L/O Draw Back?... Pls don't jerk my generic post (as it were) - Posted by Bill Gatten

Posted by JohnBoy on May 08, 1999 at 16:27:50:

If properly structured from the begining by putting the property in a land trust and entering into the option in a trust, corp, LLC, etc. Then chances of you finding out I have an option on that property are going to be pretty slim to none wouldn’t you think?

Yes, this has been a very interesting thread and so far my conclusion is, there is no bullet proof way of doing this. Protect yourself the best way you can, make sure the payments are paid on time every month and I doubt you will have to worry about a bank calling a loan due.

I have one on a l/o that the seller gave me her payment book so I can make her house payment directly to her bank every month. She would mail her payment book in with her payment every month and the bank would stamp her book paid and then mail it back to her. Now I have the payment book and I don’t mail it in every month. The bank is a local bank here and I personally take her payment book into the bank on the 1st every month and pay with my check. They take my check, stamp her payment book and hand it back to me every month. They never say a word about it. It’s an FHA loan she has on the property that she bought 2 years ago. I pay the bank and send her the difference every month (a whopping $8).

She had to sell the property because of medical problems she had and couldn’t return to work. She was going on permanent dissability and could no longer afford the house payment. I took the property on a l/o and agreed to cover her payments until I exercise the option. $0 down with my first payment starting in 60 days. Afterwards she went down to apply for state aid to help her with her medical costs. Since she had a l/o on her property and was going to get $800 a month from me (which only covered her payment every month) state aid had told her she wouldn’t qualify because my rent payment to her would be considered income even though it was a wash after covering her house payment. They told her she couldn’t recieve any other income to qualify. So I drew up an addendum that stated I was to make her house payment directly to the bank where she doesn’t recieve the money as income. They accepted that! Now she gets her medical covered by the state. Our government is screwy when it comes to their policies on how people can qualify for assistance! LOL

L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by Bill Gatten

Posted by Bill Gatten on May 07, 1999 at 14:32:57:

Recently, there have been many comments and questions concerning the potential negatives of Lease Options. And there not being answered. Now, I know that many of the Gurus who use and sell Lease Options post and read here, and don’t cotton to folks comming up with the negatives too often. HOWEVER… (risking having my little post jerked… as it were), may I please point out some very serious and honest concerns folks should be aware of and address carefully prior to entering a Lease Option arrangement. Let me make these points in question form, and the teachers among us can answer them ('dare you to just answere “Yes” or “NO” without equivocation.

  1. Are leases containing an Option to Purchase referenced in Garn-St. Germain (12 U.S.c. 1701) as clear justification for a lender’s Due-on-Sale Call?

  2. In an L/O, could an Optionor’s legal entaglements and personal problems (BK, marital dispute. etc.) cause a lis pendens to cloud title?

  3. In an L/O could an Optionee’s legal engagalements and personal problems creates a major “cloud on title”

  4. In an L/O could eviction of an errant tenant fail, forcing one into a judicial foreclosure process?

  5. If judicial foreclosure were necessary in an L/O, could an Ejectment Action and Quiet Title Action also be necessary and extremely expensive and protracted for the Optionor, while he makes the payments and pays an attorny, while the defaulting tenant leives rent-free until the Schlitz higts the can (as it were)?

  6. If an option fee is collected, and the Option is not recorded, as sometimes happpens when there is no Escrow or bona conveyance process (e.g., to avoid DOS viol.), could an unscrupulous Optionor sell or option the property to someone else?

  7. Is collecting an option fee and higher than FMV rents from someone the optionor knows can not, or will not, exercise the option considered scrupulous?

  8. Does a Lease Optionee recieve any tax benefits for mortgage interest and property tax?

  9. Does a Lease Optionee while waiting the his ship to come in, get to particpate in principal reduction, equity build-up, appreciation, water rights, mineral rights?

  10. Does a land trust in combination with a triple net lease eliminate ALL of these negatives and provide the added benefits of annonymity and virtually complete protection of the title?

  11. Would a land trust and TNL make acquiring properties easier, if the “seller” knew these thing?

  12. Would a land trust and TNL make finding the Optionee (3rd party in the sandwich) easier, if he knew all these things?

  13. Does Karp wear pink Jammies?

Bill Gatten

Re: L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by Rob FL

Posted by Rob FL on May 11, 1999 at 13:23:34:

Here is the case info of what I mentioned below.

Kirkland v. Miller, 702 So.2d 620 (Fla. 4th DCA 1997)

Congradulations Jim! You made it through Bill’s marathon… - Posted by Daniel Lubell

Posted by Daniel Lubell on May 08, 1999 at 03:38:15:

Well stated, as always, Jim! Bill has entered into quite a discussion.

The problem with this whole discussion is that, frankly, there are problems inherant in all of the solutions, as Jim has pointed out. Therefore, you can never sleep well at night if you are worrying about every little thing.

Heck, a lender could call a due on sale on a mortgage because you made a payment late (a possible violation of the mortgage language which could trigger an acceloration of the loan). Bottom line: the bank won’t and never will do that!

