Current residence and I want out!

General Real Estate Investing
1

I currently own the home I am in now for one year and I want to sell. I have explained this situation to several people with different advice. Now, I have also discussed the idea of doing a contract for deed or a similar process with my father. Of course he thinks I am nuts and I knew that was going to be the case. Also I have a prepayment penalty on the mortgage and also a 2 year arm that will adjust in January of 2007.

His biggest objection is what if they absolutely trash the house? What if they default it can take months to get them out?

I am pretty sure that with a contract for deed you can evict much more quickly correct? Any experiences with this guys?

This is quite a bit different in my opinion because I am not doing a sub2 or a land trust this is my credit and mortgage on the line.

Thoughts and opinions are appreciated.

2

Hi Sean,

I will tell you what I did when I was in a similar situation. I purchased a house in 1999 and lived in it. I refi’d in 2003 and pulled cash out. Then, in 2004 my wife had a serious injury and we were forced to move to a smaller property. Because of the refi/cash out, there was a prepayment penalty that I wasn’t willing to absorb.

I put the house in a land trust. I found a Tenant/Beneficiary who took it subject 2 and became an owner (beneficiary) of the trust. His down payment included only my closing costs (costs of the trust) plus 3 monthly lease payments. This was not a violation of the DOSC because the land trust is protected under Federal law.

I had no worry about him trashing the house as he was getting the tax writeoff and sharing in future appreciation. Since he was on a triple net lease, I had no responsibility for maintenance and repairs. He made the payments on time which improved my credit score.

Had he defaulted, it would have been a simple eviction as he had no equity in the property, only a beneficiary interest in the trust (personal property).

Last week he completed the purchase of my property (as an owner of the trust he was able to refinance). I’m not trying to sell you anything. I am just telling you my experience in addressing the issues you raised. Best of luck to you.

3

Thanks gary I appreciate the input. I realize that you aren’t trying to sell anything but rather trusts are the vehicle in which you choose to do business. What happens when you get that really bad apple who does end up defaulting? What is the length of the process for eviction. I read an article that John wrote about a five day eviction that he had to do on a sub2 deal. Is this still the case, is it state specific?

4

Sean,

You ask any expierence, not just once, but hundreds of times in helping folks in similair situations.

When you sell with a Contract for Deed it says what you will be doing with your buyer, you are contracting with them and when they fulfill the terms of the contract they will get the deed.

I set mine up on a two year refinance and explain that if they make the payments on time that lenders look very favorable on this when granting them a new loan. I work with them and with one of my mortgage brokers who understands the Subject To method of investing, so everything is done to help them aquire the home when the times comes.

You will get a lot more money down as you do not have a tenant thinking they are just a renter. You will find when you say lease or tenant the buyer thinks of renting, what you will have is a person who is realizing the American Dream of true home ownership.

They can deduct their interest paid on the property on their income taxes and you will find as I have many times they are more apt to make improvements to the property are are responsible to fix anything that goes wrong with their home.

Should something happen that the buyer is late, I know the magic date to contact them and show them how easy it is for them to move out, leave the property in great condition and pick up their reward, which is nowhere close to what they put down. I have never had to do a Judicial Foreclosure.

One way to look at it is to make some good money for yourself, not that I am against sharing, but remember you are taking a risk with a buyer as they are not furnishing a credit application only a nice chunk of change down, plus a positive monthly income, plus appreication added to the total sales price, so let me relate this to most people who purchase using their credit.

There are folks who get 0% interest loans on cars and those who pay 21%, it does not stop anyone from purchasing, however it is based on a persons credit by what interest rate the lender charges and this is what you are, so you must compute in the risk factor.

John $Cash$ Locke

5

Sean,

Why not kill two birds with one stone? Let your father move in and be your Tenant/RB and sign a triple net lease. Give yourself a $200 per month positive cash flow.

Now he doesn’t think you’re nuts, it’s a good business move – and he gets all the homeowner benefits including being able to write off the mortgage interest and property taxes.

You might even take it one step further. Tell him that if you will sell him your 50% of future appreciation for $10,000 (or whatever amount you want) now.

You have received $10K upfront, you are making a $200 per mo. positive cash flow for 36 months or another $7,200. You don’t have to worry about your tenant – he’s responsible for maintenance and repairs. And . … Best of All – You don’t collect rent payments from your dad. He pays the Trustee who pays the mortgage and sends you your positive cash flow every month.

