Posted by Stacy (AZ) on February 28, 2001 at 20:20:53:
Excellent! I wondered if it was true!
Stacy
Hung-up on Trusts… - Posted by Brad TX
Posted by Brad TX on February 27, 2001 at 10:30:18:
When buying subject-to and closing the deal with a seller, how do you handle the issue of explaining to the seller why you’re putting the property in a Trust with a Trustee of your choice, and then assigning the benificial from them to you.
I go over in my mind sitting down with a seller and closing this type of deal, and I always get stumped on explaining the reason for this to the seller. I realize these people are motivated, and probably will accept a soft explanation, but it still bothers me that I can’t picture a clean way of handling this issue.
Do I brush over it by saying something like, “Oh, this is for estate planning purposes, blah, blah, blah. Just sign here.”
Or, do I go into more detail and risk total confusion?
How do you subject-to types handle this with sellers?
Thanks!
Brad TX
Re: Hung-up on Trusts… - Posted by Brent_IL
Posted by Brent_IL on February 27, 2001 at 20:10:51:
Good enough 95% of the time -
?A trust is a barrel. It protects and insulates what?s inside from jeopardy or unwanted exposure, and makes sure that when you want to take something out of the barrel, it comes out of the spigot, in order, and at the right time. An attorney at the title company sets up the details on your behalf. It?s routine.?
Re: Hung-up on Trusts… - Posted by Bud Branstetter
Posted by Bud Branstetter on February 27, 2001 at 18:36:24:
I use the explanation that I don’t want others to know what I own so they would want to sue me. Most people have hear of a living trust. The land trust is a form of living trust designed to hold title to real property through a trustee.
I don’t worry about CYA’s and DOS anymore because I will not violate the DOS clause. I will use the PACtrust approach.
Re: Disclose - Posted by Stacy (AZ)
Posted by Stacy (AZ) on February 27, 2001 at 12:20:03:
My opinion is that you should disclose to the seller why you are placing the title into a trust. You’ll have to have them sign a disclosure letter (CYA) to protect yourself, so the avoidance of discussing the Due-On-Sale clause and what it means is not an option. You want them to know what is going on, and agree that it’s just fine.
Many times I’ve noticed investors that are doing subject-to deals for the first time think they need to hide this information from the seller…as though it’s sneaky and borderline unethical. It’s not (unless you are John Reed).
Those sellers that have a problem with the issue, should probably be converted to another strategy (L/O or straight option if it makes sense), or they are just not motivated enough.
Stacy
No CYA Huh? - Posted by JPiper
Posted by JPiper on February 27, 2001 at 19:32:21:
I guess that brings up the following question: if we assume the PacTrust approach does not trigger the DOS clause, then CYA would be unneeded even if later the PacTrust were determined to violated the DOS???
JPiper
Not quite what I was asking… - Posted by Brad TX
Posted by Brad TX on February 27, 2001 at 13:59:33:
Stacy - Will you respond again if I ask my question more clearly? Here goes:
Assuming you disclose everything about Due on Sale and the CYA letter, I still have question on how to handle explaining Trusts, specifically, and why you are having them fill out a Warranty Deed to Trustee, A Trust Agreement naming them as beneficiary, and then another form assigning their beneficial interest to you as the buyer.
This was hard for ME to understand in the beginning. Alot of sellers don’t know what a Trust IS, much less why I am using it. What is your method of explaining this to a seller? How detailed do you get?
Thanks!
Brad TX
Re: No CYA Huh? - Posted by Bill Gatten
Posted by Bill Gatten on February 27, 2001 at 21:56:29:
Jim Piper,
Why do you keep doing this after all these years? I’ve grown to know and love you…but dang!!
Any stand-alone land trust which conveys full control of a lender?s security to someone else, and one in which the mortgagor is not “a” beneficiary violates the due-on-sale clause (secretly or not). One of the reasons (though a minro one) for the PACTrust is: Hey! Don’t violate the DOS! Just DON’T sell or convey the property to another (like your contract says); and DON’T transfer the title beyond an authorized inter vivos trust in which the mortagor IS and remains a beneficiary (USC 1701j3); and specifically have the ?acquiring? party merely rent (lease) the property from the land trust until such time as the property IS in fact sold and the loan paid off. DON’T do anything you loan contract sys you can’t.
Jim, there are two distinctly different transactions taking place here (re. the PACTrust) not one (this is a tough point to get across…but you’re worth it):
-
An investor, for profit reasons, buys a share in an investment vehicle (a land trust) that owns an appreciating asset (a house). The reason for so doing is obviously to hold an interest in an income property investment that will (hopefully) yield cash flow, tax benefits and profit potential. All the “investors (beneficiaries)” then chip in to build a Contingency Fund in order to cover anything that might go wrong with the property during the life of the trust (repairs, maintenance, assessments, late mortgage payments, etc).