Since I am on the subject, here is a clear violation of the due on sale clause which the PAC Trust violates…

There is a federal law governing due on sale, in additon to the Garn-St Germain Act. It is called the federal regulation [12 C.F.R. 591.5 (b)(vi)] which says that it would be a violation of the due on sale clause if a person put a property into a trust and then moved out of the property (Clearly something Mr. Gatten advises people to do). Here is the exact wording of this little peach. According to this law, a lender may accelerate when a property is placed into a trust unless the following thing occurs…

“A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property…”

Ok, right there, every person that puts a property into a trust (PAC Trust or not) and later moves out just violeated a due on sale clause.

For what it is worth, everybody is focusing on Garn -St. Germain. The C.F.R.s seem to be a little different than the Garn-St.Germain Act, which talks about the seller transfering the “right” of occupancy.
Are we splitting legal grey hairs? Yes, and we are splitting them smaller then Bill Clinton under oath!

Now, just so I am representing all sides of this confusing legal mess, here is a blurb that Bill Bronchick wrote to me about these regulations…

“The Regs were passed by the OTC (the successor-in-interest to the FHLBB) in 1992. The OTC takes the possession that the Garn Act only applies if the
borrower remains in the property, but that’s not what the Act says. Thus, if challenged in court, the regs would probably be ignored as “ultra vires.”
It’s really an academic point, since transferring the beneficial interest violates the due on sale anyway”.

My partner, Rick Vesole, who is himself an attorney, mentioned that the PAC Trust seemed to complex and there is indeed a real danger of the courts looking through things for intent. Bottom line is, as Jim has stated, everything you do in this business has some small element of risk. Just do enough of these things to mitigate that risk and you can write your own paycheck.

Mr. Gatten, I would also be very interested in reviewing yuor actual case histories (with court file citation numbers) where we could see the results of lenders vs. due on sale clauses.

Dan Lubell

Re: L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by chris

Posted by chris on May 08, 1999 at 24:26:58:

What is a PacTrust ? Where can I find out about them? Are They legal outside of CA? I’m from FL… I found your post very interesting , but I’m left guessing as to what the technique/insturment is that you mention. Thanx in advance.

Good post!!! Thanks!!! Looks like you hit a hot button LOL (NT) - Posted by Ruth

Posted by Ruth on May 07, 1999 at 21:09:37:

.

Re: L/O Draw Back?.. - Posted by JPiper

Posted by JPiper on May 07, 1999 at 20:55:01:

Hi Bill:

Interesting points as always. Before I get started I’d like to make a general point. Over the years I have come to believe that things are rarely quite as black and white as your post would indicate. There are always two sides to a coin. I think the lease/option is an imperfect instrument. My belief is that once we step away from conventional transactions, we incur additional risk. We can mitigate against such risk, but we can’t eliminate it. My knowledge on the PacTrust is limited to what I’ve read here in your posts, and what I’ve read in your book. But my general conclusion is that the PacTrust is imperfect as well, perhaps in different ways than the lease/option?.and it certainly isn’t appropriate in ALL circumstances. Neither is the lease/option. Nothing is perfect?.not the lease/option, and not the PacTrust?.they both have their advantages and disadvantages. Having said all this, your questions are complicated ones, and I’m certainly open to being corrected where you see error. As you know, I’m not a lawyer or a CPA.

  1. “Are leases containing an Option to Purchase referenced in Garn-St. Germain (12 U.S.c1701) as clear justification for a lender’s Due-on-Sale Call?”

The answer is yes. The question is exactly how a lender determines the existence of this option, and whether a lender would call a note if the note were current. I sold my first property via lease/option about 10 years ago, and since that time have seen no lender accelerations based on lease/options. I’m not saying they don’t exist, just that I’m unaware of them if they do. In the past you claim to have seen these or have been involved in them. I would welcome any specifics (not generalities) of examples of lease/options that have resulted in an acceleration under the due on sale clause?..and in particular where the payment was current. Further, by implication you seem to say that the PacTrust does NOT trigger the due on sale clause. I’ve read the Garn St Germain closely, along with various due on sale clauses. When you make this claim for the PacTrust I think your reasoning is somewhat disingenuous. As you know, you are transferring a portion of the beneficial interest in the PacTrust?.and then later (like in the next few days perhaps) are entering into a triple net lease. The question is whether this partial assignment of beneficial interest is related to a transfer of rights of occupancy (not permitted under Garn). I see your argument that it isn’t. But I can also see the intent of your transaction, as any judge might be able to. Whether a court would rule in favor of your position is debatable?.it hasn’t been tested. Honestly, the risk of triggering a due on sale clause is no greater with a PacTrust than a lease/option?..but this doesn’t look like as clear-cut a matter as you portray it, to me.

  1. “In an L/O, could an Optionor’s legal entaglements and personal problems (BK, marital dispute. etc.) cause a lis pendens to cloud title?”

Of course they could. As an Optionor this one doesn’t bother me at all. As an Optionee the solution is record a performance mortgage. The above problems all go away with the performance mortgage, because you have a recorded, secured interest in the property. It appears that the PacTrust performs well in the above scenarios.

  1. “In an L/O could an Optionee’s legal engagalements and personal problems creates a major “cloud on title””

The only case where this would be true is IF (I’m going to address this later) the lease/option is determined to be “equitable title”.

  1. “In an L/O could eviction of an errant tenant fail, forcing one into a judicial foreclosure process?”

