ANSWR/SJM "STEVE" RE. 3RD PTY LAND TRUST - Posted by Bill Gatten

Posted by Bill Gatten on January 29, 1999 at 20:42:16:

Janet,

Thanks for the confidence. Steve did a wonderful job in anwering your questions (he’s beome quite a student here on CRE). However, let me point out a couple little nuances that make a BIG difference later. When we set up this type arrangement, we make sure of a couple things;

Paments are made to a third party collection service (someone not related to or connected with either beneficiary. The collection service must not charge the beneficiaries for its services, but can be given the right to take a portion of the tenant’s rent (e.g., the resident or 2nd co-beneficiary) for its services (fine point, but an important one). Further, the Trustee must charge a fee for holding title, but it must NOT collect rent or anoy other fess relative to management of the property… this would create a characterization (IRS) as a Homeowner’s Assocation, which would be treated as an Association and be taxed as a corporation.

Other than that, you guys are off and running. As far as the (where to acquire materials questions) drop me an e-mail.

Sooper dooper luck in all you shhot at.

Bill

ANSWR/SJM “STEVE” RE. 3RD PTY LAND TRUST - Posted by Bill Gatten

Posted by Bill Gatten on January 26, 1999 at 21:15:37:

This hicky keeps telling me I’m posting a duplicate message whenI try to append to an existing post (Sorry about doing it this way)

Steve,

Excellent questions: My comments are in lowercase in parenthesis: yours are in upper (your always were the “screamer”).

OK BILL,

I KNOW THIS IS MAKING MONEY FOR YOU, BUT I’M HAVING A HARD TIME GETTING MY MIND AROUND IT. LET’S WALK THROUGH IT WITH YOU HOLDING MY HAND (DON’T TELL MY WIFE)…

(I don?t hold hands on the first date, unless, of course, you are shaped like a cello}

I’M LOOKING AT THIS WITH THE IDEA OF ACQUIRING PROPERTIES (Yup! Good so far). THAT SAID: THIS IS WHAT I UNDERSTAND SO FAR?

LOCATE SELLER WITH PROPERTY (Yup! One who want?s out: a FSBO, a Landlord or Lease Optionor). (ANY SPECIAL CONDITIONS? I.E. BELOW MARKET, HIGH EQUITY, ETC.)?

(That depends on you? in my case, I acquire over-encumbered properties too. If they have equity to start with, I might do a two or three year agreement; if they don?t, I?ll do a 4 or 5 year Agreement; if they?re over-encumbered, I?ll likely set up the transaction for 7 or 10 years)

CONVINCE SELLER TO TRANSFER TITLE TO LAND TRUST (No! ?Offer to ?allow? seller to hold his property in an inter-vivos trust, to best protect HIS interests. That way he doesn?t have to take any chances with your or even give you the title, until you?re ready to refi or sell the property and take him off the loan) NAMING YOU AS CO-BENEFICIARY. YOU (THE BUYER) AGREE TO COVER ALL EXPENSES - PITI, MAINTENANCE, WATER/SEWER, ETC. (Yup!)

WHY WOULD THEY DO THIS INSTEAD OF SELLING TO SOMEONE ELSE WITH CONVENTIONAL FINANCING? WHAT’S IN IT FOR THE SELLER?

They do this for the same reasons they?d consider an Equity Share, a Lease Option, a Lease Purchase, a Wrap or a Land Sale Contract [Contract for Sale]. Same reason: they don?t have enough equity to finance a sale; they can?t recoup their losses with a straight sale; they don?t mind holding to get their equity out intact at the end of the agreement; they like your looks?cello shaped, as you may be). There are myriad reasons for someone deciding to stay on the loan for the benefit of someone else.

YOU NOW HAVE A HOUSE THAT YOU ARE PAYING ON. WHAT DO YOU DO WITH IT WHILE YOU ARE WAITING FOR THE TRUST TO TERMINATE? SUB LEASE? L/O?

(Nope! You run an ad for a third co-beneficiary whom, in exchange for tax deduction and all the benefits of ownership will cover all costs and handle all management and maintenance of a share in future appreciation, principal reduction and the write-off for property tax and interest expense. How much would you pay {or how much future appreciation would you give away] if I would cover 100% of the costs of all your rentals, handle all management and maintenance, and never expect a penny?s worth of your existing equity or your passive [depreciation] write-off?)

