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”).