Re: The Due-on-Sale Clause Again - Posted by Rob FL
Posted by Rob FL on December 04, 1999 at 21:50:18:
The language is the standard clause #17 for all FHA, VA, and FNMA/FHLMC loans.
Re: The Due-on-Sale Clause Again - Posted by JPiper
Posted by JPiper on December 05, 1999 at 24:00:09:
Hi Bill:
I always enjoy taking tests?.some fun huh?
Once again, just answer these general questions (PACTrust? or not):
-Can I move from a property I own and lease it out to anyone I please, without a DOS violation?
Ans: Yes you can?..as long as you just ?move?. If you deed into a trust you can?t move AND rent. Here?s the Garn wording on this issue ?(8) a transfer into an inter vivos trust in which the borrower
is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.? And here?s that pesky 12CFR591.5 that you prefer not to talk about ?(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.? Ouch Bill?.these are BOTH saying you can?t do what you claim you can do!! Now between you and me?.I think you?ve got a great argument on this one. But bottomline is the law says differently?.and until you?ve tested this in court and WON, we?re now talking risk by using a PacTrust. And that?s the point here, that all methods contain their risk?.even the PacTrust.
-Can I place that same property into an inter-vivos trust for asset protection purposes, without violating the loan’s DOS clause?
Ans: Yes you can?..but see the above for restrictions on what you can then do.
-Can I assign a beneficiary interest in my own inter-vivos trust (or my will, or my insurance policy) to anyone I choose without violating a DOS?
Ans: No?you can?t (referring to the beneficial interest). Where did you get this one?
-Could that assignee of a co-beneficial interest be my next-door neighbor, or one of my tenants…without violating my mortgage loan’s DOS?
Ans: Who you assign to is irrelevant. The conditions surrounding the assignment is what?s important.
-Can any tenant in the world “claim” tax write-off on his triple net lease payments, if he wants to (whether justified or or acceptable to the IRS or not), without involving the lender or it’s DOS clause in any manner?
Ans: I suppose anyone can ?claim? any write-off whether it?s justifiable or not?.and this has no direct bearing on the due on sale clause. But see the later argument.
-Does any lender care (or know) how my rental tenants handle their own personal income tax reporting?
Ans: Probably not?.but see my later argument.
-In the above scenario is there any public notice filed anywhere relative to my assignment of the PERSONAL PROPERTY beneficiary interest in my trust?
Ans: No
Now here?s another problem Bill. You say ?If I do all of the above Jim, haven’t I transferred 100% of the Bundle of Rights in Fee Simple real estate ownership to another?? My answer is Yes?.and therein lies a potential problem. I?ve made this argument before, but you seem to ignore it?so here it is again.
SCENARIO:
Lender for some reason checks title. They note the transfer of the property to XYZ Trust, by Bill Gatten, Inc. Trustee. They find out the water bill is being paid by the current occupant?who is not the original borrower. The rates are now 10%?.the rate on this loan is 7%. They make a business decision?.they accelerate the loan BECAUSE the property has been deeded into a trust, AND there has been a change in occupancy?.clearly permitted by Garn and 12CFR591.5. Gatten decides to fight this one in court. (You?ve already lost.) Gatten makes brilliant arguments?.lender points out that Gatten?s intent was to skirt the law?.that Gatten has effectively transferred ALL the rights of ownership in property to the buyer?who is now writing off his rent on his personal income taxes. Lender establishes Gatten?s INTENT. If it walks like a duck, quacks like a duck?.my gosh, it must be a duck. How does it come out? Don?t know?stay tuned.
The issue here is not whether you?re right Bill?.I don?t think we know that no matter how brilliant your arguments are. The issue here is whether there is a risk with a PacTrust?and it seems clear the answer is yes. And it?s similar to the same DOS risk that exists with a regular land trust conveyance.
Be that as it may, I?m NOT worried about the DOS personally. But whether I?m worried about it doesn?t have much to do with whether there is a risk. There is one. Therefore you need to use good techniques to deal with the issue?.and certainly the PacTrust is one of those. But once again, an inescapable conclusion is that there is risk in all methods of dealing with the due on sale issue.
JPiper
well said… - Posted by karp
Posted by karp on December 05, 1999 at 24:59:14:
Much of this argument echoes Bill’s concerns…
I may respond above.
I do thank you for the way you present things…very well done. Lucid and Concise.