-
Next, the trust property is leased out to someone?anyone? (as was the plan all along) by means of an ordinary (albeit triple-net) lease agreement: which was the reason for placing the property into the investment vehicle (the land trust) in the first place. Once the property is leased out, all the investors are happy.
That’s it! There ain?t no more.
Now…if one of those investors happens to become the tenant in the property (i.e., one of the ?share-holder? beneficiaries, as it were)…through no design of his own, the IRS will let him write-off the interest portion of the property?s mortgage loan payment, and the property tax that his lease requires him to pay (as per IRC 163(h)4(D). Further, the beneficiary agreement between (among) the beneficiaries can and does stipulate exactly how the profits are going to be divided or distributed to (or among) the investors when the lease on the property is up and it is sold.
If the tenant in the property wants to buy it, he can; but he?ll pay full fair market value for it, just like anyone else would (no options; no bargain buyouts, no equitable mortage arrangements). But, of course, whatever that FMV purchase price turns out to be, it will be offset by any moneys the buyer receives as a result of his investment in the title holding trust trust.
And, dag-nab it Jim P., there IS NO VIOLATION OF THE FLIPPIN? DUE-ON SALE CLAUSE! (Unless, of course, you subscribe the idea that CFR 561 vs. USC 1701 would be validated, and somehow make leasing the property out a DOS violation)
In addition, my old Woodchuck Conundrum pal, ?violating? a due-on-sale clause, and ?triggering? a due-on-sale clause, are two different things. Violating one doesn’t necessarily trigger it: the powers to be have to know (or suspect) that there is a reason to shoot and something to shoot at before they can pull the ?trigger? or allow it to be automatically pulled.
Bill Gatten
Re: Gotcha - Posted by Stacy (AZ)
Posted by Stacy (AZ) on February 27, 2001 at 14:25:02:
I’ve explained trusts slowly, at a very high level, and watched for a reaction or listened for questions. I’ve got to tell you the truth, I’ve never had a seller question me beyond that.
I STILL occasionally over-explain things. It’s a weakness in my sales skills, and I’m working on it with every new contact. I have started to watch the seller’s eyes, and look for any lack of attention or “glazing over”. Now, I’m trying my best to explain things, such as a land contract, and what equitable title means, only at a high level. If there are more questions, I continue. And I always ask if “I explained it well enough”, and “if there are any questions”. More often than not, no further explanation is needed. I’m continually surprised at how little people understand or care to understand the details about real estate transaction they are involved in. Then again, many of us were pretty much ignorant before we learned about this stuff.
I’m afraid where sales skills are concerned, I’ll not be an expert in this lifetime. Some people are naturals. But me? I’ve really got to work at it.
Stacy
Re: Not quite what I was asking… - Posted by Redline
Posted by Redline on February 27, 2001 at 14:22:06:
I’m no expert but I don’t think you need to be at that level of granularity. As long as you’ve disclosed WHY you need a trust and what exactly the PURPOSE of the trust is … the machanics is not important.
Tell them to sign the docs - this is the trust part of the deal you explained earlier. End of story.
RL
In your other posts … - Posted by RChong (TN)
Posted by RChong (TN) on February 28, 2001 at 09:59:42:
you say it has never been tested in court and, therefore, you can’t say with all certainty. Yet here you seem so certain that you see no need for a simple CYA form. Seems like you’re contradicting yourself.
What’s up with that?
PACTrust “invalidates” the DOS clause - Posted by Brian Mac
Posted by Brian Mac on February 28, 2001 at 24:03:57:
Bill
How are you?
As you know better than everyone and as we’ve previously discussed, the PACTrust(or PACTrust type) effectively invalidates “occupancy” and “occupant” as the basis of argument to exercise enforcement. Notwithstanding the classic misinterpretations of 1701 & 591.5, a lender would be no less culpable than if it violated usury law by charging excessive interest rates.
Now that I better understand, my bet is the real reason lenders hardly ever seem to enforce the DOS clause is because they are just as acutely aware of their “DOS enforcement restrictions” as they are of their “excessive interest restrictions” or any other restrictions that they must adhere to in their practices.
Have a good one.
Brian Mac
Re: No CYA Huh? - Posted by JPiper
Posted by JPiper on February 27, 2001 at 22:34:35:
Bill:
I guess when you get to be as old as I am, you always want to CYA…because there is nothing on this earth that is a sure thing. Wait a minute…you ARE as old as I am!!
By the way, being the inventor of the PacTrust doesn’t mean you get to control the results of the PacTrust too does it? If so, all my CYA comments are off.
