Here's my scheme... - Posted by John OH


#1

Posted by Brad Crouch on November 18, 1998 at 20:40:01:

Bill,

Thanks for taking the time to answer and explain. I may have more questions later.

Brad


#2

Here’s my scheme… - Posted by John OH

Posted by John OH on November 12, 1998 at 01:33:46:

I would appreciate your opinions:

Find a property (sfh) I can acquire below market price (far below market price only improves the situation, so to make it hard assume within 10% of market). This is a common occurence in Northern Ohio, and probably most areas, now that everyone has refinanced up to the market values of their homes.

Buy subject to existing financing by putting into Trust and having beneficial interest assigned to me. I now own the property with very little out of pocket - just title search and Trust expenses.

Say market price is 100K. Mortgage Balance is 94K. My total cost to purchase is 95K.
Monthly mortgage payment $750 PITI.

Lease/Option property for two years for about 10% over market price, say 110K. Get 5K option deposit, $825 per month.

Only two things can happen (as long as I make the payments, can find a tenant, they don’t wreck the house, etc.)

  1. Tenant lives in house and doesn’t buy - Make a small monthly spread, Keep his 5K, Raise price, Raise monthly, Re-Lease/Option.
  2. Tenant buys property - Make a small monthly spread, Keep his 5K,collect 10K at closing.

I realize this is close to a normal Lease/Option, but in this case you are buying close to full price and you actually own the property and have the rights of ownership - Mortgage Interest Deduction and Depreciation are two.

What am I missing? Negatives and positives? Better ideas? Thanks.


#3

Re: Here’s my scheme… - Posted by Bill Gatten

Posted by Bill Gatten on November 12, 1998 at 16:37:03:

John,

First of all, your idea is excellent, and I disagree (albeit, kindly, sweetly and with great deference) with some of the posts you got in answer to it. I disagree to the extent that I DO, in fact, find hundreds of owners (actually nearly 1,000 so far) so sick of “onesy-twosy” SFR income property that they’ll gladly give them to you. They just want to escape the burdens of keeping them. The just need to be assured that you can protect them from Due-on-Sale violation, or from taking undue chances with the possibility or attachments to the property re. your possible tax and creditor liens, judgement lis pendens’, BK’s, marital disputes, etc. The fact that these Dont-Wanter’s are abundant is especially true when their equity is nil, and they are upside-down from a cash-flow standpoint. Even if they are at a break-even, the management, maintenance and vacancies are often eating them alive.

Now, before going any further… consider this: If someone is willing to L/O with you for $900 p/mo with no tax write-off, how much would they be willing to pay if they could have, not only the tax write-off, but also equity build-up, principal reduction, future appreciation and all the "Bundle of Rights in Fee Simple or Fee Defeasible real estate ownership?

Note carefully here that for most of us, a $1,200 mortgage payment (PITI) is essentially the same cost per-month as renting for $900. This is so because one must earn $1,200 in order to be able to give the government, 1/3rd of it, and have $900 left over for the landlord (another way of saying it, is that the after-tax cost of renting is 150% of the monthly rent: whereas the after-tax cost of a mortgage payment, is just the mortgage payment).

Q: So how do you go about protecting the seller?

A: Let him/her put the property in the land trust in HIS/HER name with a neutral 3rd party Trustee and a neutral professional collection company (for collections and disubrusement). You then become a partial beneficiary, for, say a 75:25 percent share of ownership in your favor, with mutual (50:50) Power of Direction (i.e., “voting rights”). You also agree to a forfeiture of the 25% and voting rights at the end. The forfeiture is given in consideration for your prompt payments and strict adherence to all provisions of the Agreement throughout the term.

Q: OK… so… how do you give a tenant the tax write-off?

A: Make him a 3rd beneficiary in your trust (50% beneficiary interest), with an Assignment of beneficiary interest and a “triple net” lease (see IRC Sec. 163, specifically (h)4(D) re. beneficiaries in estate and trusts wherein beneficiaries have granted legal and equitable title to a trustee.

Q: Yeah, sure, but how do I convey equity build-up, principal reduction, use, occupancy, possession, water rights, minerals rights and all that to the tenant?

A: Just say so in you Beneficiary Agreement.

Q: OK, but how do I make any money?

A: When you take the property at 94K, increase the Mutually Agreed Value for the land trust conveyance to 98K or 99K (just be sure they sign off on your CMA or appriasal, and that the acknowledge tht the increased valuation is fair compensation for what is virutally 100% fiancing with no bank qualifying). You then agree to split the profits with your resident co-beneficiary upon the trust’s termination, and the disposition of the property in, say 4-5 years, after a return of your initial contribution. Your $4-5,000 beginning equity is your Contribution. And/or you can have the resident co-beneficiary pay half of your beginning equity at the start of the Agreement along with closing costs.

Q: Yeah, well… but… I still have to pay for management, maintenance, repairs, upkeep, homeowner’s dues, PMI insurance and all that.

A: No you don’t! The resident beneficiary covers all that.

Q: Really?

A: Yup!

Good luck

Bill

e-mail me if you need names of co-operating trustees, collections services, etc.