  1. THE TRUST TERMINATES AND YOU REFINANCE OR SELL. (PRESUMABLY, YOU REFINANCE AT SOMETHING LIKE 80% OF FMV. WHAT IF THE PROPERTY HASN’T APPRECIATED 20% DURING THE TERM OF THE TRUST?)

(Not me boy! I sell. However, if you?d rather re-fi, you will have included a paragraph that says something like: ?At termination, should the co-beneficiary expressly declare its intent to refinance the subject property in its own name, and find acceptable [re]financing unavailable at that time, then the entire transaction shall be extended by beneficiaries for one year at a time for an additional ___ years, or until such [re}financing can be procured.?)

I KNOW THAT I’M MISSING SOMETHING HERE (a bow for that cello… baby). MAYBE I’M EXPECTING THE PAC TO DO SOMETHING THAT IT WASN’T INTENDED TO DO. I’D SURE APPRECIATE IT IF YOU’D HELP ME TO UNDERSTAND HOW THE BUYER PROFITS (READ $$$$) USING THIS TECHNIQUE.

(Here?s the formula for $$$: Buy high?sell higher, and get income properties for nothing down nothing per month, no management or maintenance, and a positive Cash Flow along the way. If one?s goal is to make $100,000 this year, and his income property only yielded a dollar: he(she)?s either in the wrong business, or they need 99,999 more properties? and why not, if they?re free?)

STEVE

THANKS FOR ALL YOUR POSTS, BY THE WAY. YOU’RE SHARING SOME GREAT INFORMATION. I JUST CAN’T SEEM TO GET IT STRAIGHT IN MY MIND. (?When you keep on thinkin? what you?ve always thought, you keep on getting? what you?ve always got?. To change your life, change your underwear more often [?or something like that? I forget})

(Thank YOU! And please? let me know if I can help any further.

Bill)

Re: Thanks Bill - More Questions - Posted by sjm(Steve)

Posted by sjm(Steve) on January 27, 1999 at 09:49:14:

Thank You, Thank You, Thank You!

The big sticking point for me was why a seller would be inclined to go this route. I hadn’t even considered those sellers who have so little equity that realtor’s commissions and/or closing costs would make a regular sale an “out-of-pocket” experience for them. I think I’ve got the concept now but your reply raised a couple more questions about the mechanics of the deal.

  1. After the property is placed into the trust, you (as the buyer) are assigned a beneficiary interest and an agreement is signed between you and the seller(co-beneficiary) designating the property as a triple-net lease property. Next, (here’s where the question comes):

a. you(the buyer) lease the property from the trust for some monthly amount, agreeing to pay all expenses as well. You then find another tenant, name them as co-beneficiary, and lease the property to them.

OR

b. You(as co-beneficiary of trust) find a tenant, assign a beneficiary interest to them (how is this done? I presume that you need to get agreement from the original seller/co-beneficiary), and lease the property to them.

  1. At the end of the trust’s term, the property is sold and the proceeds distributed among the three co-beneficiaries. (Another question: Where is it specified how the proceeds are to be distributed and what would a typical distribution be?)

Thanks again for your help. I, like many others, grew up learning that in order to buy property you needed to save your money for the down payment and then go to the bank and ask for the rest of the money needed. Seller financing was a possibility, but only if you were related to the seller. Land trusts, Contract for deed, and Lease Options are things that were entirely new to me before I discovered CREONLINE. I’m learning to think more creatively when putting together deals, but I need to be able to explain the benefit to the other party(buyer or seller) in order to make the deal go. Thanks for taking the time to help (with a sense of humor even 8^)

Steve

BILL GATTEN…CHECK YOUR mail - Posted by Michelle

Posted by Michelle on January 26, 1999 at 21:46:25:

PLEASE CHECK YOUR E MAIL

MICHELLE…THANKS

Re: Thanks Bill - More Questions - Posted by Bill Gatten

Posted by Bill Gatten on January 27, 1999 at 11:36:03:

In answer to your question, yes? the seller needs to know whether your are
going to live in the property or not, and needs to understand your
motivation and intentions. The beneficiary Agreement spells-out your
rights relative to assigning all or a part of your own beneficiary interest.
The seller must sign too (as you indicate), but does that at the inception
of the Agreement, giving you the right to basically do what you want.