JPiper
This is way too …“Confusing” - Posted by Jim
Posted by Jim on February 27, 2001 at 22:30:58:
Tell you what. I actually attended the day long seminar that you had and I sat and listened. I just don’t get all of the involved parties here and how it works, not to mention trying to explain this to a seller who knows absolutely nothing (Less than we do) and try to make them bite on it!!
I’d love to use what you have here if perhaps it were easier to understand and explain.
I use the standard Land Trust that I learned from Ron LeGrand and Shawn Casey. (It’s easy) and I like simple along with most sellers.
Make that PACTrust easier and more folks will use it I’m sure.
Not picking Bill, just stating my view, and I hope you can appreciate that.
Jim
Re: Gotcha - Posted by Brad TX
Posted by Brad TX on February 27, 2001 at 14:43:22:
That answers my question
I guess sellers don’t care much about the details if they trust you and believe you can solve their problem.
Thanks.
Brad TX
Re: In your other posts … - Posted by Bill Gatten
Posted by Bill Gatten on February 28, 2001 at 11:34:55:
A guy is asked: Since you’ve decided to go over Niagra Falls in a barrel, which of the following containers would you prefer to use:
A. A well tested, sturdy wine barrel which doesn’t always hold up very well, though sometimes it makes it through without disintegrating at the bottom, or
B. This untested steel floatation chamber with reserve oxygen tanks and two-foot thick foam rubber padding around the occupant.
I’m bold enough to suggest “B” would be your best bet, and even boldly claim that, if constructed properly, it would get you through safely…despite it’s never having been tested.
Which would you prefer?
Bill Gatten
Do I hear a “touchet”?
Re: No CYA Huh? - Posted by Bill Gatten
Posted by Bill Gatten on February 28, 2001 at 11:21:06:
Only two areas of disagreement remain.
-
Your assertion that nothing on Earth is a sure thing. Well, that assertion is.
-
CYA to you is, I’m sure, “Cover Your As-pirins.” But to me, it’s “Continue Yelling Although-some won’t listen.”
Bill Gatten
P.S., In our transactions we don’t use a CYA re. the D.O.S.; however, the Escrow and Title Companies we work with always have one in their Escrow Instructions, which everyone signs. It’s there because they don’t need to take the time and effort to research whether it ough’ta be or not.
jim… - Posted by gary
Posted by gary on February 28, 2001 at 12:18:15:
Jimbo:
What do you mean you use the Land Trust? You haven’t even done a deal? What’s up with that?
Gary
“Confusing” to those not using it… - Posted by Bill Gatten
Posted by Bill Gatten on February 28, 2001 at 11:07:33:
Hi Jim,
First off…we’ve never done a 2-day seminar (one’s coming in Houston, next month, but it will be our first). However, I truly appreciate your having been at the one-day workshop. Thanks.
Secondly, what’s hard about the following?
Find a seller
Put his property in a land trust
Find a buyer and make him one of two co-beneficiaries (him and you).
Draft an agreement that says you’ll split the profit when the property sells (or give it all to him, after you get your costs and equity back)
Lease the property to him until the trust terminates
Sell the property and distribute the profits proportionately.
That’s it.
The “verbosity” that Bud alludes to…is my humble attempt to make what we do as clear as possible, albeit not always simple (?simple? costs you big time when things go wrong??clear? keeps you out of trouble and your money in your OWN bank account).
The folks who have the time to avoid simple, and want the best and safest for themselves, have no trouble making some pretty BIG bucks with the PACTrust.
Moreover, despite what my pal Bud B says, our program is nothing like Shawn Casey?s, Ron Le Grand’s or Bill Bronchick?s (all people whom I admire and respect)…other than the fact that it uses a–simple–land trust at its core. That part?s simple.
Bill Gatten
Re: This is way too …“Confusing” - Posted by Bud Branstetter
Posted by Bud Branstetter on February 28, 2001 at 08:35:04:
Jim,
Don’t let Bill’s verbosity overcome the concept. In the corporate world they would ask for a one paragraph overview.
I started using the shawn Casey’s land trust too and you know what- they isn’t much difference with the Pactrust one. It’s an Illinois land trust with a few things different. The concept is that the owner retains an interest. I buy this way even if I plan on L/O, rehabbing or cashing out. It’s a cheaper loan than the hard money guys. Legrand want to charge 5K+ for his MOS bootcamp and all it is is buying subject to. Not even that extra step not to violate the DOS.
The concept on the sale side is that because the occupant owns a piece of the trust he can write off on his personal taxes. Gatten says they have passed audits on that question a number of times. On those pretty houses where there is no real work you could take over subject to and sell on unrecorded contract for deed. You expose yourself to the DOS(who cares by why not have the protection) and most buyers of higher end houses are a little more sophisticated than the unrecorded contract. I suppose that I could do performance mortgage etc on the sale but I’ve still recorded public documents that can alert to a transfer or ownership.