(Oops! Just go zinged for writing co-operation without the hyphen again)


#4

Re: Here’s my scheme… - Posted by Bud Branstetter

Posted by Bud Branstetter on November 12, 1998 at 12:24:17:

I think there is a market for people giving you their house. That market is one in which the house is fairly new and there is little equity. Not enough to pay a realtor. Combine that with divorce or job transfer and you find motivation. The difference from your scenario and a true sandwich lease is srictly ownership. You try and insulate yourself from risk by not agreeing to make payments until the tenant/buyer is in the property. You may have a moral dillemma if you gauge the rental market wrong and have can’t find the buyer. But if you have title why not sell on contract or owner financed as a wrap. If you want your profit sooner make a balloon or contract due in a year or two. The more cash the buyer has into the deal the less likely they are to walk.

On your figures you estimate a PITI of $750. In our area a 94K loan at 7% would be $625 PI. Taxes are about 2 1/4 % and with insurance it adds about $250 a month or $875/mo. The house might rent for $900+ or L/O or owner finance for $1000 or more.

Depreciation is a double edge sword. When you sell you have to recapture. If you are doing a bunch of these as a business to may not be entitled to depreciation. As income property everything is deductable so there is no great advantage to ownership tax wise.

You will also find people that have a little equity they would like to get out or people that want to protect their credit. These people will lease to you at a discount to their payment and make up the difference each month. They just want the debt relief of making the whole payment each month.

As you make your calls on FSBO’s and for rents learn to disguish if they are first motivated then if they will, L/O, owner finance, sell cheap or just give you the deed.


#5

Re: Here’s my scheme… - Posted by Kevin(OK)

Posted by Kevin(OK) on November 12, 1998 at 07:37:58:

Good luck finding someone willing to just sign over their house that doesn’t owe back payments, legal fees, and interest (I’m talking close to being or in foreclosure). There goes that little out of pocket idea.

Kevin(OK)


#6

Re: Here’s my scheme… - Posted by Tim Pannabecker

Posted by Tim Pannabecker on November 12, 1998 at 07:32:37:

John,

I agree with Irwin point by point, however, the dynamics of your scheme change by merely buying at a steeper discount. If you are willing to search for property that needs some rehab, your plan would be more viable. Make your money when you buy, increase your yield with the l/o.

Good hunting,

Tim


#7

Re: Here’s my scheme… - Posted by Irwin

Posted by Irwin on November 12, 1998 at 06:45:07:

John:
Everything works on paper. However, I think you’ll be hard pressed to find a $5k downstroke in Northern Ohio. You might sit with the house for 3-4 months looking for one, and end up taking $2-2,500. Also, factor in a few months with no income because your l/o tenant bugged out on you and it took you that long to get him evicted and replaced. This shoots the heck out of any cash flow. You have so little equity you’re stuck in the deal and if things do go south, you have no way out.
Too much risk for too little reward, I’d say.


#8

Re: Here’s my scheme… - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on November 13, 1998 at 09:34:20:

Bill,

Does it really have to be all that comlicated ? Explaining sellers the “trust thing” is already a chore, but I can’t even imagine getting buyers to understand all of that. Why not just buy into a trust where you are the sole 100% beneficiary and then the trust would sell on land contract or contract for deed to the buyer ? The buyers get what they want (tax deductions, appreciation, and mortgage paydown), and we get high monthly cash flow as opposed to renting it (even on L/O).


#9

I Was With You Until… - Posted by Marvin Seawood

Posted by Marvin Seawood on November 12, 1998 at 22:24:54:

…how do you give a tenant the tax write-off?.

Bill,

I have saved all of your posts. Let’s say you (or I)
successfully explain all of this to a (sophisticted)
home owner; how difficult is it to make the buyer un-
derstand that it is a good deal for her?

Marvin


#10

Re: Here’s my scheme… - Posted by John OH

Posted by John OH on November 13, 1998 at 01:00:00:

What would the benefits be of selling on Contract or Wrap over Lease-Option? Wouldn’t you have to market the property at present market value? Or can you still mark it up because of the financing?


#11

Re: Here’s my scheme… - Posted by Laure

Posted by Laure on November 12, 1998 at 07:28:20:

What’s wrong with a less expensive property? Lower income people don’t have many options, unless we give them to them… also, you lease price could be more in tune with actual rents ie. less opportunity to sit empty. I have found here in central Ill… calls quit coming in with rents above $650. Also, Tenants in higher rent ranges are INCREDIBLE PICKY. I have a couple of high end rentals and the Tenants can drive me crazy !

Laure


#12

Re: Here’s my scheme… - Posted by Bill Gatten

Posted by Bill Gatten on November 13, 1998 at 19:18:35:

Alex,

Good point.

Taking 100% of the beneficiary interest in a land trust does several things we (personally) don’t like. It takes the seller out of the loop; violates the DOS clause; potentially triggers a contract of sale (taxable event); looks to the IRS like a simple disguised Security Agreement; and subjects the property (if discovered) to creditor liens; tax liens; divorce actions; BK’s; lis pendens (for any legal action); property tax increases; conveyance tax, etc. When I buy a property this way, I want the seller to be EXTREMELY comfortable with the deal, and I want the maximum protection for him/her as well as for me.

