Original message
| Megan
  |  "Death clause?"
, Mon 6 Nov 10:56 
Here is something new for me:
I have been working on securing a purchase agreement for the past month or so on a house owned Free & Clear by an elderly couple in a neighborhood Al and I have been targeting. This was a classic "Follow-up Pays" situation, as the owners did not set an appointment with me until the third contact.
Just to give details (this is not part of question):
owned Free & Clear
FMV approx. $120,000
asking $112,000
Recently remodelled, on golf course
Son lives there rent free, will be moving into their current home while they build on same property (he will be caretaker)
They bought this property for cash, which they secured by refinancing a portion of their current home. I will not be doing a title search until I have the purchase agreement signed, but it looks now as though it has no liens against it.
Looks like we may have reached an agreement for just about his asking price (he was going to list at $124,000), owner financed at 7% with a 7 year balloon. Here is where my question comes in...
We discussed setting the balloon because he is sick. More accurately, he recently had heart surgery, and although he is fine now, they are spooked. They are afraid that he might not be alive in 7 years. Okay, I went through how this is solid passive income for him and his family whether he is here or not, but they don't want to have the hassle at all after he dies. I went over this a million times, there's no room for negotiating on this death issue.
So, I'm fine with the balloon in 7 years. The real problem is that they would like a clause that states that if he should die, the mortgage would come due immediately. They would rather the cash go into the estate than the house. Man.
I told them that I understood and again tried to explain that the passive income is good security for their family, but to no avail. I suggested that I may be open to the clause if it could only go into effect 2 years after the closing. Basically, if he dies within the next 2 years, they'll have to wait until later for the cash out; if he dies after 2 years, I'll pay them off within a specified number of days (90 or so?).
I have never dealt with this issue before. I told them that much, so that they would understand that I would need to look into it. They understand that I am respectful of their concern, but I just have to be careful and make sure that we are all in a secure position, including myself.
He had a few financial issues to look into before signing, so I wanted to look into this in the interim. They want to build a smaller home after their son moves into their current one, and since I will not be giving them a down payment, they want to make sure they can afford to build without being cashed out on this house. They were initially going to just list the house, but after showing them how much they would make in interest alone by owner financing to me, they changed their mind. I love Free & Clear houses. It seems the possibilities are endless.
I was honest with them that this death clause is a new factor for me, but it seems that a compromise could be reached that would still place me in a secure enough postion should he die.
Suggestions? Any help would be much appreciated. Thank you all.
Megan 
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Replies:
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| Lynn
Moderator
|  "Re(1):Death clause?"
, Mon 6 Nov 13:03
Actually, if he/she/they die it wouldn't be the house going into the estate, it would be the mortgage note. But anyway...
I think it really depends on your comfort level. You need to have a strong exit plan in place.
Let me be devil's advocate for a minute... Let's say it is your intentions to put a tenant/buyer in the house and let's say you do just that. What would you do if the original seller passes away in two months? Do you have the ability to pay off the note or to get financing to pay off the note? If the answer is yes, then no problem. If the answer is no, then big-o problem .
Would you tell your t/b that they have a one-year, or until Mr. Seller dies, whichever comes first option?
At minimum you should do as William suggested and make sure that the clause gives you 90-120 days to pay off the note.
If it were me, I would first try again to negotiate that point away, but given that you have already tried that, I would consider just holding the property as a rental. If he passes away in five years then hopefully you will have some equity in the property and you will be able to pay it off yourself or to sell it quickly for a profit.
Just my two-cents worth! 
Happy Investing!
Lynn
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| | Megan
| "2 year buffer" , Mon 6 Nov 14:38
I'm still thinking, but in response to one point:
I would not have to worry about paying it off in two months from closing if I have a condition in the clause that it can not be called due within 2 years from closing, as I stated earlier. I say that because I would think that 2 years from now, either my T/B would be closer to securing financing or I would. I have already told them that I will not put myself in the position to have to pay them off within at least 2 years. They have no problem with that.
I suppose I was initially looking for an answer to that point. Would it be possible to say in the contract that it may not be called due in case of death within 2 years?
In any case, I do intend to make sure that I have at the very least 90 days from a death in order to secure financing.
They just want extra security. They want to see why they should do this with me versus selling it outright through an agent. I think it is a good deal and that they do have incentive, which they now agree with me on. I don't think this death clause should really hold me up this much.
I intend to sell as a L/P. If 2 years from now, he dies, then I would have to secure financing or push my T/B to do so, if possible (although their balloon would be due around then anyway).
Exit strategy in case of an early death should be whatever my exit strategy in case of a due on sale on any other deal being called is, as far as I can see. What are others strategies in case of that happening? I know no one wants to talk about the due on sale being enforced, but humor me. I have considered the companies that William mentioned as one option. I appreciate that suggestion, by the way, William.
Okay, so that is where I am right now. I still need help in terms of how to handle this contract-wise in case I can not, still, talk them out of worrying about this. If no help, then how do you suggest talking them out of worrying about his dying and needing this clause?
Megan
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| | Lynn
Moderator
| "Re(1):2 year buffer" , Mon 6 Nov 15:38
I think that if you can negotiate the two year buffer than you would be in a much safer position.
You can put anything in the contract and note that you and the seller agree to. Just write up a paragraph that states your agreement and insert it into the contract and the note.
We have never had a loan called due (knock on wood). In my opinion the best way to deal with a loan being called due is to be prepared to get new financing. You could offer a t/b a great deal if they close within 30 days, but that would be a long shot.
Here is my quick try at what the paragraph might look like, but I'm not an attorney, and this isn't legal advice. Use at your own risk, blah, blah, blah, blah, blah.
In the event of the death of Mr. or Mrs. Seller, the surviving spouse, heir, or holder of this note may, at their option, call this note due and payable in full. Should this note be called due and payable, payor must pay note off in full within 90 days or by the last day of the 24th month of this note, whichever comes later.
Notice that I put that they may, at their option call the loan due. This is better for them and you, because they may change their mind down the road.
Happy Investing!
Lynn
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| wgreau
| "Re(1):Death clause?" , Mon 6 Nov 11:42
Hi, Megan: I really enjoy the posts from you and Al, thanks for sharing them.
Couple thoughts come to my mind that may or may not be of help:
A clause in your contract saying "In the event of the demise of either seller, buyer will seek financing for the purpose of paying balance due in full"....could have ninety days or whatever they'll agree to. Shouldn/t be too hard once your tenant/buyer has made payments for at least a year. In the event the seller proceeds on to the "the great fishing hole in the sky"...or golf course for that matter, you could contact
FSBMC or other type company that loves getting these type deals.
They do "stated" loans that will refinance your buyer and cash you out. Check out http://www.statedloans.com/fsbmc/fsbmc/fsbmc / or call 954-927-2221 e-mail FSBMC@bellsouth.net and talk with Mike Cary.
Another you might check with is: Riverside Bancshares/Mortgage Co. 1-888-244-6161 Lisa Lewis, http://www.riversidebanc.com
ldlewis@alltel.net ...they buy non-conforming mortgages, etc.
I'm sure you will get more, and maybe better, ideas from others.
Best wishes for your continued success, may you be happy & well.
William Columbus OH
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