Posted by Glenn OH on February 03, 2000 at 21:14:03:
That’s the point. Deed is to trustee, not buyer, hence the security to seller.
Tear this idea apart. Its too good to be true. - Posted by Marc Donovan
Posted by Marc Donovan on February 03, 2000 at 14:29:31:
After looking at Bill Gatten’s PACTrust, and doing my own research, I think I may have a better mousetrap.
The seller deeds to the trustee of a land trust. He signs an agreement with the buyer where;
- They agree to become co-beneficiaries with an undivided beneficial interest.
- The seller takes a note for his equity secured by the beneficial interest of the buyer, and he files a UCC-1.
- The seller leases the property to the buyer for a year for $10. This may be renewed at the seller’s option.
- The seller agrees to be a beneficiary until the original mortgage is paid, even if he has been paid for his equity.
- The parties agree that if the property is sold, the proceeds will go first to pay off the mortgage, then to pay off the seller’s equity, then the remainder to the buyer.
- The parties agree that the buyer has the right to add more beneficiaries as long as their interest is secondary to the seller’s. Also the buyer has the right to order the trustee to sell the property.
- The buyer maintains the property, and makes the payments on the mortgage, taxes, insurance, etc.
And here’s why this works: The Garn St.Germain law prevents the lender from persuing a due-on-sale acceleration because the borrower is still a beneficiary, and he does not transfer the right of possesion (a one year lease is not considered to be a transfer, especially if there is no automatic renewall). The lender is not harmed in any way, since the seller is still liable, and he still maintains an on-going interest and right to the property.
This provides all the benefits of a land trust including shielding the property from the creditors of either party, bankruptcy protection, ease of sale, no closing, no closing costs, etc. The buyer can negotiate a no down deal since the note for the equity is a chattel mortgage and its easy and cheap to foreclose. The buyer can sell his interest in the same manner and with the same advantages as the original seller.
As far as taxes, the buyer can take a home mortgage interest deduction for both the mortgage and the seller’s note. If he decides to rent it out, he can take depreciation and expense deductions, etc. The seller will pay capital gains on the principle received in the note, on an installment basis. Since the mechanics of this deal are the same as an assumption with the seller carrying a second, it should be treated this way by the IRS. If it walks and quacks like a duck … it is a duck.
OK, so what are the pitfalls here?
Re: Tear this idea apart. Its too good to be true. - Posted by Glenn OH
Posted by Glenn OH on February 03, 2000 at 21:34:04:
A few questions?
Why #2 - filing would just raise flags, and also indicate that the trust is just to circumvent IRS installment sales rules.
Why #3 - if done with a normal fair market lease, it could cover costs of #2 and more, again without IRS problems.
#4 is required under GSG.
#5 - of course.
Why #6 - just make multiple co-beneficiaries part of the beneficiary agreement. Also, what if buyer said after one year to sell the property - another problem for possible IRS voiding of trust protection.
Finally, why not just do PACTrust?
why make it hard… - Posted by David Alexander
Posted by David Alexander on February 03, 2000 at 15:30:23:
Deed the property to a trust, with the beneficial interest in the name of the sellers. At the same closing a seperate assignment of the benefical interest also takes place. In the event that you might go to DOS Jail,“lol” because of transfer of the interest in the property you only show the bank the trust docs, not the assignment.
If something happens and it ever goes past that, the gig is up anyway and you need to do what you get paid for by taking the risk and that is figure out another solution.
Banks want your checks, not the property and are in the cashflow business just like we are.
I have a bank that I asked for a waiver of the DOS back last year,(was trying on pair of new brass balls, ala Karp). Anyway all said and done we never did, but he(A VP of the bank send out the statements to me, just as if I I’m on the loan). He just wants the monthly check.
David Alexander
Re: why make it hard. Several reasons… - Posted by Marc Donovan
Posted by Marc Donovan on February 03, 2000 at 16:20:30:
First, if the seller is not a beneficiary, he will want to place a regular second mortgage against the property. This will cost a lot of money for him if he has to foreclose, so he will insist on a big down payment to cover his potential costs.
Second, if interest rates go up, lenders will use any excuse they can to call their loans. This applies to capped out ARMs too.
Third, in order to achieve asset protection, you need two or more parties as beneficiaries, so that will have to be worked out also.
Fourth, the seller is in a more secure position if he is still a beneficiary. So the deal is easier to negotiate.
It sure seems like the same amount of complexity to me, but you have more protection all around. The only piece that takes more work is the lease, and that is just a standard document.
Ok, Marc… - Posted by David Alexander
Posted by David Alexander on February 03, 2000 at 21:12:18:
Scot has about said it all except … that to me it seems more like a lack of confidence in getting a deal like this done. So that leads you to trying to overcompensate with this thing and that thing.
Sellers, and if your going to buy property right they have to be motivated dont care, about the hoops. The only thing they care about is that maybe your the guy that can solve their problem. I personally dont go through and explain to them that this is a trust agreement, blah, blah, blah. If I did, I’d losem’. the only thing I cover really well is that CYA agreement, everything else is just the way I do business and close on a house. You go explaining everything you do and you will confuse the seller and a confused seller means you’ll lose the deal.
If you trying to buy property from unmotivated sellers you will pay too much or not buy at the right terms.
Unmotivated sellers will also be the ones saying I need my attorney, best friend, or pastor Bob to look at this and that and approve the deal.
How do I know this because I chased a few unmotivated people before I seperated the two. It only takes one good deal and you will know the difference. You want always know their full motivation but you will know they are motivated.
Also sellers dont generally know about performance mortgages and the like unless we explain it to them, or their attorney does, and if it get’s to the attorney say bye bye to the deal, that’s their standard answer.
The idea isnt just to own property but make the money when you buy it.