The following is part of a response I sent to Michelle in Canada.

  1. IDENTIFY PROPERTY – A property owner willing to remain on the existing
    loan for the benefit of someone who would take-over payments, is identified.
    (You call and say something like: "Hi, would you be willing to remain on the
    existing loan for the benefit of someone who would take-over payments?"
    Sneaky, but it works)

  2. CREATE TRUST – A Land Trust is then created for a specific number of
    years (I like 5), wherein the property’s title is granted to the owner’s 3rd
    party Trustee (i.e., Bill Brown grants the property to Poo Poopa Doo
    Corporation, as Trustee for the Bill Brown Trust)

  3. EXECUTE ASSIGNMENT – You then acquire a beneficiary interest in the Bill
    Brown trust (via an Assignment of Beneficiary Interest… like a Bill of
    Sale). You can acquire 50% and have what is tantamount to an Equity Share;
    or you can buy 90%, with an Agreement that Bill Brown will forfeit his 10%
    to you at the end, which is tantamount to a “Wrap (All inclusive Trust
    Deed)” arrangement. The seller?s keeping at least 10% prevents claims of a
    Due-on-Sale compromise; prevents property tax reassessment for title
    transfer; prevents assessment of Transfer [re-conveyance] Tax; allows him to
    retain 50% voting rights (so you can’t do anything wrong regarding the
    property or its title that could harm him); satisfies the IRS requirements
    for minimum holdings in a land trust; and leaves his tax-deferment
    privileges in tact for the duration of the trust.

  4. EXECUTE BENEFICIARY AGREEMENT ? A Beneficiary Agreement is then executed
    between you and Bill Brown, that dictates how the trust and the property
    will be managed; what the property?s use will be; when the co-beneficiary
    status take effect and terminates; how voting will be handled; how
    Contingency Funds will be handled; what happens if someone dies; etc., etc.

  5. EXECUTE USE AGREEMENT ? Next, a triple net Lease is executed between the
    new co-beneficiary and the collection service appointed by the
    beneficiaries.

  6. Now you?re ready to bring someone in to make all the payments for you. So
    you run an ad that basically says, “No Bank Qualifying, No Down Payment, as
    little as $____ and Closing Costs Moves you In. Call about Trust Property
    Oppor.” Alternatively, you could say, “?as little as ___ payments and
    Closing Costs moves you in?.” Whatever your own closing costs were, plus a
    few bucks for you, is what you?ll use to fill-in the above blanks.

  7. When the prospect calls, you tell him you?ll “GIVE” him (pardon the
    masculine pronouns here, but I?m old) the property, if he can afford the
    Closing Costs and the monthly payments. You tell him that all you want out
    of all of it is for him to agree to refinance or sell in ___ years, and then
    pay you your equity at that time? and if there?s been any Appreciation you?
    ll split it with him (or “share” it with him, if its not to be a 50:50
    deal). Now?think about it?you make money on the spread between what you and
    Bill Brown Agreed was your MAV (Mutually Agreed Value) coming in, and what
    the MAV is to be between you and your new co-beneficiary (the 3rd
    beneficiary). You also have a positive cash-flow (Bene. #3 sends payments to
    the collection entity, who makes all payments and gives you the overage
    every month); you also receive your share of the Appreciation when the
    property sell or is refinanced? AND as the payments reduce the loan?s
    principal balance, you get your proportionate share of that too.

Now here?s the pattern of a typical deal:

  1. Bill Brown?s house is worth $125,000

  2. Bill Owes $105,000 on it

  3. You come in with a MAV (Mutually Agreed Value at Inception) of $115,000
    with a 90:10 split and an agreement by Bill to forfeit his 10% at the end
    (say, 3 years): after he receives his $10,000 starting equity. In other
    words, his BENEFICIARY CONTRIBUTION is $10,000.

