How safe are you with an owner carry contract?

By
Mortgage and Lending with Guild Mortgage Co - Oak Harbor WA
https://activerain.com/droplet/4vmj

I am not an attorney and I don't even play one on TV, however, I have concerns that there are people doing things that can get them in trouble. Not only will it get them in trouble, but it could have detrimental effects on other people too. This is the sale of a home on an owner carried contract when there is a mortgage on the property. My concern is twofold, first has to do with the legality of doing it in the first place. My second has to do with protection for both the buyer and the seller. I am hearing of this happening with people that owe more than they can sell their house for currently on the seller side, and buyer's that can't qualify (for whatever reason) or think they can't qualify for a loan on the buyer side.

First, the legality:

Standard Trust Deeds in Oregon have the following wording, "18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is to transfer of title by Borrower at a future date to a purchaser.

"If all or any part of the Property or any Interest in the Property is sold or transferred (or ... is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument...."

This is what is known as a "due on sale" clause. What it means is that if you sell your home, even on an owner carried contract, the underlying loan is due and payable and the lender can demand full payment. In the case of an owner carry contract where the purchaser has paid a deposit of $10,000 and the lender calls the note due and the $10,000 is already spent, it looks like everyone is going to be a loser, doesn't it?

Second, protection:

Let's take a fictitious example. Let's say I am selling you my home for $200,000 and in today's market it is worth $200,000 and I owe $200,000 but I can't afford to sell it on the market because of the commissions and closing costs. We enter into a contract where you give me $10,000 up front and make payments every month that doesn't quite cover what my payment is. After 6 months of paying each month, I decide I can't afford to put out the additional money each month. What are your options? At the same time, after 6 months, you decide to quit making your payments, what are my options? Think about what happens if I owe more than I am selling it to you for. What are the possible ramifications?

There are numerable scenarios where this can go wrong and only one where it can go right. If you are holding a contract for sale on your home, are you aware of how long it takes to get possession of the home if I stop making my payments? If you are buying my home, and I stop making the underlying payments, what can you do about it?

Don't be taken advantage of on either side of the equation. There is another way to do this that doesn't bring in the "due on sale" clause and that is a lease purchase agreement. There are also hazards with this a lot like the protection issues above. I just want to make everyone aware of the difficulties of selling a home when not using traditional means. A lease option may be the ideal way to go about handling your problem,  however I strongly suggest you don't go with an owner carry contract if you have underlying financing on a standard trust deed. First time home buyers should be aware that they can be taken advantage of in this type of scenario. The first thing you should do as a first time home buyer, is find out what you can qualify for and if you actually will qualify for a loan. That is where you need to contact a mortgage professional like me. You can always reach me through either my office, 541-342-7576 or my e-mail eugeneloanguy@gmail.com.

 

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Topic:
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Location:
Oregon Lane County Eugene
Groups:
1st Time Buyers
Eugene Oregon Real Estate
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Tags:
lease options
first time home buyers
real estate contracts
due on sale clause
traditional mortgage
owner carry contracts
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Rainmaker
1,087,015
Greg Nino
RE/MAX Compass, formerly RE/MAX WHP - Houston, TX
Houston, Texas

Fred, some might roll their eyes for me saying this, but I never get involved with seller seconds, owner financing or anything that isn't the norm. I step outside of the box plenty, but I don't want to get into trouble.

Apr 05, 2009 06:39 AM #1
Rainer
172,065
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Greg, I think that is very intelligent on your part.

Apr 05, 2009 06:59 AM #2
Rainmaker
761,760
Thom Abbott
MyMidtownMojo.com |770.713.1505 | Intown Atlanta GA Condo Living - Atlanta, GA
Midtown Atlanta GA Condos For Sale

Fred...I go with Greg....except I take it one step further......I RUN AS FAST AS I CAN from anything like this!

I'm not going down with the ship!

 

Apr 05, 2009 08:17 AM #3
Rainmaker
337,464
Thesa Chambers
Fred Real Estate Group - Bend, OR
Principal Broker - Licensed in Oregon

Fred - I have tried time and time to explain this to buyers that are having difficulty qualifying - I hope they listen.... but I fear a few will not

Apr 05, 2009 06:13 PM #4
Rainer
172,065
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Thom - Well thought out, my man, well thought out.

Thesa - Some people just won't listen.

Apr 06, 2009 03:52 AM #5
Rainmaker
2,189,950
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

Not me. I'll do land contracts which, in CA, carry the same problems as a lease option -- that being dealing with the alienation clause that allows the bank to accelerate the loan (lease options involve equitable title transfer). But I do insist that my clients obtain legal advice before entering into these situations. The truth is that these days most banks are happy that somebody is paying the mortgage -- ANYBODY -- that they aren't foolish enough to call the loan due. But it is a risk.

sacramento agent

Apr 17, 2009 03:41 AM #6
Rainer
172,065
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Elizabeth - I think you are right, the banks are just happy to get the money, but I still worry about protection for both the buyer and the seller. But, then, I am a money guy. Thanks for your input.

Apr 17, 2009 05:55 AM #7
Rainmaker
116,561
Leslie Stewart
Oregon Licensed Broker with Berkshire Hathaway HomeServices Real Estate Professionals - Stayton, OR
Realtor, ABR, CRS, Oregon Licensed Broker

There is so much to owner contracts and I am sure every state varies with the rules. You bring out a great point with the due on sale clause.  It is hard for sellers to understand what can happen when their loan is accelerated and due.  Some banks will waive the clause, but, my advice is talk to a really good real estate attorney. 

Apr 17, 2009 07:06 AM #8
Rainmaker
238,460
Angelia Garcia
Pure Realtors - Dallas, TX

I'm with Greg on these scenarios.  I don't do them either.  And especially not when their is a lien on the property. 

Apr 17, 2009 07:23 AM #9
Rainer
172,065
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Leslie - Actually the due on sales clause is pretty universal with a fixed rate mortgage any more. You are right, advice from an good real estate attorney is the best advice.

Angelia, - Good for you. Protect your clients is paramount.

Apr 17, 2009 07:34 AM #10
Rainmaker
643,145
Marchel Peterson
Results Realty - Spring, TX
Spring TX Real Estate E-Pro

Fred, I'm totally amazed that someone would owner finance when they have a mortgage as they don't own the home!!!!

Apr 17, 2009 02:55 PM #11
Rainer
172,065
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Some people think this is the only way out for them Marchel, but I think it is full of peril for everyone involved.

Apr 19, 2009 10:38 AM #12
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Rainer
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Fred Chamberlin

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