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

Re: What I’ve learned (long) - Posted by Bill Gatten

Posted by Bill Gatten on May 07, 1999 at 23:09:00:

This a tough one to respond to… I wish the thing was shorter, but I’ll do my best.

>>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?

++Yes. But am I sure a lender wouldn’t someday try to prove otherwise? No. The fact is that the transfer of bene. interest in a land trust is of personal property and not the real estate that is the security for the loan. It is as innocuous as me giving you a beneficiary interest in my will, or naming your as the remainder agent in my family trust and renting one of my income properties to you.

>>Have you tested this in court?

++No “I” have not, and pan never to do so, because the entire system is designed to prevent such tests from ever taking place. However, if your question is has it ever been tested? The answer is Yes. Many times (particularly in Illinois)

>>I’ve seen Mr. Piper ask you this question a couple times, and I don’t recall seeing an answer

++I honestly don’t think I’ve ever failed to answer any question of Jim. I respect his knowledge and option (and intelligence) too much for that. I hope this answers it for you.

>>(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).

++Really? More question by whom? This simply is not so. An Option is recorded in the public record… an Assignment of Bene. Interest is 100% private, anonymous, unrecorded, secret, no body’s business, silent and wholly unrecorded… EVER.

>>The risk of this [lis pendens] can 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.

++OK? Hello? Why mess with it if you don’t have to? And why shouldn’t the key word here be “eliminate,” vs. “minimize>”

>>Q: In an L/O could an Optionee’s legal entanglements and personal problems create a major “cloud on title” A: 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.

++You’re missing something. How 'bout I sue you and file against all your assets… isn’t your lease option an asset? Don’t I have access to it? Wouldn’t I be able to cloud (or at least ‘mess up’) the title on the property real goo until I get it, or the house, or a settlement?

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

++Nope… sorry, but that ain’t they way it happens. The judge declares “equity,” and you’re screwed… end of story; or at least in every case I know anything about.

>>Q: 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 attorney, while the defaulting tenant lives rent-free until the Schlitz hits the can (as it were)? A: Yes, if this gets dragged into a judicial foreclosure, then things could get ugly. See above for precautions against this.

++No comment needed.

++re. #6. Ditto

>>7. Is collecting an option fee and higher than FMV rents scrupulous? A: I personally believe there are two facets to this: the option price and the rent. If both of these are jacked up high, i.e. 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. This is a matter of opinion, 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 eloquently 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 jeopardize that, then that’s their decision.

>> Q:8. Does a Lease Optionee receive any tax benefits for mortgage interest and property tax? A: No, no more than any other tenant.

++Sorry, but tenants in PACTrust leases get all of that.

>>Does this make holding rentals bad?

++No. Didn’t mean to say so either. I have rentals. It’s just that they’re in land trust arrangements so I can sleep good at night.

>>Q: 9. Does a Lease Optionee while waiting the his ship to come in, get to participate in principal reduction, equity build-up, appreciation, water rights, mineral rights? A: 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 [why “of course not” they get 'em in a PACTrust]. 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.

++Afraid I don’t the “point” then.

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

++Yes. The eviction is simple they guy who is in default in evicting himself. There is only a simple lease with no option to contend with. Getting him off the trust is another issue: and this is accomplished by his agreement to sell his beneficiary interest if he’s ever in default (following significant penalty and appraisal for full Fair Market Value… less his penalties, late payments, interest, costs of appraisal, default fee, etc.). He agrees that if he goes through all of this and proves he is owed money, that he will accept his [re]payment in the form of an unsecured promissory note to be paid when the property sells upon termination of the trust.

>>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?

Nope. There is always the risk that the tenant will refuse to pay, or will destroy the property or skip town with the neighbor’s daughter. It’s just that a PACTrust greatly minimizes such risk. Eviction is quick. The penalty for damaging the property involves recapture of tax benefits (the IRS can help you prevent property damage) and the neighbor’s daughters are always better looking.

Dang… this took a long time.

Bill

Re: What I’ve learned from the experts… - Posted by Brad Crouch

Posted by Brad Crouch on May 07, 1999 at 23:08:04:

Jim,

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

JB> 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.

Speaking of legal entanglements, how about this one:

The tenant decides to have some improvements or even necessary repairs done, then does not pay. A Mechanics’ Lien is placed against the property. This thing turns into a judgement against the house.