Concerning your concerns about the complexity, I guess it’s a little like selling Mercedes Benz’. Not everyone has a need to know the intricate details of the function of the engine and computer systems. Most just want to be sure that it impresses their friends, and gets them where they want to go, quickly and safely.

The way we market the “PACTrust™” (our system of land trust conveyance) is, to first find out what the buyer’s or seller’s objectives are, then shield them and the property from all the standard dangers, utilizing the PACTrust. In other words, from one standpoint, the system really isn’t an alternative to L/O’s, AITD’s, Land Contracts, Equity Shares, etc. It?s actually more a legal shield, and safety net, for obtaining the goals and objectives of any one of those devices: A WAY TO DO wraps, land contracts, Equity Share, etc.

Here’s pretty much my whole sales pitch to a seller:

"If you’re willing to remain on the loan for the benefit of a buyer (or for me) for a year or two, we’ll just put the property in a living trust for you, in your own name. We?ll then have the buyers (or me) take a beneficiary interest in the trust and take over the payment responsibility. This way, we don’t have to transfer title, worry about a due-on-sale compromise, a property tax increase, income tax on your gain on sale (yet), and legal ownership doesn’t pass until the buyer is (I am) ready to refinance the property and take you off the loan. In the meantime, because of your own beneficiary interest and 50:50 voting rights, you never have to worry about the untoward acts of the resident beneficiary.? [I.e., neither party can do anything requiring permission of an owner, because the legal owner is the 3rd party, unrelated, unbiased, cold hearted, fair and equitable trustee… who only responds to mutual direction of all beneficiaries].

Here’s the essence of my sales pitch for a buyer:

“Yes, I have this property that’s worth about $XXX. If you can cover the closing costs, and can afford the payments, I’ll just give it to you. The only thing I want out of it when you sell it or refinance it in 3 years is the little bit of equity I have in it now, and if there’s any appreciation over that period of time, I’d like to split with you.”

Or… "If you’re interested in taking over the payments and covering the closing costs, we’ll just put the property in a trust in the name of the seller, and make you a beneficiary. That way there needn’t be a due-on-sale violation, and your needn’t take any chances with the other party, the property or its title.

All-in-all, we see (and sell) the 3rd party land trust conveyance system as “the WAY we do it,” not “WHAT we do.”

Zis answer your question OK?

Thanks for the note.

Bill Gatten


#13

Re: I Was With You Until… - Posted by Bill Gatten

Posted by Bill Gatten on November 13, 1998 at 20:34:50:

Marvin,

As I mentioned in a previous post in answer to a similar question, here is how I personally explain it to a buyer:

Phone rings… (ringy, ringy… Hello)

CALLER: Hi, I’m calling about your ad that says, "No Bank qualifying, No Down, Closing costs and as little as 2 payments can move you in, call about trust property opportunity, $67,000 3+2, only $400/mo+tax & ins).? What?s the deal here?

ME: Well, I have this house over on Del Rosa, there in San Bernardino, which is worth about $65,000, with total payments of around $575 per month. And what I’m looking for is someone to pretty much just give it to (splint infinitive, I know, but say it any way). They’ll just need to cover about $4,000 in closing costs, and be able to make the payments. The only thing I would like out of it, is to have you (personal pronouns used here on purposes) put it in your own name, or agree to sell it in 5 years, and give me back the equity then, that I have in it now. And, of course, if there’s any appreciation over that period of time, I’d like to share it with you.

Invariably they say: “Cool! When can we see it?” Rarely, Marvin, would I have someone say they’re not interested, or even ask any more questions.

If they ask what “land trust opportunity” means, I tell them that the property is currently owned by a land trust, and that they’ll be becoming beneficiaries ‘in’ (not “of”) it until such time as they decide what they want to do with the property (sell or re-fi). I also explain that, in the meantime, they’ll [of course] have 100% of all ownership benefits: the property, the tax deductions, the equity build-up, the principal reduction, water rights, etc.; and that the only thing ‘shared’ at all, will be the future appreciation… if there is any.

What do I (as the seller) gain from the deal? An income property with free property management, no negative CF, no maintenance or repair costs, no vacancies… and pure profit potential (especially in view of having picked the property up for $50K with payment of only $375). Anything given up in future appreciation will more than be made up for in the absence of monthly costs and a higher than normal rental income.

TO A MORE SOPHISTICATED BUYER THAN THAT: "The way we do a ‘Wrap’(or Equity, Share, Lease Option, Contract for Deed, etc.) involves using a land trust and an Assignment of Beneficiary Interest. This is done in lieu of taking any chances with the lender’s alienation provisions (“DOS”), or subjecting you to any potential problems the seller could have later (divorce, BK, tax liens, creditor liens, etc.), which could affect the property. The trust will also protect you from increased property taxes, conveyance tax and public declaration of your ownership (a neon sign to anyone would want to sue you or lien your home… kind’a like a “100% Homestead”).

Best of luck,

Bill


#14

Re: Here’s my scheme… - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on November 13, 1998 at 09:29:17:

The value of the property is what a buyer is willing to pay for it. I found that in my market place buyers are willing to pay about 10% premium in price and up to 11-12% interest rate if I offered long term non-qualifying owner financing with small or no downpayment. Remember also that there are closing costs to the tune of 3-4% of sales price that buyers incur with bank financing, which I don’t charge.


