Lease with option to purchase

Due on sale. That's what he is talking about. It goes like this:
If any or part of the property or interest in the property is sold or transferred without the Lender's prior written consent, the Lender MAY require immediate payment in full of all sums secured by the security agreement.

So technically the lender can call the loan due when using the lease/option strategy.

HOWEVER, Lenders don't want to call the loan due when it's getting PAID on time every month. Some more reasons lenders don't care where the money is coming from as long as the payments are being made:

Interest rates are low. Can any DGer explain why this would keep a lender from calling the loan due? (Not you Bill)
Their rating can be down graded for having too many foreclosures.
Average loss on an REO is 50%
Servicers only make money on loans the service.

Finally, If the lender called the loan due, who would be the party responsible for payment in a lease/option deal?
Also, every REI strategy has RISK. You are going to have to take a risk or do nothing.

Michael Mangham
MD Home Acquisitions LLC

Technically the bank could foreclose, but you are correct, in this market why would they, when they are collecting the payments on time every month. According to everyone I talk to that has done this, no one has had a bank foreclose AS LONG AS the payments are made on time.

I see what you're saying. That line about all REI requiring risk spoke to me
Naturally the bank won't want to get rid of a mortgage with a higher interest because even if magically they somehow got the same principle loan off of the property, they would lose a lot in the long term from interest.

What in your opinion then is the best way to go about minimizing risk at least in the first deals one does. I wouldn't have as much of a problem with the risk if I had the ability to deal with things when they went wrong. If a deal works 95% of the time and you do multiple, its not as big of a deal if one falls through, on the other hand if its your first and it falls through you're in a bit more trouble unless you have a financial backdrop to support it.

I understand and accept risk, but at the same time I want to do everything in my power to keep things from going wrong, especially when failure would be have serious consequences.

Any suggestions from those who have experience?

You could try going after sellers that are current on their mortgage payments, but at the same time they should still be motivated for whatever reason (moving away, vacant house, tired landlord, etc.).

And when you are getting the property locked up on a lease option, it's a good idea to have the sellers sign a "mortgage authorization form" that will allow you to check on the mortgage periodically to make sure everything stays current. You could also set it up so your monthly payments go directly to the lender each month instead of relying on the seller to make the payments. If your seller is truly motivated, this shouldn't be a problem. This will ensure the mortgage gets paid every month and probably help you sleep a little better at night.

Good Luck

Jordan

but Michael asked me not to.

If you are wanting the least risk, co-op L/Os are safer than sandwich. You're in-do the deal-you're out.

(You are having a hard time not answering, aren't you?)

Michael, Ohp I didn't attempt to answer the last question you asked. I would assume that in a lease option deal the party responsible for paying the bank would be the original home owner since I have no contractual obligation with the bank. I would rather avoid that, but I could see how if someone is behind or having trouble meeting payments, a lease option could be a much better option for them than simply having the bank foreclose and killing their credit. At least this way, there's a good chance for them to save their credit.
And Michael as always thank you for your responses. I feel sometimes like I have great teachers here on DG to help me out as I'm learning. I definitely do not take that for granted.

Kareng, Thanks for your comment. Thats a good tool that I didn't think about to have just in case. I'm guessing that you would assign the option before finding someone to sublease to home to? In what way would you do that. Does assigning work the same for options as it does for regular contracts?

OK, Go ahead! I just knew you would have the answer. I wanted some people to think!

Michael Mangham
MD Home Acquisitions LLC

The odds of a lender calling a loan due in this low interest environment is reduced due to what is known as portfolio yield. When a lender has a 5% or higher loan that is assumed without their consent, it doesn't make sense for them to call the loan due as their current portfolios are adding new loans at lower rates thereby decreasing their overall rate of return. However, if interest rates went to 9% or more, the banks may have an incentive to call the loan due and retire a low paying interest rate to free up cash to issue a new loan at the higher rate.
This explanation is simplistic as it doesn't take into effect that most banks are only servicing mortgage loans that are being held by Fannie Mae. They are receiving their servicing fee no matter who is paying the mortgage. But that's the rub.
If you acquire a home thru a "subject to" arrangement, you have to be able to pay the loan NO MATTER WHAT as it isn't your credit on the line. Because if you don't and collection proceedings are started, the banks may accelerate the mortgage simply because thdiscrepancycy has beeblatantlyly been brought to their attention through the action (actually inaction) on your part. Once they document that the deed has been transferred, they are placed in an awkward position if they do nothing. Just pay the monthly payment and your chances of getting called due decrease dramatically.
Remember that banks today are simply financial institutions that are trying to increase their yield while attempting to reduce their risk. It is one big game of arbitrage as most banks are no longer the homegrown local banks that hold their own portfolio. So my rule is to do "subject to" loans only with the major banks as the chances of them calling the loan due is slim. But local banks can play by a different set of rules since they usually hold their own mortgages for investment. I will never "subject to" a local bank unless I am prepared to refinance and/or pay in full the outstanding mortgage.

See, I knew you had the answer!! Right on as usual. Not something a lot of people consider when worrying about "due on sale".

Michael Mangham
MD Home Acquisitions LLC

If you are interested in doing L/Os check out this thread that I started a while ago. It will give you LOTS of info.

Then go to wendypatton.com and click on "articles". There is lots and lots of info there for you. L/Os are great!

Good luck!

Karen