Is that what you were talking about? Could this happen?

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

JB> 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.

Not really. You wouldn’t believe the terms involved in a PACTrust. The guy would have to end up suing himself because in addition to being a “buyer” (resident beneficiary), he is also a beneficiary in the trust that has given him a triple net lease. To actually get this guy out if you had to, would take very little time as his “default” would serve as “constructive notice” to the other beneficiaries, that he was abandoning his position as beneficiary AND “occupant” of the property.

I think a judge would laugh and dismiss if the guy tried to sue himself.

BG> 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?

JB> 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.

When you say, if the option price and the rent are “jacked up high”, what exactly do you mean? Is 10% over FMV “high”? 20%? 30%? Sometimes these figures are based on “current value”, but the option (if and when exercised) might be exercised after a “significant” amount of appreciation has transpired. If you establish a “strike price” at the beginning of the term, aren’t you gambling on appreciation, besides trying to offer a “good deal” to the tenant buyer? What if the property “depreciates”? Who is at risk here?

If your tenant buyer had D or E credit, and nobody else in the world would deal with him, except you . . . aren’t you entitled to a “premium” price to compensate you for your risk? Aren’t you doing a fantastic thing for this tenant buyer, even at a higher rate? Would it be better to relagate him and his famiy to apartment dwelling for a few years? Better to “turn down” a deal so as not to take “unfair advantage” of him?

As for rent credits, isn’t that “negotiable”? Does the tenant buyer speak English and does he understand the agreements he is signing? Those issues are important, at least here in California.

The tenant buyer will see the agreements he makes as possibly the only way to get into a home . . . at least right away. If he can talk, he can negotiate a deal he can live with.

JB> 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 . . .

“Fair” is a very subjective term. Fair to who? Don’t you deserve to make an “above average” income? Sure you do!

JB> 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.

Jim Piper has convinced me that it is actually best to get as much option consideration as possible. This helps the tenant buyer to “stay” and ultimately exercise their options. It also allows you to “keep going”, being “funded” and all.

JB> . . . what would happen if your 3rd party
> tenant/buyer refused to make their payments.

They’d be outta there in a flash (maybe 30 days or less).

Just a few thoughts that came to mind as I was reading this thread.

Brad

If Bill doesn’t mind, I’ll try my quizziness. - Posted by FJW

Posted by FJW on May 07, 1999 at 18:28:52:

Mr. Beavens,

No controversy here, just joining in on the fun.

1.There’s nothing in a DOS that mentions effects of transferring beneficial interest, or violations there of. The transfer would occur completely unbeknownst to the lender anyway. 10% is retained by seller to retain non-partitionability of personal property protecting corpus from attachments. 10% is smallest amount, limiting beneficiaries to 10/trust and to prevent creation of security agreement.

  1. Recording the memo of option is what would alert lender and indicate intent thereby enlightening a DOS breach.

  2. As with #2, option indicates intent, and could construe to optionees grantors, possible equitable interest in the property…not to mention the spouse.

  3. They could take you to court, but it’s highly unlikely unless their attorney was half-dead. Since they are beneficiaries of the trust as well as the tenants who signed the lease of the trust(along with all of the other pertinent PACTrust documents), they would be suing themselves. In other words, all the partners(beneficiaries) draw up the rules as to how this property will be used; what the terms will be, and how it will be administered and enforced. Everyone agrees and signs. Then any one of them becomes the tenant and ALSO agrees to the lease terms. If he/she defaults, 3 day pay or quit, AUTOMATIC unlawful detainer pronto. To reinstate, defaulting tenant must rectify in accordance with said agreements or leave. Quickly.

  4. Same as 4. If it ever did happen, the process of eveiction is much shorter and easier because they have to sue themselves to try and prove anything.

6.See above about option. I’m not sure about the deed.

  1. I agree with you, but I think Mr. Gatten is trying to imply that the PACTrust allows you to easily confront this issue and avoid trying your scruples.

  2. No, doesn’t make holding rentals bad. But, if it could be offered, to sweeten the deal or add more value to it, doesn’t it make sense?

  3. Sort of the same as #8.

  4. As far as not making payments, see above. I leave the rest for Mr. Gatten.

Have a good one.

FJW

Re: What I’ve learned from the experts… - Posted by Sheik

Posted by Sheik on May 07, 1999 at 17:04:10:

I see you have put quite some thought into this…well said.