#15

Re: Here’s my scheme… - Posted by Brad Crouch

Posted by Brad Crouch on November 14, 1998 at 04:00:11:

Bill,

I agree that this process seems VERY complicated and EXPENSIVE. I have a couple of questions.

> Taking 100% of the beneficiary interest in a land
> trust does several things we (personally) don’t like.
> It takes the seller out of the loop; violates the
> DOS clause;

I know that you say your PACTrust successfully circumvents the dreaded “due on sale” clause, but I’m trying to understand exactly how. By giving the buyer a 50% beneficial interest in the trust, isn’t that the same as some of the property “interest” being transferred? The trust owns the property. The trust is very actively administered by the trustee, at the direction of the beneficiaries . . . including the new buyer who shares in the “direction process”. Are we to conclude that the new beneficiary (50% owner of the beneficial interest) does NOT have an interest in the property?

> When I buy a property this way, I want the seller to
> be EXTREMELY comfortable with the deal, and I want
> the maximum protection for him/her as well as for me.

It seems to me that one of the incentives for the seller to sell (on a lease option anyway), is that the seller retains the tax benefits and depreciation of the property. Are they really THAT “comfortable” about giving up half of this?

And does the tenant buyer really DESERVE to have these benefits, until they have actually “bought”?

By the way, Is there anyway that a PACTrust can work in a “sandwich lease” situation? I just can’t picture me spending over a thousand dollars a year to enable someone else to receive tax and depreciation write-offs (assuming a seller could be found who was willing to forgo his own tax benefits).

I think that most folks realize there may be “some risk” involved whenever a DOS is circumvented, whichever method is used. And has a backup plan for dealing with that possibility. The idea seems to be to keep a “low profile” and not take any unnecessary chances. It’s a calculated risk.

I was wondering if your PACTrust includes the same strategy, or does it involve full disclosure to the lenders? If so, why do you recommend not adding the co-beneficiary until AFTER the deed has been recorded in the name of the trust?

> Concerning your concerns about the complexity, I
> guess it’s a little like selling Mercedes Benz’. Not
> everyone has a need to know the intricate details of
> the function of the engine and computer systems. Most
> just want to be sure that it impresses their friends,
> and gets them where they want to go, quickly and
> safely.

Speaking as a 25 year veteran Mercedes technician (a fancy word for “mechanic”), when the owner doesn’t know enough to occasionally look at the temperature gage, or not have enough sense to realize that a shaking steering wheel might mean trouble, or that massive amounts of smoke coming from the tailpipe means something is wrong, they turn a $250 job into a $18,000 job. The same is true when the oil is not checked on a regular basis.

It’s almost unbelievable how many times I’ve had to make a late night service call only to find a stupid driver waiting for me.

The point is that you usually cannot get by with “Trust Me”. My opinion is that generally folks want to know what they’re about to get themselves into . . . BEFORE they agree to anything.

> In other words, from one standpoint, the system
> really isn’t an alternative to L/O’s, AITD’s, Land
> Contracts, Equity Shares, etc.

> It?s actually more a legal shield, and safety net,
> for obtaining the goals and objectives of any one of
> those devices: A WAY TO DO wraps, land contracts,
> Equity Share, etc.

Tell us how it works with lease options, please.

I have read your book, but maybe with an insufficient amount of concentration. Because I still don’t understand how using a PACTrust could benefit me. I guess that I should mention that my primary focus is sandwich type lease options.

My strategy involves master leasing a property, helping the property owner to put the property into a land trust (doing this myself, for free, with the help of the “Bronchick” land trust - Grantor trust in California) to protect him from judgements and liens and to protect my interests.

Part of “protecting my interests” involves recording a
performance mortgage on the property if I can get the seller to agree (ostensibly to give me the “standing” to insure the property).

The next step is to set up a loan servicing company to administer the cash flow and to make sure the underlying mortgage payments (if any) are made in a timely manner . . . and of course to make sure I get paid.

The last step is to put a tenant buyer into the property, collect some healthy up front cash (initial option consideration), a monthly spread of at least $150, and a healthy spread on the back end when the tenant buyer exercises their option.

Mainly I want to be sure that I can convey clear title when it becomes necessary.

I can’t figure out how a PACTrust can be useful to me. Maybe you could point out whatever it is that I am missing?

Brad


#16

Re: Brad’s excellent questions - Posted by Bill Gatten

Posted by Bill Gatten on November 14, 1998 at 14:23:15:

Brad,

In answer to your excellent questions (let me paraphrase them here, if I may):

Q1: How does the PACTrust circumvent the DOSC?

A: Garn-St. Germain allows any mortgagor to place its property into a living trust (be it revocable, inter-vivos, etc.). But it is required that the trust (itself)not relate to occupancy rights by another, and that the Grantor must remains the beneficiary (in a beneficiary directed trust), or remain the trustee (if it’s a trustee directed trust). It is AFTER the trust is created that one’s attorney would ask the grantor who he/she wants to be the remainder agent or the co-beneficiary. Appointing either does not violate a DOSC, because the assignment is a transfer of “beneficiary interest” only – not personalty and not realty (like becoming an heir in a Will or a beneficiary in an insurance policy). However, be that as it may, the IRS, characterizes beneficiary interest in land trusts as Realty, and the UCC characterizes it as Personalty: but in actuality, it’s neither.