Karl
I agree… - Posted by karp
Posted by karp on December 04, 1999 at 11:26:28:
Yes, my loan was current…lol
However. I still would call what I did more of a moron thing myself- definitly not heroic. I certainly wouldn’t recommend it anyway…
Thanks,
Karl Hartley
Re: The Due-on-Sale Clause Again - Posted by Bill Gatten
Posted by Bill Gatten on December 08, 1999 at 17:29:00:
Jim,
Sorry to take so long on this one, but we are just inundated right now (with all those willing to the take the PACTRust plunge into darkness…as it were). I don’t even have time to spell check my postings.
Re. the CFR issue…I don’t have a problem addressing it…its a part of what I do on a daily basis, it’s just that I find it an unnecissary and outworn argument… the law doesn’t dictate what a lender has to do…it lays out what the lender CAN do if they want to. Further, I contend that it is silly because it says a lender could forclose one me, just because I don’t want to live in the property anymore, but choose not to give up the income and appreciation potential…this would end the income property business tomorrow if it were taken literally by too many folks.
Jim the whole thing always boils down to what is the safer method, and how important is that safety. If folks don’t want or need anything safer than what they already have, more power to them. “If yours ain’t broke, don’t fix it, but don’t suggest that others should have one like yours.” It’s just very interesting to me that most of the quetions that come up on CRE are answerable, and can be mitigated by, the PACTrust concept… and that there are so many who want to shoot the PACTRust down because its not what they already know.
Definition: “Cogntive Dissonance” A predisiposition to continue disbelieving something that has always been disbelieved in view of solid contrary evidence.
Definition: “Cogntive Rigidity,” The predispostion to keep on doing what you’ve always done, despite there being a better way.
QUOTE. All good ideas go through thee phases: 1) Disbelief 2) Violent Oppostion 3) acceptance as a self evident truth.
Bill
Re: The Due-on-Sale Clause Again - Posted by Bill Gatten
Posted by Bill Gatten on December 06, 1999 at 21:05:33:
Jim,
When I owned a finance company, a bank and founded my first two mortgage companies I couldn’t even spell non-sequitur…but now (dang) it seems they’re everwhere.
Forgive my brevity in answering your post here (though this is waay too long anyway)…but I’m truly pressed for time right now and for the next several days…though I do want to answer you to the best of my ability and sincerety.
You said if I deed my property into a living trust I can?t move AND rent it out? You sure you don’t want to reconsider that one? …irrespective of the FHLB interpretation of Garn St. Germain?
Your quote (from the law): "…a transfer into an inter vivos trust in which the borroweris and remains (Jim, in a PACTrust the borrowing IS and DOES REMAIN a beneficiary) and which does not relate to a transfer of rights of occupancy in the property (As I’ve said many times before, the key is that, the trust NEVER DOES relate to such “rights”…its the Lease Agreement re. the corpus of the trust that does that: the lease or rental agreement it’s not a part of the trust in any way–in coformity with the law).?
You said: "And here?s that pesky 12CFR591.5 that you prefer not to talk about(What do you mean? Its the focal point of half of my seminars!). Of couse, I don’t like it’s purposely confusing verbiage, but I certainly acknowledge its existence. In effect it invalidates itself by stopping anyone from including rental properties into their own living trusts. And I don’t buy it as a valid reason to disparage the safety and conformity of the PACTrust concept (and I know that you don’t either…you’ve said so on several other occasions).
You say: "I think you?ve got a great argument on this one. But bottomline is the law says differently (So Jim Piper and the law are finally in conflict?)
“…and until you?ve tested this in court and WON, we?re now talking risk by using a PacTrust.” Dad gum it, Jim! If I’m right, there will never be such a court case (or am I missing something here?) If you wish, I’ll run right down and sue myself so I come out ahead on this one after 100 years of the land trust’s existence in the US.
In your post your’re saying you or I can not assign a beneficiary interest in my own inter-vivos trust (or my will) to anyone I choose without violating a DOS? (BTW, the phrase “Where did you get this one” is a little insulting isn’t it?
Jim, you can’t mean this. Do you think you can’t name anyone you want to as a co-beneficiary in your living trusts (family, land, etc.) – your wife, your daughter, your neighbor, your brother, your minister…your parrot? I do believe your a bit off on this one…but then again…)
Jim, once more, I’m truly sorry I haven’t the time to go deeper, but the next time you get out this way, I’d love nothing more than to sit with you for the day and try to better support our position on this issue. The subject you bring invariably require more time and more ligical (and research) than I generally have time for at the moment.