This is possible, but it’s going to be a function of the structure of the lease/option. I might point out that the effectiveness of PacTrust in this issue and others depends on how it was structured and administered. You seem to assume that ALL lease/options are the same?.which is not true. You further seem to assume that a proliferation of PacTrust devotees will not lead to ineffective structuring and/or administration of some of the issues that MUST be handled correctly to have the trust do what you claim it will do. Recently I had a discussion with my attorney regarding the PacTrust. One of the topics that came up was how a court would view the “intent” of the transaction, if one were to closely view it. A buyer using PacTrust, and having a significant down payment (called closing costs) might be able to press the issue in a court, that words and INTENT are not necessarily equal. Further, all states aren’t going to view this issue in the same light. Either way, I have seen no “equitable title” defenses to an eviction under a lease/option. This type of claim is going to require an attorney?..read money. If the guy can’t make his payment, how does he come up with the money to make this claim? Do all lease/options create “equitable title”? Doubtful?again depending on the structure, and depending on the state.

  1. “If judicial foreclosure were necessary in an L/O, could an Ejectment Action and Quiet Title Action also be necessary and extremely expensive and protracted for the Optionor, while he makes the payments and pays an attorny, while the defaulting tenant leives rent-free until the Schlitz higts the can (as it were)?”

Sure, they could be?.see above. And again, what problems might come from an improperly structured PacTrust?.and what might they cost?

  1. " If an option fee is collected, and the Option is not recorded, as sometimes happpens when
    there is no Escrow or bona conveyance process (e.g., to avoid DOS viol.), could an
    unscrupulous Optionor sell or option the property to someone else?"

Yes?.and this is exactly the way I sell via lease/option?with no recording. It hasn’t happened to anyone who has bought through me. Has it ever happened? Yes. Could this be avoided? Yes?through the recording of a performance mortgage (not in violation of the DOS). See above.

  1. “Is collecting an option fee and higher than FMV rents from someone the optionor knows can
    not, or will not, exercise the option considered scrupulous?”

Now come on Bill. Does the PacTrust really insure that your buyer can refinance at the conclusion of the term of the agreement? If it doesn’t, would you say that a seller via PacTrust is unscrupulous? Personally, I bend over backwards to attempt to get people financed?.and I’m willing to extend the term of my agreements to do so. But I know of no way to predict whether someone can get financing several years hence, whether they will have financial problems during the course of the agreement, or whether the loan programs that exist today will exist a month or a year from now. You say that the buyer could sell at the conclusion of his PacTrust, and take his portion of the profit? Couldn’t a buyer also do that with a lease/option by exercising and selling simultaneously? You’re really stretching with this one.

  1. “Does a Lease Optionee recieve any tax benefits for mortgage interest and property tax?”

No?.and another question might be “As an Optionor do I want the Optionee to receive tax benefits?” Frankly, I like the idea of having depreciation which helps to convert rental income into long term capital gains in a lease/option (to the extent that it offsets the rent). I understand your idea that you can get higher rent as a tradeoff for the tax deduction?..again, somewhat disingenuous. Bill, there’s a whole country out here that doesn’t work based on California economics, or at the California level of sophistication. If I have a PacTrust on a property wherein the payment is $500?.it’s questionable whether the interest write-off will exceed sufficiently the standard deduction to make it a worthwhile deduction to the buyer?.depends on other deductions. I know some people who have bought houses who are unable to write the interest off at all because it makes no economic sense from a tax standpoint. Better yet, in California rents are typically low relative to the mortgage payment?.a situation which would seem ideal in terms of the PacTrust and your ability to raise the rent in exchange for the tax writeoff. But in the midwest, the opposite is true. Rents are already higher relative to mortgage payments?.this is the land of positive cash flow. Raising them even higher would be a difficult sell?.especially when in some markets the tax writeoff may not be meaningful, and the buyer may not have the sophistication to understand that he can raise his allowances to compensate his higher payment until the tax refund. Believe me?.I’ve tried to sell such concepts?it’s not necessarily easy. This whole situation is not quite as clear cut depending on the part of the country?but I do think this aspect of the PacTrust is a good one given California economics.

  1. “Does a Lease Optionee while waiting the his ship to come in, get to particpate in principal reduction, equity build-up, appreciation, water rights, mineral rights?”

An Optionee gets to participate 100% in appreciation above the exercise price. These days that can and does happen. Optionee gets a rent credit?which can be equal to or higher than principal reduction. Again, see above. In the PacTrust the residential beneficiary (or whatever it is called) get’s part of the appreciation. But as you know, this COULD be nonexistent (as it was in California several years back).

  1. “Does a land trust in combination with a triple net lease eliminate ALL of these negatives and
    provide the added benefits of annonymity and virtually complete protection of the title?”

See all of the above?.even though you carefully picked your questions, I doubt that the PacTrust eliminates all possible negatives. In fact, you yourself have posted many of the adverse consequences of “dry trusts”, “adverse tax rulings” etc. which result from using trusts ineffectively. None of these problems exist with lease/options. Perhaps when I have time I’ll make up a questionnaire which shifts the topic to possible problems with a trust.

  1. “Would a land trust and TNL make acquiring properties easier, if the “seller” knew these thing?”

