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Take Over The Payments
By Jeff Riddell
Unfortunately, many people would like to dump their properties even though they made substantial downpayments. Some use jingle mail (send the keys to the lender and walk away). There are consequences, however. Since the lender will still need to foreclose, the owner will still have a foreclosure on his record. Other than the temporary moratorium for primary residences, at least in Florida every foreclosing lender has the right to pursue a deficiency judgment, and more are doing so. Usually there is no defense to the deficiency claim. To defend, the owner would need to obtain an appraisal in an amount greater than the lender’s appraisal, and the owner would need to retain an attorney to appear with the owner at the motion for deficiency judgment hearing.
Despite the desire of some owners to walk, there may be “buyers” out there who are willing to “take over the payments.” But how should it be structured? Giving the buyer the deed will trigger the due on sale clause in the mortgage; likewise for an agreement for deed. Some “buy real estate with no money down” classes claim that trust arrangements between the owner and the buyer will solve the problem, but I’m not so sure.
Maybe you think I’m naïve to think that there are any “no money down” buyers who would be willing to take over the owner’s problems, but for the patient ones it may work. Say the owner placed an 80% $200,000 mortgage on the property and now the property is worth $180,000 instead of $250,000. For those who believe that Florida home prices will recover within the next several years, taking over the payments may work for them, especially if there is a fixed rate low interest mortgage on the property.
Worse case, the buyer holds the property for several years (and pays the mortgage and other carrying costs during that time) and then decides it’s not worth it. Since this scenario envisions no (or nominal) downpayment by the buyer, what does he have to lose? If the buyer walks later on, the owner will face the same foreclosure then that he faces now. If years pass and the owner moves on to another part of the country (or world), the lender may lose track of his whereabouts. If the foreclosure occurs later because the buyer loses patience, service of process may be by publication. Personal service is required in order to pursue a deficiency judgment.
So, how is it done so that the due on sale clause will not be triggered? I like the long term lease option approach. I did one recently where the owners from Germany wanted to return home and leave their bad real estate experience condo behind. An acquaintance who already owned a unit in the building agreed to help them out by “taking over the payments.” We prepared a 15 year lease option. At any time during the 15 years, the “buyer” could either sell the condo for more than the mortgage payoff, or refinance and pay off the mortgage. Mortgage payments over the years would reduce the balance, all to the buyer’s benefit. Of course, the buyer was given the right to sublease the property in case he wanted some rental income to subsidize the mortgage payments.
Other nuances had to be addressed such as condo association approval (although there may be a prohibition on short term leases, most associations to not restrict long term leases), deed in escrow, non-recourse to buyer, notifying the lender that checks would be coming directly from the “tenant” (he’s not a buyer until he exercises his option to purchase) to pay the mortgage, obtaining a renter’s insurance policy for the “buyer,” etc., but otherwise it seems to work. But please don’t try this at home; contact a competent professional to assist you because these arrangements can be complicated.
Jefferson F. Riddell is a Florida Board Certified Real Estate attorney with thirty-five years of experience assisting people with a variety of residential and commercial real estate matters. U.S. 1031 Exchange Services, Inc is a 1031 exchange qualified intermediary (QI) and a member of the Federation of Exchange Accommodators (FEA). As President of U.S. 1031 Exchange services Jeff has been facilitating 1031 exchanges for more than twenty years. Jeff has been awarded the Certified Exchange Specialist (CES) certification. Jeff may be reached at 941-366-1300 or via email at jeff@us1031.com [2]. www.us1031.com [3]
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