documents Collection".
You may contact Matthew at 706.565.5090 or you can email him at: firstname.lastname@example.org.
You can also find Matthew at MatthewChan.com.
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