I doubt it. Most sellers have never dreamed of the issues that you bring up?.nor would they dream of the possible negatives to the use of a trust. You can make anything sound good?.but frankly if you got into a discussion of the real nitty gritty of trusts OR lease/options with a seller?chances are you would lose them?much too complicated. In fact one the problems with PacTrust is the difficulty in understanding all the implications and in’s and out’s. Many of us here are still grappling with that.

  1. “Would a land trust and TNL make finding the Optionee (3rd party in the sandwich) easier, if he
    knew all these things?”

Not in the Midwest. If your goal is to raise the rent even higher, in return for what may prove to be negligible or non-existent tax writeoffs?it’s going to be a hard sell. Further, try justifying some of the costs to have experts such as yourself administer the details of a complicated transaction to either buyer or seller. My view is that it would be a tough sale.

  1. “Does Karp wear pink Jammies?”

No?.I hear he wears underwear?but I do hear they’re pink!

Having said all the above, and assuming you’re still with me?.I want to say that I am interested in the PacTrust, and I do think it accomplishes certain things in certain circumstances in certain markets. I just don’t think it’s the only way to do business. Nor do I suggest that anyone JUST do lease/options, AITD’s, land contracts, etc. Fitting the technique to the circumstances is important. Also again, all techniques have their difficulties and problems?.lease/options and PacTrusts amongst them.

Thanks for the post Bill. It was good exercise?..WHEW!

JPiper

Lease Options - Posted by Sean

Posted by Sean on May 07, 1999 at 18:07:09:

I think the biggest negative I’ve heard against lease options was a practical point.

A lot of people sell on a lease-option to get a price that’s above market value. A lot of people buy on a lease-option because they can’t qualify for a conventional loan.

So what happens when a person who can’t qualify for a conventional loan tries to buy a residence that’s overpriced? Crash.

Plus many banks are obnoxious in not accepting credits except for the amount of the rent that’s above market rent. Considering that they ding you 25 percent of your rent coming in for vacancy and maintenance and if you put an optionee in there that will have no vacancy and perform the maintenance shouldn’t the optionee be entitled to claim up to 25 percent of the fair market rent as a bona fide credit regardless?

What I’ve learned from the experts… - Posted by Jim Beavens

Posted by Jim Beavens on May 07, 1999 at 16:40:07:

I have yet to do a lease-option, and I’m sure others will chime in here. But I’d like to use your post to exercise my brain about all that I’ve learned about lease-options over the last couple months since the convention. So excuse me as I use your post as a pop quiz for myself, and I welcome any grading that any of the experts would like to provide. =)

  1. Are leases containing an Option to Purchase referenced in Garn-St. Germain (12 U.S.c. 1701) as clear justification for a lender’s Due-on-Sale Call?

Yes, I believe a lease with an option to buy is referenced in the law. Now a question for you: Are you absolutely sure that transferring 90% of the beneficial interest in a land trust does not violate the DOS clause? Have you tested this in court? I’ve seen Mr. Piper ask you this question a couple times, and I don’t recall seeing an answer (yes, your point is taken about how a lease-option is clearly stated in the law, whereas a 90% transfer of beneficial interest in a land-trust is more questionable).

  1. In an L/O, could an Optionor’s legal entaglements and personal problems (BK, marital dispute. etc.) cause a lis pendens to cloud title?

Yes, it could. The risk of this should be minimized by doing two things as the optionee: Record an affidavit and memorandum of option to cloud the title yourself, and have the optionor give you a second performance mortgage so that you will be in front of any subsequent judgements. The first is easy to do, the second may or may not be possible depending on the optionor’s motivation level.

  1. In an L/O could an Optionee’s legal engagalements and personal problems creates a major “cloud on title”

I don’t think so. As the optionee, you don’t yet hold title. Unless I’m missing something, I don’t see how anything the optionee does would affect title until the option is exercised.

  1. In an L/O could eviction of an errant tenant fail, forcing one into a judicial foreclosure process?

Yes, it’s possible (you never know what a judge may do), assuming that the tenant/buyer pursues this all the way to court. Precautions against this include making a small part of your option consideration refundable as a normal security deposit, so you have something to hold over their head (this would also make your seperate rental agreement hold up better in court). If they’re getting particularly adamant then you could bribe them with some of their option consideration back to get out. As Bronchick says, do everything you can to stay out of court…I assume the same would hold true if somebody went after you because they didn’t like the way a PACTrust worked out.

  1. If judicial foreclosure were necessary in an L/O, could an Ejectment Action and Quiet Title Action also be necessary and extremely expensive and protracted for the Optionor, while he makes the payments and pays an attorny, while the defaulting tenant leives rent-free until the Schlitz higts the can (as it were)?

Yes, if this gets dragged into a judicial foreclosure, then things could get ugly. See above for precautions against this.

  1. If an option fee is collected, and the Option is not recorded, as sometimes happpens when there is no Escrow or bona conveyance process (e.g., to avoid DOS viol.), could an unscrupulous Optionor sell or option the property to someone else?

Yes, if nothing was done to secure the optionee’s option (see #4 above), then the optionor could do bad things. A smart optionee would set up an escrow account with a signed deed from the seller. Such a deed that goes unrecorded for a year or more might not survive a challenge, but it should deter most people from trying funny stuff (it will also settle things if the seller dies or disappears).

  1. Is collecting an option fee and higher than FMV rents from someone the optionor knows can not, or will not, exercise the option considered scrupulous?