In the PACTrust, after the assignment function, one of the co-beneficiaries merely leases the house from the trust (there is no alienation if the lease is for 3 years or less, and does not contain an option to purchase).

Q2: Are we to conclude that the new 50% owner of beneficial interest does not have an interest in the property?

A: Yes. The co-beneficiaries (at 50%, 75%, 90% or ??%) have clearly and undoubtedly given all of the “Legal” AND “Equitable” title to the trustee. Their ownership is strictly of “benefits.” They do not own the property, and they do not own the trust: they merely own the “benefits” of an owner of the property (tax deduction, equity build-up, appreciation, mineral rights, profit potential, etc.).

Q3: Are sellers really that comfortable about giving up their tax write-off? With L/O’s they keep the tax write off.

A: When a seller in a PACTrust gives up the write-off, it’s because he/she’s getting something of much greater value in return (it’s like selling $100 worth of cash-value in tax benefits for $125 and getting a free property manager and maintenance company thrown in for good measure). Compare the seller’s benefits in an L/O wherein he/she pays for maintenance, repairs, upkeep, p. tax., insurance, etc. and receives 900 p.mo in rent, to a seller who receives $1,200 in rent, and has zero expenses (if the roof blows off in the middle of the night, it’s the PACTrust co-beneficiary who fixes it).

Q4: Isn’t the cost of putting one of these things together a litte too expensive? With a L/O I just hire a loan servicing company to collect payments, make disbursement, etc.

A: That’s up to you. If you put it together by your self, it costs no more than, say, title insurance, Escrow (or conveyance attorney), a month or two in reserve, the first payment due, new hazard insurance policy, pro-rations of p. taxes, etc. In a PACTrust, the collection service is free, and the trustee (who by precedent statute must charge for it’s services [see U. of Ill., Kenoe on Land Trusts, etal), charges a fee sufficient to pay for: legal services (if/when necessary), the legal exposure of holding title, and the expense of the professional collection service. When I put them together, provide the trustee, the documentation, the law firm, the collection service, etc. … well… um… I charge for doing so. (Other readers: Please do not ask for cost specifics in the discussion group)

Q5: Does the “tenant buyer” really deserve to have these benefits [Re. tax deductions] until they’ve bought?

A: Sure they do, if they’re paying for them (higher rent, covering all costs, doing all the work, etc.). Remember the program I’m describing is a vehicle for: a) being able to “sell” tax benefits for a profit; b) a contingency sale, with the benefit of immediate tax-write-off; c) a Buy Now and Finance Later device(an excellent “bridge” financing system); a way to avoid capital gains for a while longer; a way to buy a first home (or the 45th home, for that matter); a way to protect the seller and the buyer and the property from legal actions and dangers; a way to buy for No Down and No Bank Qualifying; a way to sell zero equity, no equity or over-encumbered property, etc., etc., etc.

Q6: I can’t imagine me spending over a thousand dollars a year to enable someone else to tax and deprecation write-off [A question, well… a “rhetorical” one anyway].

A: Most of the properties we deal with don’t run near that much, and theres a max. of $139, but…the answer is: Why not? If what you are receiving in return is worth twice as much, why not? If it’s not, then you don’t do it. Remember that in the PACTrust it is almost always the Resident Beneficiary (or the 2nd co-beneficiary, if an investor) who pays all monthly costs. Any portion of costs paid by a non-resident beneficiary is tax deductible. Note that I use the 50:50 Fairness Doctrine in determining who pays: that is: 50% of the time I’m the buyer, in those instances the seller pays the costs; and in the 50% of the time when I’m the seller, the buyer pays the costs.

Q7: If the PACTrust doesn’t involve a DOSC Violation, why not a full disclosure to the lender?

A: Because $24,000 per-year bank clerks typically have a taco or two missing from their Al Carbon Special (as it were). We do notify the bank (in EVERY case) that the property is in a land trust and being handled by the collection service; and the seller signs a prepared letter to the lender(s), the insurance company(s), the Homeowner’s Associatio, the taxing authorities, etc., authorizing and directing them to accept our checks and release any and all loan data to us.

In this regard, however, we are aware that since ?PAC Management writes the checks" they probably presume we are a property management company handling a simple rental (which, in effect, we are). But, since even someone as astute, experienced and highly knowledgeable as yourself hasn’t fully grasped the entire concept inside and out yet… we don’t expect a servicing agent in some Podunk bank to even come close.

Q8: How would the PACTrust work with a Sandwich L/O? I do the land trust my self with Bill Bronchik’s form and documents (i.e., the land trust - “Grantor’s Trust in Calif.”)

A: 1) First of all (minor issue) we don’t use a Grantor?s lease per se, though that would be the typical characterization by a non trust attorney in Calif. – Black’ Law and other sources define a Grantor?s Trust as one in which the benefits (tax write-off, etc.) flow exclusively to the grantor; 2) Bill Bronchik’s documents are excellent, as is his book "Using Land Trusts for Privacy and Protection ("Get that Property out of your name). You are doing the rights thing… though I would suggest a co-beneficiary arrangement with a forfeiture (of beneficiary interest and directive powers) at term, rather than a 100% conveyance.