And, oh by the way, on that issue of your suggesting that I post here on CRE only to sell something…I suppose I should be more like Bronchik, Diamond, Kaiser, Le Grand, Vaughan, etc. and not try to sell anything (though my family prays that I don’t do that). To be honest with you, if I had to live on what business CRE (or the internet in general) stimulate for me I’d have starved a long time ago…I post here because I like you; I like the subject matter; I like the people; I like the comraderie; and I like the (postive) feed back and wealth of information on the subjects that are truly dear to me. If someone wants to buy a book or a tape, that’s great, but that AIN"T why I’m here. How 'bout you Jim? What do you get out of it?
Bill
Re: The Due-on-Sale Clause Again - Posted by karp
Posted by karp on December 05, 1999 at 01:14:39:
Very well laid out Jim.
I really do disagree with you about the lender’s abililty to prove INTENT in court.
I think you would just flip a coin on that one or check the judge’s biorythm or whatnot.
BUt since this is not cloudy enough- I want to bring up one very strong point about the Pac trust that I have not been able to poke a hole in yet.
It has to do with doing an eviction vs. foreclosure.
Eviction being the simpler option of the two obviously- your resident tenant is renting from the trust and therefore even if he is buying the personal property eventually he still does not have any beneficial interest in the property as such.
Coupling this advantage into the picture for the purpose of lessening the investor’s exposure and pain in a seller carry scenario (should something go wrong) makes a lot of sense.
My concern is both parties have to agree on the decision the trust makes to evict the tenant, and since the tenant owns part of the trust anyway- how the heck is that supposed to work??
I know Bill has an answer for this one- I just forgot to ask him last time we spoke…
Nice to read you again, Jim.
Karl Hartley
Re: The Due-on-Sale Clause Again - Posted by Bill Gatten
Posted by Bill Gatten on December 08, 1999 at 17:34:27:
Karl, in answer to you question, the eviction process and instructions (to the trustee) are laid out completely in advance within the beneficiary agreement. The beneficiaries agree at the inception as to what they direct the turstee to do if there is a default by “any” tenant who may be residing the property, whether it be one of the beneficiaries or not. Upon default, the trustee then proceeds under those inalterable guidelines (the beneficiaries would have to agree and direct the trustee to stop the process: not start it).
Bill
Re: The Due-on-Sale Clause Again - Posted by Brian Mac
Posted by Brian Mac on December 06, 1999 at 19:33:04:
Karl
I believe Brad has the process correct. According to Bill’s previous posts, the key lies in the beneficiary agreement. ie Espenses and Contributions.
“Interest in…solely for investment purposes” and “ANY BENEFICIARY WHO MAY RESIDE…ACKNOWLEDGES…”
Gotta go
Brian Mac
Re: The Due-on-Sale Clause Again - Posted by JPiper
Posted by JPiper on December 05, 1999 at 11:21:02:
I agree with you…that would be a nice feature of the PacTrust. I’ve had that argument with Bill as well…and as always, he has some brilliant arguments.
My concern has been that this type of set-up in essence removes the buyer’s right to foreclosure…just like the contract for deed and others have done in the past. In this case, this is done through the use of a trust and separate occupancy agreement. In the case of a contract for deed it is done with language in the contract along with a “pre-executed” quit claim deed.
Whether a court would construe the whole set-up to be a device to get around the buyer’s right to foreclosure…again, remains to be seen. Bill says it’s not an issue in California.
I deal in one state where that part of the PacTrust would be VERY beneficial (no play on words)…except that I now have to figure out how to get around the rental licensing boys…maybe Bill can figure that one out.
JPiper
The resident beneficiary evicts himself - Posted by Brad Crouch
Posted by Brad Crouch on December 05, 1999 at 03:58:05:
Karp,
> My concern is both parties have to agree on the
> decision the trust makes to evict the tenant, and
> since the tenant owns part of the trust anyway - how
> the heck is that supposed to work??
Part of the agreement the resident beneficiary makes initially is that any default of his would serve as “constructive notice” to the other beneficiaries, of him relenquishing his interests.
If he is owed any monies by the trust at the time he does this, he also agrees to take an unsecured note, to be paid at the time of trust termination and sale. The note would be for substantially less after the default fees are deducted. If he wants to argue with the current value figures, he can pay a few thousand dollars for a MAI apprasial (to protect whatever appreciation that may have occurred while he was in possession of the property).
Brad
Re: The Due-on-Sale Clause Again - Posted by Bill Gatten
Posted by Bill Gatten on December 08, 1999 at 17:09:49:
Jim, in all candor. I’ll bet I can. Ask the question so tht I know exactly who the rental licensing boys are.
Bill
The resident beneficiary evicts himself!?!?! - Posted by karp
Posted by karp on December 05, 1999 at 11:35:37:
Okay we need to clear up this language a bit.