This is a matter of opinion, of course. I personally believe there are two facets to this: the option price and the rent. If both of these are jacked up high, ie you’re charging a significantly above-market rent in return for an option to buy at a significantly above-market price, then I start to have a problem. In other words, you’re contributing to their having trouble buying the property. But if I’m selling the property at a fair price, then a higher rent as part of the option arrangement seems fair (note that this scenario applies to rent credits…a common practice is to apply, say, a $200 rent credit for every $100 the rent is above-market; you’re in effect trading a higher rent for a lower price at time of exercise). Likewise, charging fair market rents along with an option to buy at above market value seems fair as well.

I won’t get into the question of “someone the optionor knows can not, or will not, exercise the option”. Jim Piper has address this issue several times in the past far more eloquantly than I could; the bottom line is that as long as the price is fair, then there’s no reason that anybody shouldn’t be able to qualify to buy the house after 1-2 years (at least in our current lending environment). If they make choices with their credit during that time that jeapordize that, then that’s their decision.

  1. Does a Lease Optionee recieve any tax benefits for mortgage interest and property tax?

No, no more than any other tenant. Does this make holding rentals bad?

  1. Does a Lease Optionee while waiting the his ship to come in, get to particpate in principal reduction, equity build-up, appreciation, water rights, mineral rights?

Principal reduction and equity buildup: Depends on what was negotiated. If there are rent credits, these will usually accumulate far faster than principal reduction would occur in the first couple years of a long-term loan.

Appreciation: Again, depends on what was negotiated. If the option price is set at a constant amount, then any appreciation beyond that is realized by the optionee upon exercise of his option.

Water/mineral rights: Until the option is exercised, no, of course not. But if the optionee decided that these were important to him, then he would have the option to buy the property to obtain these rights. That’s the whole point.

  1. Does a land trust in combination with a triple net lease eliminate ALL of these negatives and provide the added benefits of annonymity and virtually complete protection of the title?

You would know better than I would, Bill. Please enlighten us on what would happen if your 3rd party tenant/buyer refused to make their payments. Could you guarantee that a court wouldn’t rule that that person has an equitable interest in the property, and force you to go through foreclosure?

It seems to me that both of these methods are using legally sound principles, but that as with anything, these principles may or may not be applied consistently in a court of law. Are you saying that a PACTrust is truly risk-free? Are you willing to guarantee that?

I’d welcome any thoughts from others about how I scored in this “test”. And I apologize to you Bill if my tone tended to be adverserial at times…it’s been a long day.

Re: L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by Maurice (ca)

Posted by Maurice (ca) on May 07, 1999 at 15:41:33:

Hi Bill:

I am not a guru answering one of your questions, but a rookie considering a lease-option as a means to buying my first home to live. Also, should the opportunity arise on a real estate investment deal, I would definately consider l/o as a creative means to getting the deal.

Here are my questions to you & and anyone else out there:

-Obviously there are ramifications to consider when l/o, but if you use an alternative method, what’s the tradeoff?

-What’s the likelihood of Due on Sale clause being called on?

-Has a l/o actually backfired on anyone? If so would you mind sharing with us?

-Isn’t there always a risk factor when using some of the Creative strategies in either acquiring a property or selling a property?

-If you set up the l/o correctly, i.e. protecting yourself with certain stipulations, then wouldn’t that lower the risk to the point that at least legally you’re protected?

Well since I’m still new at investing, this is all I could think of, but I am interested in knowing more about whatever I can do to protect myself in case the “what ifs” occur.

Re: L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by JohnBoy

Posted by JohnBoy on May 07, 1999 at 14:44:46:

Answer to 13: YES! LOL

Re: Congradulations Jim! You made it through Bill’s marathon… - Posted by Bill Gatten

Posted by Bill Gatten on May 08, 1999 at 16:18:44:

Dan,

Kudos on knowing about 12 C.F.R. 591.5 (b)(vi). What it says that you can’t put income properties into your living Trust. We don’t think about it much, don’t talk about it much and don’t worry about it EVER.

However, you are right in your assertions, both pro and con.

Please remember that in a co-bene PACTrust™, the borrower does remain a beneficiary (the only one in the beginning, until a quiet assignments takes place)and does live in the property (when the trust is created), unless its already an income property, being held in his trust. Also note that nothing is “sold”: there is an “assignment” of co-beneficiary interest in the form of personal property (not realty) amd the co-beneficiary merely rents the property from the trust with an agreement that it will be sold one day, and at that time–if he cooses to–he can buy it for the same FMV as anyone esle would (minus, of course any monies due him from the trust).

On the subject of Intent… think about it… intent to do what? The pathway to foreclosure has not been impeded; the lender’s security interest has not been compromised; there is no could on tite; saleability is not diminished; federal LAW (vs. opinion) has not been violated; the transfer is secrety, private, annoymous and unrecorded. Intent to do what?

As far as the PACTrust being toO complicate: Its not nearly as complicated as a space shuttle (can-like on the outside Rolls Royce-like on the inside). It is, in fact, quite simple (on the clinet’s side)… its features, advantages, and benefits are so numerous, however, that to understand them all, and why they work as well as they do, is a complicated undertaking. Falling off a log is complciated too, if you want to know all about logs.

