There are huge numbers of properties on the market for bargain prices. I mean real bargains. But it is harder than it has ever been to get financing. The solution is not to get new financing. Use the seller's existing financing instead. Do a wrap-around deed of trust transaction.
I got into real estate law back in 1980, when interest rates had accelerated to the highest rates ever seen. The Vietnam War had pumped up the economy. Nixon had taken the country off the gold standard. The price of oil had gone through the roof. There was inflation at 13.5% per year and recession at the same time. It was called "stagflation." Paul Volker took a sledge hammer to the economy, raising interest rates to the point where Jimmy Carter lost the election and home mortgage rates were in the teens.
People wanted to sell their homes, but buyers either could not qualify for mortgages at such high interest rates or were not willing to do so. Millions of sellers had 4%, 5%, and 6% mortgages, and inventive real estate agents and lawyers figured out ways for buyers to assume their mortgages formally or informally. In some cases the mortgages had Paragraph 17-18 due-on-sale clauses, which said that if the seller sold the property the bank could call the loan due. However, many state cases around the country held that due-on-sale clauses were void as restraints on alienation, practical impediments to resale.
I went into partnership with a Seattle attorney in 1980, and we were very busy writing wrap-around deed of trust, seller-financing transactions. Title companies and escrow companies were unwilling to close the transactions, and so we escrowed them ourselves.
Assume a $300,000 property with a $250,000 deed of trust against it and a buyer with $30,000 in cash. The buyer would pay $30,000 down and give the seller an all-inclusive, wrap-around deed of trust for $270,000 that wrapped around and included the underlying $250,000 deed of trust. The buyer would make payments to the seller, and the seller would make payments to the lender. There would be a cash out in five years. Often we set up a collection account to handle the money and give the seller notice if the buyer was not paying on time. Sometimes we got consent from the lenders. Sometimes we did not even ask for consent.
Then in 1984 Congress federalized the law of due-on-sale and preempted all state cases and statutes on the subject. Banks could enforce their Paragraph 17-18 due-on-sale clauses and call loans due if there was a change in ownership. The bank had to give 30 days notice, and if the balance was not paid in full or the property was not deeded back to the seller, then the bank could conduct a foreclosure, a process that typically takes six months.
In the agreements we wrote, the buyer and seller agreed what they would do if the lender called in the loan. There were exceptions to the new rule: The bank could not call in the loan if a parent deeded to a child, or a spouse deeded to a spouse, or if a borrower put title into the name of a trust and there was no change in possessory rights.
How does this relate to the present? Although interest rates are relatively low, it is still difficult for borrowers to get financing. The difficulty getting financing has had a significant impact on the current stagnation in sales and the drop in property values.
Maybe it is time for buyers and sellers to rebel. My experience is that lenders do not want to take properties back and will consent to wrap-around sales, with the understanding that the seller is not released from liability. The banks have too many properties in their portfolios and mortgage insurance companies are being stretched financially.
I am ready and willing to write and set up wrap-around deed of trust transactions. The method I use is this: I either get the lender to agree to waive enforcement of the due-on-sale clause, or I get buyer and seller to acknowledge there is a risk, and I define the risk. I get the buyer to agree that if the lender calls the loan due, that the buyer will either refinance or resell the property.
What kind of buyer would be a likely candidate for a wrap-around sale? If I can get the lender to consent to the wrap-around, then any buyer would be a likely candidate.
If I cannot get a response from the lender or if the lender refuses to give consent, then the buyer candidate would be an investor or a person who could tolerate a certain level of risk, perhaps a person with sufficient assets who could refinance or re-sell the property if necessary. Every transaction would be handled differently.
If the parties or real estate agents still have some concern about the bank possibly foreclosing, I can put the deal together on a lease-option basis, in which case there is nothing the lender can know about the transaction. Payments can be made through a trusted collection agent. The deed can be held by the collection agent in true escrow. I will work with parties in states other than Washington, provided they have counsel in their home state.
I generally represent the buyer. I give initial telephone consultations to real estate agents and buyers and sellers by telephone for no charge.
Bank regulators should require banks to allow buyers to take over sellers' existing mortgages in order to spur homesales. Due-on-sale clauses should be disregarded until the housing and mortgage markets return to normal. Click here to read the letter I wrote Henry Paulson a letter regarding this issue.
Call me at 425-774-6611 or 888-999-2022 for further information. Or e-mail me. The fax number is 425-776-8081. Send me an e-mail if you want to sign up for my e-mail messages.
For details about how to apply for a mortgage with me go here.
Copyright
© 2009 James Robert Deal.