Concerning the “Sandwich L/O,” I see no reason to stop what you’re doing, if you are comfortable with it. Just remember that the 3rd party land trust conveyance, does answer the “Yeah Buts” and “What If’s,” when they arise (no DOSC Viol., the grantor remains in a revocation position, the name of the trust is still in the name of the borrower (re. G-St. Germain); no beneficiary has less than a 10% interest (IRC regs); no more than 50% of the voting rights has been relinquished (state and county R&TC regs… most areas; ergo no transfer or conveyance tax); the ability to pass tax benefits to a contingency buyer or lessee (for a fair price); existing title insurance flows to the co-beneficiary without the potential for cloud (Probate Code regs); the two parties (buyer and seller) can’t take advantage of each other or misuse the property or its title; etc.

Q9: I hire a loan servicing com;any to collect payments and make sure I get paid, and give me at least $150 p. mo. cash flow. ('Nuther rhetorical one… but a qwekshun non-the-less)

A: Likewise, in the PACTrust, the “collection service” is provided, and all transactions are escrowed to protect the parties. Why is there no charge for the collection service? Because statutes governing land trusts require that the beneficiary/ies manageme the property themselves exclusively. They can appoint a party collect and disburse, but if its a paid agency, licensed as a property manager or loan servicing company, the IRS could (if the agent were bright enough to catch it) characterize the entire transaction as a disguised secuirty agreemen, a partnership or an association, double-taxed as a corporation.

Regarding positive cash flow, I have a property in Hollywood, which gives me about $1,500.00 in pos. CF. I have others with no cash flow, but I do have $20-$300,000 equity, and half the appreciation in all of them, which is due me when I dispose of them in a year or two. My ‘figger’ is that if I have zero monthly cost, zero management and zero negative, and pure profit potential, I can live without an extra hundred bucks a month. Most (maybe I should say “many”) who do L/O’s create a positive cash flow, then eat it up in maintenance and management costs.

Q10: Mainly I want to be able to convey clear title when the time comes.

A: It could be difficult, if the seller creates a trust, conveys the property’s title to it, and in the process loses the right to control or revoke it. One of the more highly touted advantages of the Mutual Direction aspect of the PACTrust™, is its protection of the title from any clouds or rash or untoward actions by either (any) of the beneficiaries.

Q11: I can’t figure out how a PACTrust can be useful to me… maybe you can point out what I’m missing.

Brad, I hope this does it. However, remember, as gung-ho as I am, I never (in a seminar or workshop, or in our courses or books) pitch the program as the replacement for anything… it’s just another (albeit, in my opinion, extremely valuable) weapon in your Investor’s armamentarium.

Best regards,

Bill

P.S., thanks for giving me the opportunity to have just written my third book (above). Phew!


#17

Re: Brad’s excellent questions - Posted by Brad Crouch

Posted by Brad Crouch on November 18, 1998 at 04:15:54:

Bill,

> Garn-St. Germain allows any mortgagor to place its
> property into a living trust (be it revocable,
> inter-vivos, etc.). But it is required that the trust
> (itself) not relate to occupancy rights by another,

Interesting. I thought the “occupancy” issue was related . . . but you say it is not “REQUIRED”. I wonder exactly who does not “require” this? The Garn St. Germain text seems to be clear in requiring it. You can word the PACTrust anyway you want, it’s just not as important as a judge’s decision. From what I can tell, no judge has had this issue to decide.

Mr. Bronchick and you both seem to be quoting the same paragraph, yet you both draw different conclusions. Why is that do you think?

> When I put them together, provide the trustee, the
> documentation, the law firm, the collection service,
> etc. … well… um… I charge for doing so.

Brad: I can’t imagine me spending over a thousand
dollars a year to enable someone else to tax
and deprecation write-off.

> Most of the properties we deal with don’t run near
> that much, and theres a max. of $139, . . .

Lets see if I am clear on this . . . $139 X 12 = $1,668 per year . . . maximum. Right?

Your fee schedule indicates a minimum fee of $850 “PER SIDE”. Assuming two “sides”, this comes to $1,700.00, for a “retainer”.

If there were someway feasible to involve three “sides”, this would amount to $2,550. This would be for the “retainer” for doing business with you.

For property values of over $150,000 (common in California, where we both are located), brings a setup fee of $500 with a minimum monthly trustee fee of $40 ($480 per year) or a maximum monthly trustee fee of $139 ($1,668 per year). Then you “throw in” the loan servicing for free.

I find myself wondering if there are “additional” expenses for you that justify the different Cal-Equity prices on lower priced properties. Isn’t your program the same for these lower priced properties as it is for the higher priced properties? Same amount of work SHOULD result in the same price.

Kind of reminds me of the strip mall landlords who want a percentage of a businesses receipts (along with a “guaranteed” minimum amount, which should be the normal rent). Looks like you’re trying to get all you can.