Here are some of the cites your pard is looking for (by no means a complete list, but I’m plumb tuckered out by all this writing):

Check on California Real Estate Secured Transactions, Sec.4.55, Calif. Cont. Ed. of the Bar 1970; Flaherty, Illinois Land Trusts and the Due on Sale Clause, 65 Ill.B.J. 376(1977); Newhome Fed. S&L v. Trunk, 483, A.2d 625 (Pa. 1984).

Bear in mind tht I’m picking these up from Kenoe’s references in Kenoe on Land Trusts (IICLE, 89) and have not looked at them within the past 6 months or so ('hope I got the right ones). I you’d like more, just e-mail me and Ill be happy to pull some of my library stuff.

A reverse cite (wherein it WAS etermined that without a co-beneficiary, the DOS was enforceable) is Damen S&L v. Heritgage Standard Bank & rust, 103 Ill.App.3d, 301, 431 N.E.2d 34;59 Ill.Dec. 1982.

Thanks for your response. Excellent!

Bill

Re: L/O Draw Back?.. Pls don’t jerk my generic post (as it were) - Posted by Bill Gatten

Posted by Bill Gatten on May 09, 1999 at 16:15:37:

Chris,

Normally I would say “just click on the Cal-Equity banner ad above,” but apparently the site is down for the moment (I have a contract out on Ed Kawakami, our website manger for the weekend, but I think he skipped town out of fear of another knee breaking). So… just email me with any questions you have.

If I knew anymore than how to turn a computer on, I’d try to fix it myself; but that would be like a one-legged monkey trying to repair a dump truck.

Bill

More like a “nerve” - Posted by Bill Gatten

Posted by Bill Gatten on May 11, 1999 at 13:11:36:

b

Re: L/O disingenuous? (I can’t even spell that) - Posted by Bill Gatten

Posted by Bill Gatten on May 08, 1999 at 15:48:55:

>>PACTrust is imperfect as well, perhaps in different ways than the lease/option?.and it certainly isn’t appropriate in ALL circumstances. Neither is the lease/option. Nothing is perfect

Jim, my own relative state of purity excepted, I agree; however, the objective of the system combining the title holding trust and the net lease is much closer to that state of perfection in that it virtually eliminates the risk and discomfort.

>>have seen no lender accelerations based on lease/options

JIM! Jim, (Jim, Jim, Jim) That not the point! Neither have I! The point IS how your prospect perceives the threat of the DOS… they’re usually not as sophisticated in these matters as are investor pros.

>>record a performance mortgage

I know of the concept, but I fail to see how a Performance Deed (or mortgage) will help you. In the first place, most jurisdictions I know of, it’s virtually impossible to get a title co. to foreclose on a performance Deed (Ca. Hawaii, Nevada and Arizona in particular). I prepared one last week, but I had to have the client (at the direction of our legal department) sign an exculpatory hickey indicating their awareness of this “fact.” Secondly, when the property is the subject of an IRS tax lien or a major lawsuit, how would you perfect your interest, much less foreclose? (I’ll admit that I may be missing something here, and will accept correction happily). And furthermore, what the h… is an “engaglement” (much less an entaglement? Just testing to see if you’re paying attention).

>>If the guy can’t make his payment, how does he come up with the money to make this claim? Do all lease/options create “equitable title”? Doubtful?again depending on the structure, and depending on the state.

Jim, as you know my kids are attorneys, my two best friends and virtually all of my enemies are attorneys, and I honestly don’t know one who wouldn’t “probably” take a L/O eviction on contingency (if they dealt in those matters). Win or lose, there’s about a 99% chance the LL will settle out of court in order to curtail the hassle and get rid of the scum bag tenant, for fear of incurring further costs.

>>judicial foreclosure)? Sure, but what problems might come from an improperly structured PacTrust?.and what might they cost?

It’s difficult to explain this in a sentence, but as I hope you have deduced from reading the book, a PACTrust™ (note the “TM”) contains verbiage that makes such difficulties extremely remote (re. the eviction and relinquishment process). Not impossible, but no such problems in hundreds upon hundreds of problem transactions have ever occurred? repercussions involve the IRS and are too great for most but the scummiest of bags (which we try to aovid).

>>performance mortgage…not in violation of the DOS.

Huh? Jim! Does your Performance Deed relate to the “transfer of the rights of occupancy” (or to the “Option” itself) Re. U.S.C. 1701(j)((D)(1)?

>>I sell via lease/option?with no recording

Jim… understand that if I’m the driver, pedestrian laws are annoying, but when I’m walking across the street, I’m glad they’re there. When I post… I take both sides into consideration. When I discuss the benefits of the land trust conveyance (3rd pty, co-bene) I’m assuming (apparently naively in the eyes of some) that everyone wants the deal to be fair and equitable on both sides. I wouldn’t want to L/O from someone who wasn’t going to protect me as well as themselves (perhaps I misread what you were saying here, though, and will be happily corrected if so).

When I structure a deal, sell a book or give a class, I want it to be win-win fair-fair, money-back guaranty on both sides…not just mine (as I’m sure you do, as well).