  4. Later, you and Beneficiary #3 agree that your own BENEFICIARY
    CONTRIBUTION will be $10,000, and his (Bene. #3?s) BENEFICIARY CONTRIBUTION
    will be whatever his non-recurring Closing Costs will have been (escrow
    fees, title ins., Contingency Fund [Reserve payment] any "equity buy-down,"
    etc…)

  5. Beneficiary #3 now moves in, makes all the payments (including your pos.
    CF) and handles all costs of ownership in exchange for the tax deductions
    and his/her share of the future profits (and the other myriad benefits of
    homeownership). Note that Bene. #3 (except for profit potential) has 100% of
    ALL the benefits of homeownership here, and he/she hasn?t had to qualify for
    loan or make a down payment

  6. At the trust?s termination, the contract provides that the trustee will
    sell the property: and if the resident chooses to buy it (refinance it),
    he/she may do so? at Fair Market Value as determined by a mutually
    acceptable appraisal? LESS his/her initial BENEFICIARY CONTRIBUTION and
    his/her share of appreciation and principal reduction.

The Priority of Distribution at termination is stipulated to be as follows:

First ? all loans are paid off

Second ? all costs of sale are paid (escrow or attorney?s fees, commissions
of sale, if any, etc.)

Third ? all of the Bene 1?s Beneficiary Contribution is refunded

Fourth ? all of Bene. #2?s (you) Beneficiary Contribution is refunded

Fifth ? all of Bene#3?s Beneficiary Contribution is refunded

Sixth ? all remaining proceeds are divided between Bene #1 and Bene#2 (you)
proportionately with each party?s share of ownership of the trust?s
beneficiary interest (remember that Bene. #1 is forfeiting all of his to
you).

Note that for maximum safety and protection, a trustee should be a
corporation and shouldn?t collect payments, but should charge a fee {IRS
rules]; anyone trustworthy can collect payments, but they should be a
corporation too, and should be bonded, and should NOT charge a fee {IRS
rules], should not be related in any way to either beneficiary.

Re: Thanks Bill - More Questions- from janet … - Posted by JANET COHEN

Posted by JANET COHEN on January 27, 1999 at 17:09:16:

Thanks for sharing this info bill!
Where’s the book? seminar?..where do I sign !

I just havea few questions. Explain the part where you find a 3 rd party,as if you were talking to a three year old.

You mention a triple net lease…is that with you, the trust company, and your new 3rd party?
Do you tell the owner that this is exactly what you are going to do (net lease with a third party), if so why would (an intelligent person) need me, could’nt he just go find a person himself?

When you bring in a third party, what do tell the trust company?

Could’nt we avoid to use the trust company when we want to stick a person in there by just simply leasing it out, and give the new person an option?

Which brings me to my next question, when doing it via
"triple net lease", do we sell the house for more money?
ie.(from your example) …you agree to purchase from the owner at 115.000.00 10-90 split. Do you somehow state in the 3rd parties agreement that he’ll be paying…say 130.000.00

If that is not possible…where do we make our profits?
well we have positive cash flow, maybe a down payment, and equity sharing.Can’t I make more(I’m greedee)
EQUITY SHARING…I get a 90-10 split with the owner, now, when I get a 3 rd party, how do YOU usualy structure the split with him/her(lol)
And going back to the positive cash flow part for a sec.
Who does the 3rd party make his payments to …me? or the trust cie?
If it’s the trust company, when do I get my money? When we sell, in xxx years?
Well, I know your answer…BUY THE BOOK …and I will,
it sounds like a good concept, just trying to figure out how much money there is to be made( I’m really greede) Thanks…Janet Cohen

Re: Your Web Site - Posted by sjm(Steve)

Posted by sjm(Steve) on January 27, 1999 at 15:06:28:

Bill,

Thanks again for being so free with the information that you make a living with. It’s much appreciated.

I found your web site (www.cal-equity.com for those who might be interested) and have ordered your book on the PACTrust. I can see all kinds of possibilities already.

Steve

Note: For those who are interested in Bill Gatten’s method, visit the web site mentioned in the previous paragraph. His group also provides the Trustee and Payment Collection services that are part of the method. (I have no financial interest other than a wish that they stay in business at least until I get my book 8^)

Re: Thanks Bill - More Questions- from janet … - Posted by sjm(Steve)

Posted by sjm(Steve) on January 28, 1999 at 10:23:52:

Janet,

Let me try to answer some of your questions. I think I’ve got a pretty good handle on this thanks to Bill’s patience with me.

>>Where’s the book? seminar?..where do I sign !