I have honestly tried to find a way that your program might benefit me. I have not found it. And the prices you list just adds costs to the deal, regardless of who ultimately has to pay. Even if your prices did not cause a deal fall through, it seems to me that the same protection (or nearly the same protection) is afforded by a simple Land Trust and the use of an independant loan servicing company. And keeping a “low profile”. Now THERE’S a system that requires only a little common sense.

I guess it really depends on just how paranoid an investor is, and the lengths he/she is willing to go.

> We do notify the bank (in EVERY case) that the
> property is in a land trust and being handled by
> the collection service; and the seller signs a
> prepared letter to the lender(s), the insurance
> company(s) . . .

When we use a “standard” trust agreement, the same things get done, except by the seller (beneficiary of the new trust). Since this is standard operating procedure, I am wondering why you seem to think these things are only done in conjunction with your program?

> . . . the Homeowner’s Association . . .

Why would you tell these guys anything? Is it with the thought that they might not notice a new person moving in or occupying the premisis?

> the taxing authorities, etc., authorizing and
> directing them to accept our checks and release any
> and all loan data to us.

What “loan data” would the taxing authorities have? Does the taxing authorities really care who sends them the tax payments? Wouldn’t any communication by the taxing authorities go directly to the Trusts trustee which is on record as owning the property?

> . . . we are aware that since ?PAC Management writes
> the checks" they probably presume we are a property
> management company handling a simple rental (which,
> in effect, we are).

If a corporation (mine) were to be made trustee of the trust, do you think there would be any problem getting the corporation’s checks accepted as payment for anything (including underlying mortgage payments)?

Brad: How would the PACTrust work with a Sandwich
L/O? If I do the land trust myself with Bill
Bronchik’s form and documents (i.e., the land
trust - “Grantor’s Trust in Calif.”)

> First of all (minor issue) we don’t use a Grantor?s
> lease per se, though that would be the typical
> characterization by a non trust attorney in Calif. –
> Black’ Law and other sources define a Grantor?s Trust
> as one in which the benefits (tax write-off, etc.)
> flow exclusively to the grantor;

I was talking about a “Land Trust”, but California does not recognize this term. My understanding was that it was called a "Grantor’s Trust, here in California.

I would expect the seller to retain the tax benefits, but as the “master lessor” I would expect the cash flow to come to me. The beneficial interest wouldn’t be mine for possibly a few years when my tenant buyer exercised his option, and then only for a few minutes.

By your definition, this would not be called a “Grantor’s Trust”. What would it be called? Would failing to use the PACTrust necessitate the use of two separate trusts, one after the other, two years apart?

> Just remember that the 3rd party land trust
> conveyance, does answer the “Yeah Buts” and “What
> If’s,” when they arise . . .

This brings up an interesting point; WHO asks these questions? How could anybody learn enough to ask them?

> Why is there no charge for the collection service?
> Because statutes governing land trusts require that
> the beneficiary/ies manage the property themselves
> exclusively.

Do these statutes indicate that no monies can be charged? It looks to me more like you are tossing in these services to justify the high fees, and so you can say, “See, you’re getting something for nothing - lets get started!”

Maybe I could start another company, just to service my own deals and escrow closing documents . . . if I couldn’t find an “acceptable” company to do this my way. I have already established that no RE license is needed (in California).

Brad: Mainly I want to be able to convey clear
title when the time comes.

> It could be difficult, if the seller creates a trust,
> conveys the property’s title to it, and in the
> process loses the right to control or revoke it.

How in the world would that happen? The seller would not assign me his beneficial interest until his underlying loan was paid off and he had received any profit that we had negotiated.

I feel I should point out that just because I find no real value to your program and think your fees are unreasonably high, does not mean that the PACTrust won’t work for other people who have different goals.

I kinda hope someone can show me how to get value from this program.

Brad


#18

Re: Brad’s excellent questions - Posted by Bill Gatten

Posted by Bill Gatten on November 18, 1998 at 19:08:26:

Brad,

I will try to answer your questions and concerns one at a time, but understand first off, that we’re honestly not interested in making money from you (other than possibly the price of a book or tape set you may order, should you choose to do so). We are interest only in showing you how to do what we do for your OWN benefit.

Re. Fees. We are investors and facilitators for Realtors, buyers and sellers. Other than perhaps buying a book, we don’t expect you to pay us anything for our information. We presume that, as an investor, you’ll merely do what we do. For forms and documents, they are a part of our materials, or you can order Bill Bronchik’s excellent book (Get That Property out of Your Name), which also provides you with pretty much any forms you need. Should an investor need our services, we are more than available; however, our trustee, facilitation and collections services were not necessarily designed for use by knowledgeable investors, such as presume you are.

Our purpose in posting on CRE is not to suggest that you have to (or even should) use our company’s services at all. If someone does need our Trustee, attorneys, collection service, facilitation and documentation help, we charge: if not, we don’t. Although, we still are happy to assist you in any way we can by telephone or fax.
On the “occupancy” issue w/r Garn-St. Germain: As Bill Bronchik and I just discussed, and agreed on, this morning (e-mail): in our system, the “rights of occupancy,” as referred to GSG, is not conveyed by the trust: it is conveyed by a subsequent Occupancy Agreement, and there is, therefore, no conflict with regard to GSG or the Due-on-Sale Clause. After all, thousands of people put their rental properties into living trusts every day, then convey occupancy rights by leasing or renting them out).

