What is YOUR take on brokering property "subject to" existing loans which have a due-on-sale clause (for a long-term hold)?
It has gotten to the point that I am beginning to see FRANCHISES, for goodness' sake, for specializing in these kinds of deals.
Some local lenders are trying to endear themselves to Realtors by giving classes in taking long-term title to properties subject to existing loans (again, loans that have due-on-sale clauses, as permitted by federal law... Garn St. Germain, in particular).
In short, the practice seems widespread...
As a practical matter, per federal law, an option longer than 3 years, or an option of any duration, coupled with the homeseller vacating the property, triggers the due-on-sale clause.
If the bank calls the loan, and if the property cannot be refinanced by the person who "bought" the property with an option (likely, since if they could have financed it, given today's interest rates, they probably would have financed it), then they could lose their up-front (option) money and any payments they made which were more the fair market rent for the property (assuming they were occupying or renting out the property).
The seller, whose credit rating is held hostage by the transaction, would likely be powerless to do much under most agreements of this nature if the bank calls the loan. Even if there were reversion provisions covering the loan being called, the "seller" may not be able to refinance, either, for a variety of reasons. So, the seller could lose whatever equity had not been collected by the time of the loan acceleration by the lender, plus end up with a foreclosure on his credit.
As a legal matter of potential concern for agents, I wonder what the liability might be of a licensee who knowingly conspires to hide the transfer from the bank (the usual approach, through the use of trusts and the like to "cover up"). Even if the agent is not conspiring to hide the transfer (say, if a simple AITD/wrap-around is used, for example) would it still not be the case that the agent is conspiring to assist the breach of contract between the bank and the original borrower?
And, here is the $64,000 question (perhaps literally a "$64,000 question"):
Might the courts find the agent liable for the losses of the lender by virtue of the cover-up/assisted breach that the agent participated in? Interesting question, no?
At some point, rates are going to rise. (I spent most of my career wishing for 10% rates.) At that point, if the number of distressed properties has declined, it may be VERY worthwhile for the lenders to have attorney strike forces hunt down all the unauthorized transfers... could be an interesting time.
What are your thoughts on the matter?