>>As an Optionor do I want the Optionee to receive tax benefits?" Frankly, I like the idea of having depreciation, which helps to convert rental income into long term capital gains in a lease/option (to the extent that it offsets the rent). I understand your idea that you can get higher rent as a tradeoff for the tax deduction?..again, somewhat disingenuous. Bill, there’s a whole country out here that doesn’t work based on California economics, or at the California level of sophistication. If I have a PacTrust on a property wherein the payment is $500?.it’s questionable whether the interest write-off will exceed sufficiently the standard deduction to make it a worthwhile deduction to the buyer?.depends on other deductions. I know some people who have bought houses who are unable to write the interest off at all because it makes no economic sense from a tax standpoint. Better yet, in California rents are typically low relative to the mortgage payment?.a situation which would seem ideal in terms of the PacTrust and your ability to raise the rent in exchange for the tax writeoff. But in the midwest, the opposite is true. Rents are already higher relative to mortgage payments?.this is the land of positive cash flow. Raising them even higher would be a difficult sell?.especially when in some markets the tax writeoff may not be meaningful, and the buyer may not have the sophistication to understand that he can raise his allowances to compensate his higher payment until the tax refund. Believe me?.I’ve tried to sell such concepts?it’s not necessarily easy. This whole situation is not quite as clear cut depending on the part of the country?but I do think this aspect of the PacTrust is a good one given California economics.

Jim… If you will remove the word “disingenuous” from the above, I’ll ride with you on this one. However, understand that in ANY part of the country, if you are renting without a tax write-off you are worse off than if renting WITH a tax write-off… isn’t that true? Not because the tax deduction give you something, its because of what it costs if you don?t have it. Someone in a 1/4rd tax bracket has to pay 750 per month after tax to rent for $500: if they can write off the $500 then they save $250. Am I missing something here too?

Again… please think “out of the box” for a moment (as I know is always your bent, or we wouldn’t be involved in this discourse). If you and I have identical rentals side by side, on the same street, and the mortgage payments and taxes are the same, but I can offer the tax write-off (I have it in a PACTrust and you have yours in a L/O)… who will likely get the tenant? Then–what if MY rent is a just a leeetle bit higher than yours… won’t I still get the tenant if he/she has any brains and can use the write-off?

On the issue of your taking the depreciation to offset principal reduction… you STILL take the depreciation in a so-called PACTrust. Even when the tenant is taking the active write-off; you still take the depreciation and any deductions for any expenses you have on the property. Now…if you need the active loss, and you can’t make money without it… you take it, and let the tenant share in other benefits of ownership… if he pays no more than FMV Rent, he shouldn’t be getting the write-of anyway (though you might want to sell him some equity build-up, appreciation potential or existing equity (“rent credits”).

>>In the PacTrust the residential beneficiary (or whatever it is called) get’s part of the appreciation. But as you know, this COULD be nonexistent (as it was in California several years back).

Jim, we rarely do PACTrusts for resident beneficiaries who don’t get 100% of the appreciation. It’s only when my students, CRE friends and I acquire property this way that we offer part of the “future” appreciation to a resident beneficiary as an incentive. But we don?t “give it away.” Whatever we give up in such future profits, we more than make up for in additional rents or services.

As far as the Calif. downturn over the past nine years… it was only the PACTrust owners who didn’t get scrood (as it were). When their 2,3,4 and 5 years terms were up, they were free to leave. They didn’t have upside down properties and 25-year remaining terms on their mortgages, and thousands of dollars or RE commission starring them in the face (as their traditionally financed neighbors did).

>>I doubt that the PacTrust eliminates all possible negatives

You’re right. But as I’ve said–it does mitigate and minimize them to the point of some significant assuredness and safety, when compared to other seller-involved financing alternatives. In terms of your questionnaire in the works: please make the list lengthy and the questions pointed enough that I can answer without writing a book like this one (I’m looking forward to it).

>>if you got into a discussion of the real nitty gritty of trusts OR lease/options with a seller?chances are you would lose them?much too complicated. In fact one the problems with PacTrust is the difficulty in understanding all the implications and in’s and out’s. Many of us here are still grappling with that.

Jim… we don’t suggest that a client – buyer or seller-- ever be exposed to the “nitty gritty.” We suggest that you be the doctor and treat the patient. The patients needn’t know that Dexymethasone Sodium Phosphate is a superior glucocorticoid when compared to Hydrocortisone because of its propensity for ameliorating mineralocorticosteroid side effects of gluconeogensis, hirsutism, alopecia, tissue edema and moon-facies. But the doctor better D… well know that!! Most patient want only know that its safe, helpful and superior to most of what else is on the market: and far less likely to cause harmful side effects. It’s only when the patient persists in wanting to know more, that the doctor should display the knowledge he(she) has accumulated : OR? be able and immediately ready to call in the specialist

>>Not in the Midwest. If your goal is to raise the rents even higher, in return for what may prove to be negligible or non-existent tax write-offs?it’s going to be a hard sell

We don’t raise rents “even higher” when it’s not warranted. We only give benefits in proportion to the terms that compensate us for them. However, in my view the more benefits you CAN give, if need be, the better the likelihood of a sale. I would suggest making list of the possible advantages of a land trust conveyance to yourself, then a list of advantages for your client… then decide which ones you would be willing to “sell” or “give away” in order to procure the price and terms you want. “Tax write-off” is only one of the benefits a land trust conveyance can provide…stop thinking about that it if doesn’t apply, and concentrate more on safety, ease of transfer, protection for the parties, etc. When you done do the same of the L/O and go with the one that gives the most to sell.