Sheik

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 07, 1999 at 22:10:19:

>>What’s the tradeoff?

Perhaps its a bit more complicated for some.

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

In an L/O minimal to none: in a PACTrust… virtually none… HOWEVER… the point I don’t seem to be getting across the the others is: Which is easier to sell–a cuddly soft protective title-holding 3rd party trustee trust in the Optionor’s own name; or a Lease Option that could come back to bit him in aspirin box someday?

>>Has a l/o actually backfired on anyone?

Oh m’god yup. I don’t have to elaborate here on that… everyone on this group will tell you about horror stories in Lease Options. It’s the Optionors who will tell you about multi-month-long foreclosure processes; and errant tenants who destroyed the property and couldn’t be evicted. The one really big one that backfired on me was an unrecorded one, so it doesn’t count because I was young(er) and stupider then than I am now (whichis not saying much). I was acting as an agent in sandwich deal wherein the Optionor had optioned the property to one couple, then equity shared it with another, and sold it to another… all in a period of two months. (I know, I know, a whole bunch of folks will say they’ve been doing l/o’s for years and hadve never had a problem… well, I smoked for twenty-five years too, and never got moles with hairs in 'em either: but a whole d… bunch of the rest of family did… and they died!

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

Sure… but there doesn’t have to be…if you use a !@#$% title-holding land trust to shield the transaction!! (Exclamation points doubled for effect: random characters imply explitive… don’t try this at home).

>>If you set up the l/o correctly, i.e. protecting yourself with certain stipulations, then wouldn’t that lower the risk…?

Of course, this goes without saying… but how protected can you be… nothing is going to make eviction of a tenant easier, if they don’t want it to go. And if your the tenant… how protected are you from the Optionor’s legal, personal and tax problems that will attach to the house and your rear-end, when something goes wrong? If your the Optiolnor, the dead-beat tenant is NEVER the problem… its the attorney he goes to, who salivates and rubs his clutchy little hands together like a hungry fly, when he sees a Lease Option eviction coming his way.

>>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.

LAND TRUST! LAND TRUST! LAND TRUST! (with an accompanying Assignment of Beneficiary interest and triple-net lease agreement)

Phew.

Bill

I do NOT want to know how you know this! LOL (nt) - Posted by Brandi_TX

Posted by Brandi_TX on May 07, 1999 at 18:35:26:

.

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

Posted by Daniel Lubell on May 09, 1999 at 01:55:26:

Bill,

First, let me thank you for your well reasoned response and tell you that I do apprecitate the court cases. I will look into them further. Having said that, I had to respond to your discussion about intent to get around the due on sale clause.
You mention the subject of intent, in your reply to me.
You said, and I quote, "On the subject of Intent… think about it… intent to do what?"
The answer is… INTENT TO GET AROUND THE DUE ON SALE CLAUSE!!! Pure and simple.
If I were looking for evidence, aside from the obvious substance over form type of arguement, I could simply look at what you have written about such transactions.

Here is another quote from your advertisement about the PAC Trust…
The PAC Trust involves “locating someone capable of taking over the monthly payments on the property in exchange for the tax write-off and the use and occupancy of the property (all the benefits and incidents of home ownership). There are virtually thousands who are willing to do just that.
Imagine this all happening quickly and legitimately without a new loan or loan assumption; without violation of lender’s due-on-sale clause; and without involving the property’s title; and even with full tax benefits to the buyer”.

Now Bill, C’mon. That is pretty damning stuff. It looks like a duck and squaks like a duck. It must be a duck. Clearly, you have just published on a popular internet site with about 5000+ new hits per day that the intent of the PAC Trust is to get around the due on sale clause. You can’t have it both ways.

Having said all that, I can tell you that part of my business is skirting the due on sale clause on a daily basis. I have no moral problem with it and no dilema doing it. I have never had a problem with it, either.

Still, lets call a spade a spade. If this agreement was ever exposed to the light of a courtroom, it would not hold any water and I would probably have to pay off my loan. There is no magic clause that will get around this issue of intent.

Dan Lubell

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

Posted by JPiper on May 09, 1999 at 12:52:34:

Bill:

“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?.”

