My Sellers are Afraid to Carry Paper – Has Anyone Seen a Bank Call the Loan?
Sellers who are willing to offer terms and carry paper can really give themselves a nice seller financing advantage in today’s market, but sometimes they get freaked out by the “due on sale” clause. They are worried that if they wrap the existing lien, they’ll be in trouble if the bank gets wind of the transfer.
Wrapping good underlying financing is a great way to put a deal together, but there can be a lot of fear out there, as evidenced by this email I just received from another real estate agent:
“I have a client looking to carry and was just told by Title that the banks could call the loan due at any time. Has anyone ever had that happened and would it be beneficial to contact their mortgage company with a ‘heads up’ of what they were doing, or would that red flag it? Cannot believe in this real estate climate that a bank would do that if the mortgage was being paid for in a timely manner. Sellers are now ‘freaked out’….any suggestions?”
“Dear Mr. Awesome, Enlightened, Progressive, Agent Who Educates Clients About Seller Financing,
There is a “due on sale” or acceleration clause technically in the note which theoretically gives the bank the right to call the note due. For some reason this causes a lot of fear and trembling and makes it seem like it’s borderline illegal, which of course it’s not.
I have never heard of anyone’s note being called. Like you said, what lender is going to call a perfectly performing asset? I know at one point in history when interest rates had spiked from single digits to double digits, the banks were calling loans to force people to refinance at the higher rates. Given the current climate, there simply isn’t any incentive for the lenders to call a nicely performing loan.
My personal feeling is that wrapping a nice underlying mortgage is a great way to get a deal closed right now, and that the risks are minimal if the loan stays current. The risks of not selling and waiting for further depreciation and/or hyper-inflation are possibly a much greater risk.
If the buyers are willing to hold title in the name of a trust, then a trust could be set up and the likelihood of the banks picking up the transfer is reduced even further. For instance, if John Smith is the seller, then sell the property to John Smith Living Trust (with the buyer as the beneficiary) and the banks will just see this as an estate planning strategy.
Good luck in educating your sellers. The due on sale threat is more of a boogey man than anything else, in my opinion. And P.S. I would never call any lender to give them a ‘heads up.’ This is sort of a humanitarian posture . . . don’t you think they’ve got enough to worry about these days? 🙂 ”
Please comment on this post. I’m gathering data. I want to know if anyone personally knows of a performing loan being called.