>>try justifying some of the costs to have experts such as yourself administer the details

You mean like the closing attorneys? Title companies? Conveyance experts? Escrow companies? That the others use?

Jim… you know our costs (even if someone wanted us to do something) are from zero to a percent. It depends upon how much assurance and peace of mind someone wants. They can do it themselves or not; they can buy title insurance or not; they can take a reserve or not; they can prorate taxes and insurance or not; they can include the 1st payment in the contract or not; they can buy home warranty insurance or not; etc. its not what the set up and administration costs… its how much comfort and assurance they want. And as far as trustee fees are concerned, they are optional, and are minimal if compared to property manage (or when compared to, say, PMI insurance). Where I take my car–they don’t charge anything for an oil change? unless you want oil. Then if you choose, they’ll also sell you for filters, points, plugs and the like.

>>I am interested in the PacTrust, and I do think it accomplishes certain things in certain circumstances in certain markets. I just don’t think it’s the only way to do business

I know that Jim, and if you’ll accept the major premises I try to hard to chisel out… then I’ll relax and agree with you. (Can you keep a secret? I have an offer out right now where a lease option may be the only way I can get the property… hard-headed old school teacher who wrote the book, “Everything Ever Worth Knowing”).

Bill

Can you explain the Performance Mortgage or referance an example? - Posted by Jim

Posted by Jim on May 08, 1999 at 08:26:31:

Jim,

Can you explain the Performance Mortgage or referance an example? Could someone email me a sample?

Thank you very much

Jim

Great Thread - Posted by Marvin

Posted by Marvin on May 08, 1999 at 24:21:16:

JPiper,

Great post.

Regarding #7; “Couldn’t a buyer also do that (sell)
with a lease/option by exercising and selling simultaneously?”

Probably not. (Please change couldn’t to wouldn’t.)

In a PACTrust, all beneficiaries direct the trustee
to sell the property.

Marvin

Re: L/O Draw Back?.. - Posted by Rob FL

Posted by Rob FL on May 07, 1999 at 22:24:45:

I agree with a few of your comments. I have read the PacTrust book and found some of the ideas in it absolutely fascinating and creative. But there are some potential problems like you mentioned.

I have a condo right now that is owned in a trust. I own a percentage and the occupant owns a percentage. Our agreement was to let her take the tax deduction because it would otherwise cause me to pay income taxes each year, however the interest and property tax deductions fall far short of her standard deduction thus neither one of us gets any tax benefits on the condo.

The INTENT that you mention is also a touchy subject. We can agree in writing anything we want to. But if we act differently, the courts could tell us to go jump in a lake. There was a court case in 1997 in Florida in Seminole County. Keep in mind that Florida has an Illinois Land Trust type law. The basic details are that the buyer couldn’t get financing through a bank so the seller was willing to finance but still wanted control. They formed a trust and the seller assigned his beneficial interest to the new buyer. The buyer then gave back the seller a collateral assignment of his beneficial interest as collateral. The seller had monthly payments and control of the property. The buyer eventually defaulted and the seller went for an eviction as called for in the trust. The courts took one look at the documents and said this whole trust garbage is bogus. The intent was really a sale with seller financing. You must foreclose his interest. It cost the seller big bucks and defeated the whole purpose of his “creativity.” All the documents were prepared by a prominent attorney (who really ate crow on this one).

Oh well, I guess I am rambling.

Looking forward to your questionair about PACtrust I’m sure that would be another excellent post! (NT) - Posted by Dave(MI)

Posted by Dave(MI) on May 07, 1999 at 21:44:52:

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Re: Lease Options - Reposted - Posted by hkCA

Posted by hkCA on May 08, 1999 at 15:22:47:

Sean,

My first post got lost in the system somewhere and came up as a post from Ed Garcia! So I’ll try again.

At first appearance, it may seem that an optionee is entering into a deal to buy a home that is overpriced. But you must consider that the home may not be sold for a year or two, possibly longer. What may seem to be an unfair price today may be a bargain at the time the option is exercised.

During that time (let’s say 2 years) the future buyers will hopefully implement a plan to make that purchase happen. Their chances of being able to qualify should be much greater than it is in the beginning. They will have two years of stability in their residency. They will have hopefully shown the ability to make timely rent payments over that period. They may have made improvements to the property to add value and appeal. They have built at least part of their down payment through the option consideration, rent credits, and maybe a small savings account. They’re now in a much better position to qualify for a mortgage as long as they’ve stuck with their plan and looked at home ownership as a dream progressively coming true.

Now, I will concede that many, if not most, will never stick to the plan. It’s hard to break a life’s worth of bad financial habits in a year or two. But it can be done. And some that won’t qualify now may be the result of circumstances beyond their control such as divorce, illness, accident, etc. Those people may be good credit risks with bad current circumstances.

As an aside, I try to encourage these future buyers as much as I can during their rental period. I call or drop by occasionally to see how they’re doing. I send them notices of how long it will be before they are “owners” (sort of a countdown to the American Dream). I help them with a plan for saving for that day. In other words, I hold their hands though the process.

And last, I have never had a lender deny the use of rent credits towards down payment. If they do, you need to send the buyer to another lender.

Hope this eases your concerns about lease/options. They’re great for both sides.

hkCA