I know you don’t make your comments lightly. I use the term “performance” as a descriptive one. In other words, I’m sure there are all kinds of mortgages written to accomplish the obvious goals. But what the “performance” mortgage does is give the buyer a recorded interest in the property. Surely you’re not suggesting that it DOESN’T accomplish this. Therefore, a seller’s attempt to sell more than once is going to be blocked unless the buyer is paid off. A judgment is going to come after the mortgage, and will therefore be eliminated in a foreclosure action. An IRS lien is a problem, at least temporarily?.just as it would be for any secured mortgage. In that particular sense a land trust would be preferable?..and by the way, I’m not arguing against trusts?..I own properties in trust for some of the reasons you mention.

I assume that you meant “trustee” in terms of a foreclosure, not “title co.”. I don’t see a problem in foreclosing under this instrument. Admittedly I haven’t had to do it?.which is probably a testimony as to how infrequently a seller takes some of the actions you are worried about. But I’ve discussed this many times with my attorney. Further, the very first “performance” deed of trust I used was in California. It was designed by an attorney for an escrow company.

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

What I was referring to here was the problems that may arise from structuring and/or administering a land trust incorrectly. You have mentioned some of these issues in the past?..things like “dry trust”, etc. My point was that problems can arise out of lease/options, especially if they are set up incorrectly. The same thing would be true for land trusts?.even PacTrust. In other words, an errant user of a PacTrust can create problems just as can an errant user of a lease/option.

“everyone wants the deal to be fair and equitable on both sides.”

I have a little different take on this. First, I represent my interests. I don’t try to pre-determine what someone else’s interest are?..I don’t make decisions for them. I offer a deal that makes sense in light of my own interests?..they’re free to accept it or reject it. Is my deal a good deal for them? Most of the people I deal with are people who are rejected by the conventional system. This leaves them with needing someone to carry them in some fashion. This leaves their options quite limited. In other words, I’m one of the few people who will deal with them under ANY circumstance?..because they are RISKY. I think the fact that I offer to let them in one of my houses is a BIG thing?.no one else will. But I am certainly cognizant of the risks that I take?.and I expect to be protected and compensated for that risk. I bend over backwards to help them accomplish their goals, as long as they live up to their agreement. To me this is more than fair. What I don’t feel compelled to do is be judge and jury of the transaction. I don’t feel compelled to decide for the buyer what the “correct” terms of the deal should be. I’m willing to participate in the free market system?..if the buyer can find a BETTER deal?.so be it. Under the circumstances of the buyer’s history, I will ONLY do business under conditions that compensate my risk according to my own standards. Did the buyer win? Well he got a house and someone who will work with him?.albeit at stiff terms. No one forced him to accept my deal. If you want to offer him a better deal than I would, that’s up to you. Again, that’s the free market.

“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?”

Yes I think you’re missing something?..that something is called the standard deduction. In other words, EVERYONE that doesn’t currently write off interest gets the standard deduction. Right now I don’t remember what that amounts to?.but I believe it’s in the neighborhood of $5K-$6K per year for a couple filing jointly. If the interest deduction doesn’t exceed that the “writeoff” is useless. Further, even if it exceeds it, the benefit of it is diminished to the extent of what they could have gotten simply by taking the standard deduction. This is probably less of an issue in California where the payment levels are higher, but in the midwest it’s reality?.tax writeoff’s may not have a significant bearing depending on the personal circumstances of the buyer.

“>>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?”

I think you miss the point here. In a lease/option I don’t have any of the above. Closing costs = 0. Unless one feels capable of setting up something like the PacTrust on their own, they would need to engage experts, perhaps your company. You fees seem within reason given the price structure for instance in California. However you do have MINIMUMS if I recollect. Try analyzing those minimums for the price structure in the Midwest sometime. They don’t pencil?.and become onerous. Keep in mind, we’re comparing here to a lease/option, not a conventional transaction.

By the way, I’m focused on this discussion more from the standpoint of one who sells properties via lease/option, not one who buys that way. Mostly I don’t buy with a lease/option. When I buy if the loan has a due on sale clause, I buy with a land trust. Further, I use land trusts to hold properties many times even if there is no underlying loan, or one containing no due on sale clause. I use the land trust to accomplish many of the goals that you set forth. I’m just not putting the “PacTrust” twist on it at this time.