Visit Cal-Equity’s site at http://www.cal-equity.com. You can order the book from the site. You will also find more info on the PACTrust

>>>I just havea few questions. Explain the part where you find a 3 rd party,
>>>as if you were talking to a three year old.

You advertise that you can put someone in a house with NO QUALIFYING and $XXX a month. In addition, the tenant gets to take all the tax deductions that are afforded to a homeowner, making their effective monthly payment that much smaller.

>>>You mention a triple net lease…is that with you, the trust company,
>>>and your new 3rd party?

A triple net lease means that the tenant pays all of the expenses, including property taxes, water/sewer, maintenance, etc.

>>>Do you tell the owner that this is exactly what you are going to do (net lease
>>>with a third party), if so why would (an intelligent person) need me,
>>>could’nt he just go find a person himself?

They could, but they almost certainly don’t have the knowledge, resources, or contacts to put this kind of deal together.

>>>When you bring in a third party, what do tell the trust company?

I don’t know exactly how you notify the trust, but it shouldn’t matter to the trustee. When you execute the ASSIGNMENT OF BENEFICIARY INTEREST or the BENEFICIARY AGREEMENT (Not sure which of these contains the verbage. Bill?) between yourself and the owner, it specifies that you may assign some or all of YOUR beneficiary interest to another party. That is what you are assigning to the 3rd party.

>>>Could’nt we avoid to use the trust company when we want to stick a person in there
>>>by just simply leasing it out, and give the new person an option?

I suppose you could, but as the person in the middle you need to collect at least as much as your paying to the owner. You’ll have a hard time charging above-market rent when you can’t offer the tenant the tax deductions (which you cannot under this scenario) It might cause the IRS to classify it as an installment sale as well if you set an option price before the end of the trust.

>>>Which brings me to my next question, when doing it via “triple net lease”, do we
>>>sell the house for more money? ie.(from your example) …you agree to
>>>purchase from the owner at 115.000.00 10-90 split. Do you somehow state
>>>in the 3rd parties agreement that he’ll be paying…say 130.000.00

In the agreement you specify that the house will be sold at FMV (according to independent appraisal) at the end of the trust. If you set a specific price beforehand it will probably be classified as an installment sale by the IRS with the associated tax consequences. Hopefully you get a higher price because the house has appreciated. In addition, the existing loan(s) have been paid down during the term of the trust, giving you more equity.

>>>If that is not possible…where do we make our profits? well we have
>>>positive cash flow, maybe a down payment, and equity sharing.Can’t I make more(I’m greedee)
>>>EQUITY SHARING…I get a 90-10 split with the owner, now, when I get a 3 rd party,
>>>how do YOU usualy structure the split with him/her(lol)

This deal is somewhat like a partnership where everyone has a piece of the house and everyone shares in the profit at the end. The way it is divided is determined up front - the original owner gets his(or her) beneficiary contribution(typically the amount of their equity) first; the 2nd party (you) gets their beneficiary contribution (an amount agreed upon up front); and the 3rd party gets their beneficiary contribution(typically the amount of their closing costs) last. Then, any remaining profit gets split according to the proportions negotiated up front.

>>>And going back to the positive cash flow part for a sec. Who does the 3rd party
>>>make his payments to …me? or the trust cie?

The trust.

>>>If it’s the trust company, when do I get my money? When we sell, in xxx years?

Yes.

>>>Well, I know your answer…BUY THE BOOK …and I will, it sounds like a good concept,
>>>just trying to figure out how much money there is to be made( I’m really greede)

You have to wait for your money, but since you have none of your own invested your yield is, as Lonnie Scruggs would say, "Good enough!"
Also, if you can lease to the 3rd party for more than your leasing from the 1st party, then you have cash flow as well.

>>>Thanks…Janet Cohen

Hope I understand it as well as I think I do. I invite Bill to jump in and set me straight if I’ve misrepresented it in any way. Visit the web site; there’s some good information there.

Steve

Re: Thanks Bill - More Questions- from janet … - Posted by JANET COHEN

Posted by JANET COHEN on January 28, 1999 at 14:40:40:

Thanks steve!
Guess Bill’s busy hiring more office staff!lol
Best of luck to him…and you!
Thanks for talking to me as if I were a three year old!

haha.Let me know how you do when you try one, and I’ll do the same.
janetcohen@cybercafemaui.com…keep my e mail on record.
Janet cohen out!