See, whether we like it or not the PAC trust is not
the simplest tool to get your brain around.
SO- having said that I can absolutly tell ou for sure the resident beneficiary would not be evisting himself, rather it would be BOTH beneficiaries who would have to agree.
Now, since they would not agree, it will end up in court and what have you gained?
The ability to evict as opposed to foreclose is fantastic in theory, but if said evistion is cvontingent upon one of the parties tying their own noose? I doubt it…
Make me wrong.
Thanks,
Karl Hartley
Re: The resident beneficiary evicts himself!?!?! - Posted by Brad Crouch
Posted by Brad Crouch on December 06, 1999 at 05:06:00:
Karp,
The PACTrust may not be simple to understand but the idea is not to try to sell the thing at all. Just use it as a tool to accomplish whatever the seller wants to accomplish. Similar to try explaining how the brakes work on an automobile. The driver just has to be confident that they will work EVERY TIME he steps on the brake pedal.
There are three beneficiaries and their “voting rights” are not necessarily proportional to their interests in the trust. The resident beneficiary, for example cannot make capital repairs without approval, in advance. Unless he is willing to absorb the total cost, himself.
In this case the resident beneficiary has already signed a document stating that if he ever defaults on ANY payment, it is to be considered “constructive notice” of his intent to vacate the property and give up his interest in the trust. If the trust owes him money at that point (appreciation, approved capital improvements, etc.) that is a separate issue that we’re not covering at the moment.
I’m sure that you’re right about the resident beneficiary not being willing to tie a noose around his own neck, but he has no choice. He either signs the documents prior to moving in, or a new resident beneficiary is found.
Bill Gatten has gone through the eviction process many times, and has had no trouble at all. He was saying that he had another one to do, a couple of weeks ago.
As for “making you wrong”, that’s the LAST thing I would want to do.
I’m sure that Bill could give you a better answer, as this is all just from memory. I tried to research a bit but my office is all packed up in boxes while I undertake a major reorganizing effort, and I couldn’t find what I was looking for (still).
Thanks,
Brad
Re: The resident beneficiary evicts himself!?!?! - Posted by JPiper
Posted by JPiper on December 05, 1999 at 11:43:01:
Beneficiaries have “pre-agreed” in the occupancy agreement and in the trust. Whether you can “pre-agree” away your rights is another question.
JPiper
Good response- one final question - Posted by karp
Posted by karp on December 06, 1999 at 12:06:22:
Okay-
you say if he does not have a choice as to evicting himself…if he has a problem presigning his rights away you will find someone else.
But this is a counterfactual argument. In other words, you won’t know if he has a problem presigning his rights until such time as the consequences of the presigning kick him in the butt.
My final question is this.
Given that the resident beneficiary won’t likely go quietly into the night after he has defaulted, aren’t ou likely to end up in court anyway? And if so is this a limitation of ANY real estate method or tool or can you think of another way to amend the PAC trust to cover this.
BTW, I am very aware that enyone can sue anyone over anything. I am more concerned with the practicalities in the PAC trsut for an eviction to go smoothly.
Thanks,
Karl Hartley
Re: The resident beneficiary evicts himself!?!?! - Posted by Bill Gatten
Posted by Bill Gatten on December 08, 1999 at 17:39:53:
Jim,
The “pre agreement” is a direction to the trustee to handle the entire transaction for the beneficiaries…irrespective of who’s being evicted. Why would one of the beneficiaries get any more break on the process of eviction than anyone else would? He’s the one who made the “unbrakable” rules. He’s just a tenant as far as the truste goes. Any monies he’s spent are contribution to his investment in the land trust, and have nothing to do with his lease of the trust property.
When you take out a loan, don’t you pre-agree to abide by the bank’s foreclosure and evictions processess if you don’t pay? When you got married, did you pre-agree to some things you wish you change now, but can’t. Hmmmm??
Bill
Yes but … - Posted by Redline
Posted by Redline on December 07, 1999 at 14:36:40:
Isn’t this the same as the “liquidated damages” clause you put in your contracts? (seller is entitled only to earnest money in case of default, not specific performance, etc).
Isn’t the seller pre-agreeing to give up their rights in case of a default? Why would that be OK and this not?
RL
Re: Good response- one final question - Posted by Bill Gatten
Posted by Bill Gatten on December 08, 1999 at 11:52:31:
What can I say? There is no reason they shouldn’t given the the structure of the PACTrust™ and the safeguards built in. They always have (without a single exception) and though we can’t predict the future, we don’t think there will ever be a problem.
We’be built the safest ship in the world…can it sink? The Titanic did.
'Best I can do.
Bill