Seriously, should be something like Mr. Seller this what I can do, I can buy your property but they way I do it is to take over your payments, you see if I went and got a knew that would take to much time and if I put cash to every deal I’d be out of money. but if we can do it this way then we can do business. And on and on nothing more nothing fancy.
This is at least my opion and the way I’ve done the few I’ve done.
David Alexander
Re: why make it hard. Several reasons… - Posted by JD
Posted by JD on February 03, 2000 at 20:04:30:
Unlike most people that post on this board, I happen to agree with you on point #2. I think you are mistaken on the other three points. As regards to your original post, you state: “The Garn St.Germain law prevents the lender from persuing a due-on-sale acceleration because the borrower is still a beneficiary, and he does not transfer the right of possesion (a one year lease is not considered to be a transfer, especially if there is no automatic renewall).” _____ A 1 year lease is a change of possesion. Please refer to Title #12 C.F.R. 591.5(b)(vi) for a clarification of this point. It can be found at http://www.access.gpo.gov/nara/cfr/waisidx_99/12cfr591_99.html
I recognize that some people believe that the Office of Thrift Supervision has exceeded their authority in instituing this clarifying regulation, I dont.
Obviously…you’ve done few if any of these type deals… - Posted by Scott
Posted by Scott on February 03, 2000 at 16:44:18:
Are you serious…??
Are you the SELLER is your example?
I act as the BUYER…and 100% of the cases the SELLER has NEVER brought up any of the issues you presented.
Easier to negoitate? What negotiation? These sellers are SO motivated they are ready to walk…yesterday.
I suggest you work a few of these deals before you begin to speculate about the opposition the Seller may have.
Your 1st Q:
“First, if the seller is not a beneficiary, he will want to place a regular second mortgage against the property. This will cost a lot of money for him if he has to foreclose, so he will insist on a big down payment to cover his potential costs.”
You’ve got to kidding… The seller get LITTLE if ANY money…there is NO down payment…the Money you may give the seller is for their equity.
Your 2nd Q:
“Second, if interest rates go up, lenders will use any excuse they can to call their loans. This applies to capped out ARMs too.”
How will the LENDER know?..
Your 3rd Q:
“Third, in order to achieve asset protection, you need two or more parties as beneficiaries, so that will have to be worked out also.”
Wrong. Period…Also, Who says the beneficiares are INDIVIDUALS??
Your 4th and FINAL Quesion:
“Fourth, the seller is in a more secure position if he is still a beneficiary. So the deal is easier to negotiate.”
Is this your idea of “Joke of the Day?”
I REALLY did enjoy your post…not matter how far in Left Field you are…
Scott
Re: Good post, D.A. I agree 100% (nt) - Posted by Stacy (AZ)
Posted by Stacy (AZ) on February 04, 2000 at 01:25:50:
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Re: why make it hard. Several reasons… - Posted by Glenn OH
Posted by Glenn OH on February 04, 2000 at 09:46:15:
I am not a lawyer, but I think you may have missed a couple of points in your citation.
Title #12 C.F.R. 591.5(b)(iv) allows for a lease (with no option) for up to 3 years.
Title #12 C.F.R. 591.5(b)(vi) covers the lender if the borrower refuses to provide for notification of the lendor about changes in beneficiiary or occupancy.
Thus, it appears if notification off each event is provided, i.e. assignement of partial interest to co-beneficiary, and change in occupancy (as would be allowed under 591.5(b)(iv)) then DOS is not violated.
Re: Obviously…you’ve done few if any of these type deals… - Posted by Marc Donovan
Posted by Marc Donovan on February 03, 2000 at 17:17:53:
Yes, I’m serious.
Have I done any of these type deals? No, hence the post. Hell, I just thought of the idea today.
Am I the seller in my example? No, I’m the buyer.
You must be assuming that I intend to make deals with distressed sellers. Not so. This plan is designed to work with any seller, distressed or not, for no money down. The typical seller who will carry a second, usually insists on a down payment to cover his possible foreclosure costs. The trust arrangement allows him to foreclose easier and cheaper, so he will not need a down payment. Its really very simple.
As to “how will the lender know?” If interest takes a hike, there will be plenty of incentive for the lender to dig into his insurance records, public records of the second mortgage, mortgage payments from someone other than the owner, etc.
As to the asset protection, you must have more than one party to protect the beneficial interest in the trust. If you are sued, the plaintif can get a writ against your interest. The asset protection comes from the fact that the beneficial interest is personal property, and if, and only if it is owned by more than one party, it cannot be partitioned to satisfy the judgement of one beneficiary.
:Your 4th and FINAL Quesion:
::“Fourth, the seller is in a more secure position if he is still a beneficiary. So the deal is easier to negotiate.”
:Is this your idea of “Joke of the Day?”
Yes Scott. Pretty funny huh? Again you are assuming the seller is desperate. You know what they say about assuming. It makes an ASS out of U and ME.
:I REALLY did enjoy your post…not matter how far in Left Field you are…
Pop fly, you’re out.
Re: why make it hard. Several reasons… - Posted by JD
Posted by JD on February 04, 2000 at 21:15:55:
print it out and then read it.
Short and sweet… - Posted by Scott
Posted by Scott on February 03, 2000 at 19:25:56:
No UN-motivated seller will give you the deed…Period.
Marc, Experience will be your greatest teacher…go do a few deals and you’ll see.
For the last time, the LENDER will not find out.
Scott
Re: why make it hard. Several reasons… - Posted by Glenn OH
Posted by Glenn OH on February 05, 2000 at 14:13:36:
Since I made the citations above, I obviously printed it out and read it. If you disagree with my points, the explain your point of view. Don’t get patronizing and assume I haven’t read it.