Again, regarding fees being less for smaller properties than for big ones… don’t RE commissions work that way? Legal fees? Escrow costs? (Has to do with exposure and cost justification). But again… we don’t expect you to pay us to do anything you can do for yourself.
Brad, in RE sales jargon, the term “sides” typically applies to the buying and the selling “sides” in a transaction, not to the number of parties in a transaction. When we refer to costs applying to so much “per side,” we are referring to the relative costs shared between buying and selling entities.

Contrary to your apparent understanding (for which I apologize), we do not “throw in any loan servicing for free” in order to entice anyone to do anything.

The reason there is no charge for collections or property management in a land trust, is that statutes and precedents relative to land trusts, specifically require that the beneficiaries may not pay for such services. They are, however, free to appoint a third party (entity) to do it for them (so long as it is not a property management company or a loan servicing company). All of this has to do with avoiding the characterization of the transaction as an Association (taxed as a corporation).

As far as the charge for the trusteeship is concerned, if a trustee were not acting as a professional land trust trustee (for a fee), there is a chance that a 3rd party trust conveyance could trigger characterization by the IRS as a disguised Security Agreement, rather than as a transfer to a trust, with the inherent benefits (see Keno on Trusts, U. of Illinois).

Regarding a single beneficiary trust being “charged by lien,” it is highly possible, in that attachment to one’s beneficiary interest can (could, if properly effected) put the judgement creditor in a position of Power (re. Power of Direction) over the trustee. This very subject is the topic of another conversation that Bill Bronchik and I are discussing (e-mail). On the other hand, co-beneficial interest by unrelated parties creates a non-partitionable interest that protects the corpus of the trust from the untoward actions of either beneficiary.

You said something like ?I can?t imagine spending over a thousand dollars, to give someone the tax write-off…? I’m not sure what you mean here. When I acquire a property, I’m happy to pay the trustee fee (whatever it may be) in order to GET the tax write-off, along with the protection and services it provides me. Moreover, when I’m on the other (selling) end, I presume the buyer will feel the same way.

Regarding your quest to find “?some way this program can benefit [you],” it only can, if you need it to be. If you have a less expensive or safer way of buying, selling or managing properties, that is what you should do. We offer our program for consideration by those who would wish to avoid transfer of title to an unknown entity. Those who would wish to eliminate the dangers of an errant optionee (or buyer in an AITD, Contract or Equity Share) from claiming “equity” to forestall eviction or foreclosure. Or those who would wish to protect the title from liens or clouds. Or, those who would wish to avoid characterization as a Partnership, Corporation, Association or disguised security agreement, etc.

Re. your question about “? the Homeowner’s Association… why would you tell them anything?” Well… I guess that’s up to you… but personally, I don’t want the HOA not knowing who the owner/s is/are, and demanding reserves or special renter assessments, or excluding the rightful owners from insurance coverage, participation in the Board of Directors, etc.

When I said that we notify the bank on every case, I didn’t mean to imply that other trust programs wouldn’t do the same necessarily… that statement was simply in answer to a direct questions about doing so.

Your question re. the taxing authorities ?caring about payments…? you accidentally eliminated the first part of the sentence wherein I mentioned the lender (i.e., …"lenders, taxing, authorities, etc.). You are right the taxing authorities couldn’t care less who sends them the money, but we need them to change the billing address. The “authority” who may care, however, is the bank (and we frequently [monthly] have checks returned on new transactions, from lenders who haven’t yet been informed that they are to accept checks from a new Payor.

Regarding terminology (?grantor trust? vs. ?land trust?) it?s the content of the documentation and intent of the parties that characterization depends on. We steer away from the term ?Grantor?s Trust,? because, as I mentioned, the strictest definition of such a structure is a trust in which all the benefits are in the interest of the grantor, not the beneficiary/ies (as is the intent of the land trust). For a generic classification, we use the term ?title-holding (Illinois-type) land trust (e.g., see, for example, Black?s Law 6th Ed.).

Regarding no RE license being needed in California, in all candor, depending upon what you mean, I might suggest that acting as a broker between parties without a license carries a fine of $10,000 and six months in jail. However, consulting or buying or selling below the dealership status (I think it is eight properties per year?not sure) does not require a license.

Again, Brad, our ?unreasonable fees? are not intended for you. We presume you and/or other CREA folks would do what we do, and charge your own fees. It is only when we act as an agent between parties, or as consultants and facilitator that we charge anything. Think about it? if I?m a would-be (or wanna-be) investor, and have a property picked out to buy, and haven?t the slightest clue as to how to put it together (Lease Option, Lease Purchase, AITD, Contract for Sale or Equity Share); and I seek you out for your knowledge, expertise, computer skills, programs, attorneys, escrow company, forms documents, etc. TO DO IT ALL FOR ME? what would YOU charge? And, on that issue, strictly for interest’s sake, the companies we use for trustee, collection agency, escrow etc. are not my companies, and we receive none of whatever they charge for their services.

Brad, I hope this answers your questions? if not, keep writing.

Bill Gatten