JPiper

I don’t care about Win-Win, just give me the tax bennies!!! - Posted by Daniel Lubell

Posted by Daniel Lubell on May 09, 1999 at 02:13:58:

Bill,

You are a nice guy and all, and I respect your writings, but that win-win thing leaves me cold. I will never go out of my way to make it win-lose, and I will even try and help the other guy a little, but at the end of the day I am watching out for my own ass!!

There are far too many l\o buyers for me to have to make tax concessions. Plus, all of that depreciation looks far too good on my tax return to just give it away. In addition, most l\o buyers have had financial difficulties, so their adjusted gross incomes rarely put them in a category where interest write offs would exceed their standard deductions anyway.

Finally, and this is a very important point…

Houses are not sold to owner financed buyers based on tax benefits! Instead, they are sold based on salesmanship. You could have your home for sale with all of your complex equity sharing benefits and legaleeze, and I could have one right across the street for sale on a lease option. If I market better than you, I will beat you, -hands down- every single time. I currently have about 175 leased option homes in all price ranges. I have NEVER lost a sale due to my lack of complexity or lack of tax benefits.

Daniel Lubell

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

Posted by Bill Gatten on May 09, 1999 at 16:06:32:

Rob,

I would like to have the details on this case e-mailed to me, if you have them and wouldn’t mind taking the time.

In your analogy, note that there is no mention of the property having been leased by bona fide agreement to the defaulting party with a legitimate posession and occupancy arrangement. Nor is there mention of a clear bifucation of ownership interest. Understand that I agree wholeheartedly that, in your story, this transaction should be, and would always be, treated as a disguised Security Agreement… people have tried to do it this way for years–'doesn’t work when the chips are down. That’s precisely why we preach so hard that the potential for characterization as a Security Agreement must be avoided at all costs. Also note that, in your scenario, 100% of the beneficiary interest was relinquished–that’s unquestionably a security arrangement, impeding–without a doubt–all chances for the benefits of non-partionabiliy.

Doing “something” via a trust, and putting together a carefully constructed system like the one I bore everyone with, are two entirely different things. You can imagine that with all the transactions we’ve done over the years, just about all scenarios have been encountered (including–along with several others–my OWN stater and IRS audit; and a half dozen UDT actions).

Rob, I’m sure it wasn’t your intention to do so, but please don’t let anyone confuse what your talking about here with what the discussion of this thread has has to do with… (as different as apples and armadillos).

ON the issue of standard deductions and tax benefits… I understand (because of your, and Jim Piper’s tempered and considerate treament of the issue), and am in accord. I will rely more heavily on the several other major benefits of the PACTrust when presenting it to the midwest and other areas of the country where properties appear to be so minimally priced.

Respectfully,

Bill

Re: What I’ve learned (long) - Posted by JohnBoy

Posted by JohnBoy on May 08, 1999 at 24:49:01:

>>Q: In an L/O could an Optionee’s legal entanglements and personal problems create a major “cloud on title” A: 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.

++You’re missing something. How 'bout I sue you and file against all your assets… isn’t your lease option an asset? Don’t I have access to it? Wouldn’t I be able to cloud (or at least ‘mess up’) the title on the property real goo until I get it, or the house, or a settlement?

I don’t think this would work. If I have a lease on a property then that is a liability, not an asset. The option would only become an asset once I exercise it and purchase that property. I don’t own it or have anything to do with having any ownership in the property by only having an option to buy it. You might be able to collect on the profit I make from my tenant I’m sub-leasing to, but that would be about it. My guess is, if your were to cloud the title somehow or file a lien against the property, then you could end up being sued by the owner of the property. They still hold title until I exercise the option. Assuming there was a way that you could legally cloud the title even though I don’t have any legal ownership in the property, what happens if I just forfeit my option with the seller? I’m being sued so there’s no way I could buy this property anymore so I’m forfeiting my option.

If you could legally go after the property while I only have an option to buy it, then wouldn’t you have to actually purchase the property if I chose to forfeit my option so you could get any equity I might have been entitled to IF I were to exercise my option?

Since I only have the “option” to buy, and not the “obligation” to buy, then I don’t see how you could file a lien against a property until I exercised the option and took title in my name. Until I exercise that option, I only have a liability on a lease. Where is the asset?

If I was just leasing a property without any option to buy and turned around and subleased that property to someone else, could you cloud the title to that property? I don’t own an asset, I only have a liability.

