Re: What would you do with this one? - Posted by Brent_IL
Posted by Brent_IL on August 26, 2003 at 14:08:00:
Yes, they are yahoos.
I owe a debt of gratitude to my late father-in-law.
When I got married in 1972 it was hippie-time. I didn?t know that I was supposed to ask for his daughter?s hand in marriage. I thought it was antiquated. My future spouse informed her Dad of our wedding date and asked him to drive out 800 miles to attend. Right before we met for the first time he noticed the beard and the fact that I was left-handed. The first words he said to me were, ?You?re a G_d-Dam_ed hippie left-handed sh_t handler. You?re not Italian either, are you?? Four grandchildren and thirty-one years later, the last three of which he lived with us, I still called him Mr. Vitello.
After learning to interact with him, it was like coasting downhill all the way.
All of us have opinions that take a lot of effort to change. Unlike many of us, older people don?t even pretend to listen to alternatives. I?ve learned that if I try to influence folks this age by politely pointing out certain facts, they will spend the next two hours sincerely explaining to me why I am full of crap. I have to force myself to shut-up about the entitlement thing. It takes considerable effort because they all think that way. I used to think that I was non-judgmental. I?ve come to realize that I am extremely judgmental, but that I don?t let that influence the way that I interact with people.
I think the reasons that I can get results are:
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Our mutual belief is that it?s a good idea for the title of the property to transfer.
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I accept that I have to deal with them yahoo-to-yahoo. I don?t let the yahooitiveness of either of us block the objective of the seller to sell or mine to buy.
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As with all sellers, my job is to find out what they really want out of the sale. It is relatively easy because they all like to talk. However, they are never going to agree to anything that they haven?t proposed. I?m not going to get a deal unless I give them everything they want. This is where my knowledge of term-buying and financial instruments comes into play. All the flexibility I will ever need is built into the purchase contract. By mixing and matching the terms (and utilizing a little stealth), I can get what I need, too.
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Few older sellers have personal lawyers, but every one of them know someone whose cousin is an attorney and they won?t hesitate to telephone a lawyer that they met at a party two years ago. My attorney review clause doesn?t make the agreement subject to the lawyer?s approval. It?s there for show. It is actually an attorney?s right to review and suggest modification. The sellers like to get the opinion of others though they will do what they want, regardless. To date, I?ve never accepted a suggestion by the seller?s lawyer to modify anything significant. After the contract is signed, their only way out is to exercise the ?Seller?s Option to Cancel,? but most just accept the deal that they have made. It?s the ?a deal?s a deal,? and the ?I made my bed ?? mentality.
I think if I truly had to deal with the mavens I couldn?t do it.
- This is Illinois and trusts are ubiquitous. I can write my maneuverings into the detailed instructions to the trustee, but first I have to get the property into a trust. Reading comes naturally to older people and they are inundated by writings that feature estate planning and the value of annuities. They accept the land trust idea because the banks here make them move the title in and out of trusts when they get a loan. Their bank likes the idea of a non-judicial foreclosure option. The term doesn?t scare them. They get a long or a short answer depending on their need.
Like all of us, they need to know that we have reasons for what we are asking them to do. Our reason doesn?t have to be a good reason as long as it sounds like a reason and the seller doesn?t have to understand it completely as long as he is not uncomfortable. I?m sure that I?ve posted this somewhere previously, but here?s how I explain the trusts, complete with a plug for NARS.
This question will come up at the point where we have agreed in principle to some post-sale seller involvement. His mind is no longer stuck on getting an all-cash sale. He’s open to retaining an investment in the property, but needs to eliminate the property?s challenges to do it.
?What?s this ?trust? thing all about? I read that these might be illegal in this state.?
“If I can eliminate the [pick one - financial hemorrhaging, the tenant worries, the maintenance, and all those repairs,] so that you can have peace of mind and get on with your life, do we have something to talk about?”
When he gives you a ?Yes,? you describe your creative solution.
You may have briefly mentioned putting the house in trust for safety or estate-planning reasons, but, now, the seller has focused on the word, got stuck, and needs more information to continue. He or she asks the above question.
Very often, the short answer is all you?ll need:
?No, trusts are not illegal. They?ve been in continuous use for at least 500 or 600 years.
A trust is a legally recognized box that holds items of value in order to safeguard them for the real owner. All the lawful details were worked out hundreds of years ago. The attorneys from the title company will make sure everything is taken care of correctly before they issue title insurance on the property. I agree with you. Feeling safe is important for us both, isn?t it??
O.K., but if I do as you suggest, I won?t own the house, will I? What exactly is going to happen if I put my house into the trust? {or switch to a different trust} (Long answer)
{Take the time to review the major non-financial points of prior agreement before heading into deeper detail. You need to develop the reasons why a trust arrangement is necessary to ease the seller?s acceptance.}
?Mr. Seller, if I understand what you?re been telling me, you don?t hate this property. You?re happy with your investment in your home, but the situation with {reason they are selling} is such that you no longer want to continue living here at this time. Is that pretty much it?
Now, Mr. Seller, you?ve told me that the necessary discount on an all-cash sale seems large, plus, you don?t want to take the tax hit. You say you need to get {the price or, to a lesser extent, cash that they say they want from the sale, before expenses} from the sale of your property. If our company can find a way to get you what you want, this house would be perfect for one of our first-time buyers. One who?s working with an affiliate of our company now, so they can quickly get to the point to where they no longer need us.