Having an option wouldn’t become an asset until I exercise the option. Until that happens it only allows me the right to acquire the asset. Is having a right to do something considered an asset?

Let’s assume if I were to exercise the option that I would have some equity I would acquire in the property. Would that alone be enough to give you the legal right to file a lien or cloud the title on a property owned by someone else before I exercised my right to buy the property? I can’t imagine it would. Maybe if you could show that I have an option on a property that would entitle me to gaining some equity in the property IF I was to exercise my right to purchase it and you were willing to actually pay off the seller the amount due to them by you suing for my right to buy that property to collect on the equity that would be gained if I were to purchase the property, that might be a possibility.

In my opinion the bottom line is, I don’t own an asset by just having an option, I own a liability by having a lease. Only IF I exercise the option will I own an asset. Not until then.

Ok, I’m ready to hear some more on this issue now. :slight_smile:

Mechanic’s Liens… - Posted by JPiper

Posted by JPiper on May 09, 1999 at 13:13:18:

Brad:

I think your post creates some misleading information.

As you know, “mechanic’s lien law” varies from state to state. Frankly, I don’t know what the law is in California, and further, I don’t know what it is in most states. HOWEVER, in the states of Missouri and Kansas, a contract with the lessee or tenant of the property does NOT avail the contractor OR subcontractor (in either state) with the authority to file a mechanic’s lien for unpaid work or materials. In both states, contractor’s and subcontractors need to take certain steps as prescribed in the law in order to get an effective mechanic’s lien. One of those is to obtain the authority of the actual owner of the property and provide legally prescibed Notice to the owner PRIOR to supplying labor and materials. I currently have a 10 page document before me provided by my attorney detailing the requirements of the mechanic’s lien law in both states.

As in most things, my suggestion would be a careful review of the mechanic’s lien law in your state with an attorneys help?..laws do vary.

JPiper

Re: If Bill doesn’t mind, I’ll try my quizziness. - Posted by Brad Crouch

Posted by Brad Crouch on May 07, 1999 at 21:37:08:

FJW,

> 1.There’s nothing in a DOS that mentions effects of
> transferring beneficial interest, or violations thereof.

The Garn St. Germain Depository Institutions Act of 1982 (10-15-82) 12 USCA Sec. 1701 -j - 3 . . . is the regulating force of the “due on sale” issue, and lists several exceptions (circumstances under which the lenders are prohibited from exercising the “due on sale” clause). There are eight exceptions, but I will only quote the 8th:

Transfer of title to a trustee in an inter-vivos trust (a land trust falls under this catagory), in which the borrower is, and REMAINS a beneficiary, and which [trust agreement] is revocable by the borrower, and which does not relate to the transfer of the rights of occupancy.

Straight from Bill Gattens’ materials:

This verbage doesn’t prohibit a property in an inter-vivos trust from being leased out by its beneficiaries; nor does such verbage prohibit the [personal property] beneficial interest in a trust from being assigned to a third party (which third party could also be a lessee in the trust property [12 USCA (“US Code Annotated”) Sec. 1701 -j -3].

> The transfer would occur completely unbeknownst
> to the lender anyway. 10% is retained by seller to
> retain non-partitionability of personal property
> protecting corpus from attachments.

Also a percentage of 10% or more is retained by the seller so that he “REMAINS” a beneficiary of the trust, making it “impossible” for a lender to call the loan due under the “due on sale” clause . . . whether the lender likes it or not, he is legally prohibited from calling the loan due, as long as the borrower retains a beneficial interest and the payments are not in default.

> 2. Recording the memo of option is what would alert
> lender and indicate intent thereby enlightening a DOS
> breach.

Not really, sport. Unless the loan is in default, the lender hasn’t much reason to spend the time and energy to check the public records, specifically for the subject property. The most common way that lenders find out about the “triggering” of a due on sale clause is from the insurance company . . . who is legally obligated to report any “changes” on the policy, to the lender.

Just my $0.02,

Brad

Re: Thank you Bill. Where can I find…? - Posted by Steve Heller

Posted by Steve Heller on May 08, 1999 at 08:35:30:

Thank you Bill for your candid assessment of the dangers of lease options. A lady friend and I are looking at getting into the business and your post helps greatly. Can you tell me where I can find more information on Land Trusts (with an accompanying Assignment of Beneficiary interest and triple-net lease agreement). Has anyone produced any material on this procedure?

Thanks your a big help,

Steve Heller

Re: I do NOT want to know how you know this! LOL (nt) - Posted by JohnBoy

Posted by JohnBoy on May 07, 1999 at 19:43:17:

Well I’m not telling, but just let me say this, they’re pink with little orange fishys on them! :slight_smile:

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

Posted by Bill Gatten on May 09, 1999 at 11:51:56:

Dan,

We’ve been in business since 1984… I have personally done (for myself) or been involved in many hundreds of transactions (well in excess of 1,000) which involve lenders’ “Due-on-Sale” clauses. Everyday we correspond with the lenders who hold the loans on these properties. Over the years I have spoken with dozens of attorneys who represent these lenders, and have heard the “intent” argument as many times (far more pros than cons… i.e., more of them agree with your point of view than not).

Don’t think that I don’t also agree with you on point: its the principal within which our disagreement would lie. What I’m saying is that what we do does not violate the clause(s) as it(they) are written (under GSG… the FHLMB interpretion notwithstanding). Could we lose that argument in court? Of course (if Johnny Cochran was on the other side). But would we necessarily lose it? No. Are we afraid of losing it? No. Are we afraid of it ever getting that far? No.

Please understand our (my) point of view: there is not (and cannot in a PACrust™be a sale of realty taking place, anymore than that there would be if I were a remainder agent in your own inter-vivos trust (which you have an absolutely right to so name anytime you choose) and decided to lease one of your rental properties from you. If your living trust held both the legal and AND the equitable title to my rental home, I am left with only air (as in being a beneficiary or heir in your will)… the fact that the courts regard my “air” as personalty and that the IRS regards it as realty and will allow me a tax write off on my rent (providing the lease is properly constructed and I can past the tests of Sec. 163)does not constitute a sale of realty. No more than when you take the write-off on a master lease in a commercial building (or sandwich). The fact that I can receive and enjoy the “benefits” of owning, and am pleased with my assignment (of personalty), doesn’t make me an owner of either legal or equitable interest in the property. It’s just that I’m treated as if I were one.

Yes… we can continue boiling the bean until it is bean water, but why? Even if there is, as you say, the possiblity or liklehood of a determination that the “intent” was something else… has anyone come up with a better way of avoiding such likihood?

Bill

Re: L/O disingenu… re: one of JPiper’s comments - Posted by Rich_PA

Posted by Rich_PA on May 09, 1999 at 15:45:58:

Although the rest of this debate is hard to follow at times, JPiper’s paragragh which starts–


re: “everyone wants the deal to be fair and equitable on both sides.”

I have a little different take on this. First, I represent my interests. I don’t try to pre-determine what someone else’s interest are?..I don’t make decisions for them. I offer a deal that makes sense in light of my own interests?..they’re free to accept it or reject it.
(JPiper)

I agree with this paragraph TOTALLY. The other people can ALWAYS DECIDE NOT TO DO IT.

Rich_PA

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

Posted by Bill Gatten on May 09, 1999 at 14:20:13:

Jim,

As always your reply is complete, concise and well thought out. I hate to say it (not really), but I completely understand your point of view and tend to agree with it…especially in view of your comments re. the income tax issue.

Bill

Re: I don’t care about Win-Win, just give me the tax bennies!!! - Posted by Bill Gatten

Posted by Bill Gatten on May 09, 1999 at 14:33:28:

Daniel,

Thank you for the “nice guy” part. The feeling is sincerely mutual.

When you mentioned “depreciation looking good on your tax return,” I presume you meant, instead, that the interest and property tax write-off looks good…in a PACTrust the depreciation (passive loss) remains with the borrower of record, and is taken primarily to offset the gain resulting from principal reduction in the underlying financing.

On the tax issue, however, let me ask you question (a rhetorical statement actually, not really a question): Which looks better–a $200 write-off, or a $300 check in your pocket every month? Once again… when one gives up something to a tenant, we recommend that he charge for it and add a good profit in the process.

Thanks for your commcents.

Bill

Midwest… - Posted by Kev.

Posted by Kev. on May 09, 1999 at 22:37:42:

Hey, Bill!
We are alive and well with our program, which is very much (identical?) to your pactrust.
It works in the Midwest. Well, too.
Great thread. I am always learning the legal aspect of what we do as I read your posts. Great program!
It works WELL for us.
Kev.