Here’s what I have in mind. We know this house can?t support itself as a rental unit. When we looked at the financials, we established that the amount available for payment after expense allocations is $ [around here, usually .40 of 1% of FMV]. In order to get the monthly payments up to where it can pay for itself, I need to be able to pass on some tax benefits to one whom if they weren?t buying, would be called a tenant. Otherwise, no renter is able or willing to pay "above market’ rents to subsidize this house. It would be foolish of them to consider it and our clients are trained not to be fools.
You can’t transfer the title to us, or sell on a land contract, without triggering the “due on sale” call in your loan agreement. Plus, if you did transfer title to me, and I transferred it to [my company], and I, or the company, got into a jamb with the IRS, the property could be liened, or some other judgment could attach to the title. In fact, in the future even you could get in some kind of now unforeseen trouble that would cloud the title in the event we had some kind of contract sale! So that won’t work for either of us.
What about a lease and option? Well, besides still having the title subjected to the risks of court judgments and possible “equitable title” issues that only lawyers want to think about for very long, I still wouldn’t be able to pass along the available tax benefits to the one that?s actually putting out the cash to pay your existing note interest and property taxes. Without saving the income taxes that would otherwise go to the IRS, our buyers can?t afford to buy. It?s the tax benefit that allows them to pay the money toward their mortgage instead of sending it to the government. The buyer?s cash is freed up so they can pay for the house.
At this point in time, there is only ONE legal way that I know that we can accomplish what we both want to in this arrangement.
It’s pretty simple, really. There are special provisions in the tax code that allow tenants who are working toward buying their home and are living in the house to deduct part, or all of their payments that they make each month. This doesn?t really affect you in any way since you?re not the one making the payments. It?s up to the buyer to comply with the regulations. If you?re technicality interested, I?ll show you the IRS Code later.
There are also special provisions in the law which exempt you, and DISALLOWS a lender from enforcing the “due on sale” provision in their security agreements when you transfer your property into your own living trust. When it?s correctly structured with the right title-holding provisions, and believe me, technical structure is everything, here’s what we can do:
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Our company will contract for your house and guarantee the performance provided for in our purchase agreement. One of our client buyers will move into the home, and your future buyer will sign an agreement to pay all mortgage payments, taxes, insurance, maintenance, and the upkeep for an extended period of time, say 3, 5, 9, or whatever years you?ll need to maximize your profits. As long as they are never in default under that obligation, we’ll give them a percentage of any future appreciation. Because you have effectively sold the house, this has nothing to do with your existing equity. Their right to the property?s appreciation value only begins from the day of our closing and only if it is part of their agreement. Are you with me so far?
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Here’s the GREAT part for both of us. Since our agreement will continue in effect after the closing, so that we can remove the property from the risk of any possible judgments of any kind levied against anyone, you, us, or the buyer, let’s have a title and trust company help you put your property into an Illinois-type, beneficiary-directed, title-holding land trust. You are initially the sole beneficiary of the living trust. And, you control everything that?s going on with the property because you are the only beneficiary.
The reason we’re putting your home into the land trust is because the IRS will allow a co-beneficiary who resides in the home, and who agrees by contract to pay the note, taxes, maintenance, and most other expenses, to take the active tax deduction for the interest and taxes paid! Once it?s set up in the right way, the buyers/tenants are entitled to these deductions under the Code, even though you still own the house and are entitled to depreciate the property if your tax advisor recommends it.
And here’s the clincher,
- We will work out a deal with a buyer/client of ours who will become a “co-beneficiary” in the living trust, and we?ll transfer the active tax deductions to him by making him contractually obligated to pay for taxes, the mortgage payment and property maintenance. You?ll still get to depreciate the property. To make sure we have an accurate record, all the payments he?s making for you will be made through a bonded, not-for-profit escrow collection firm, so you?ll know the bills are getting paid. We are going to have him put up a security deposit for possible late payments so that the company doesn?t get stuck with late fees, and, in turn, we will assume responsibility for his actions, and guarantee you that nothing he does will ever affect your financial security.
When the trust ends, the resident co-beneficiary, in other words the one living in the house, has the first right to buy you out. If the buyer is unwilling, or, by an act of God, is unable to re-finance and complete the transfer of title, the property will be sold to a 3rd party; probably direct to us, or perhaps it might be someone else. In any event, you’ll be paid for any “equity” remaining at that time {, plus xx% of the appreciation since the time the tenant moved in, took over the payments, handled the maintenance, and paid the taxes}. ? ONLY IF IT?S PART OF THE DEAL
Mr. Seller, you can appreciate that neither of us is an attorney. The paperwork for all of this is handled by North American Realty Services (www.landtrust.net), a company we use that’s done thousands of these; it’s all they do. I?ll call you with their phone number so you can give it to your advisers.
If you want me to, I’ll get started on a search right now to find our best possible client for this house. I met a young couple two days ago who I know would appreciate the opportunity to build some equity in exchange for paying all the expenses, and who will start making your tax and mortgage payments immediately. If the purchase offer is ok with you, I can get started as early as tomorrow morning. O.K.?
Great. Let?s complete the set-up forms, now.?
{Nail down the purchase contract.}
That?s about it. Mostly, I just listen. I only tell them as much as they need. I want them to realize that I know what I?m doing, but I don?t want to overwhelm or scare the sellers. I?ll do what I can to get the sellers most of their real equity over the next few years. I have no qualms whatsoever about draining all of the air of the sale, regardless of the purchase price. These appointments take longer, but these folks usually have more equity for me to play with, and less real need for all cash. If they are going to stick the proceeds on the bank anyway, they may as well place it as I direct. They?ll be further ahead and so will I.