Title to the property rests with the Trustee. A co-beneficiary owned trust property is very solidly protected and shielded from actions associated with any party’s: past bankruptcy; creditor claims and civil judgments; litigation in marital dissolution; Probate actions, and even state and federal income tax liens.

Best of luck to you, Sean

6

Sean -

Why not do a Lease Option? Get a good upfront payment that will cover any missed payments down the road. If they do stop payment, pay them a couple hundred buck to leave and find someone new with another upfront payment or a legal eviction is all that needs to be done, a couple days downtime and your back marketing the property.

Make the deal work for them too and everyone is happy. They’ll keep paying on their dream home and take care of the place.

Best of luck.

7

A couple of reasons as to why he should not do a lease option:

  1. His name is still on the mortgage and the payments will count against his debt-to-income ratio if he applies for a new mortgage on another house. If your property is in trust it will not be listed under real estate owned on your new application but under “stocks and bonds” as you own personal property.

If it is triple net leased, your trustee will write a letter to your new lender. The old payments won’t affect your debt-to-income ratio because you don’t have the traditional liability for maintenance and repairs or the exposure to vacancies. My trustee has done that for me successfully and it is a standard feature.

  1. With a lease option, if he is giving his tenant rent credit, the tenant may be considered to have an equitable interest and he may be required to foreclose, rather than evict.

The best advice goldthread gave you is to make sure the deal works for everyone and to make your tenant happy. Nothing makes them happier than all the benefits of homeownership.

8

Gary just to clarify, I am not putting my father in the house. We were just discussing the process and how it works. I will be putting another RB or resident in the property when the time comes hopefully no later than April 1st.

9

Hi Sean,

Then just apply the same principles as outlined in my first answer. It’s exactly what I did and from my experience it worked out just fine. My tenant’s on-time payments on my credit elevated my score significantly and the trustee letter was readily accepted by my lender.

10

I have a question on a deal when the buyer gives you a down payment. From my understanding, once the buyer is able to refinance the home for themselves none of that down payment is credited towards their financing. Doesn’t this ever come up as an objection? If so how do you handle this?

11

Your understanding is not correct. My buyers don’t make a down payment. They pay 3 months lease payments, plus closing costs (which includes my costs for setting up the trust) He assumes the existing financing subject 2. At termination (See #5 below) :

  1. The property is either sold by the trustee at FMV, or purchased and refinanced by co-beneficiary at FMV.

  2. All loans are retired (out of the proceeds of the sale or refi).

  3. Costs of disposition are paid (e.g., escrow, re commissions, etc.).

  4. The settlor beneficiary (Seller) then is refunded its beneficiary contribution (beginning equity and non-recurring startup costs).

  5. The co-beneficiaries (Buyer) are refunded their beneficiary contributions (non-recurring startup costs, equity contributions, escrow fees, any part of commissions paid at inception, etc.)

  6. ALL remaining (net) proceeds are distributed among beneficiaries in proportion to their respective percentage of interest held.

12

Sean,

I sell you a property for $105K and you give me $5K down so you will need to finance $100K when required to do so.

The down payment is not credited to the financing, but the total purchase price, nothing to explain for getting a down payment, unless the objection is they don’t have it.

John $Cash$ Locke

13

Got it guys. Gary my understanding is correct, depending on whos method we are talking about. With yours we use a RB with a triple net lease and require three lease payments and closing costs. With Johns method using sub2 and a contract for deed there is a down payment.

Looking at it from the buyers perspective I think that I would rather hear that I am making a down payment opposed to just making lease payments that in a way are a expense that I will never recoup. This again instills the idea of homeownership in the buyers eyes rather than a lessee or renter. I would love to hear what you think.

14

The buyer recoups his closing costs at the termination of the trust, so they are refundable. He is also able to writeoff mortgage interest, property taxes, etc. and share in future appreciation. The IRS recognizes my lessee as an owner of the property for tax purposes because he is an owner of the trust.

15

Gary, since you mentioned the IRS let me ask you this. When are you required to pay income taxes on any gains that are realized? I will make an example of what I mean as this always helps me understand better.

I create a land trust or sub2 agreement with the seller in January of 2006. I then find a buyer/ RB / lessee whatever you want to call it for a term of let’s say two years in February of 2006. From what I understand, you will have to pay taxes based on the amount of the agreement. But, if you don’t receive those gains until the buyer gets financing of their own doesn’t this create problems? This is really the only thing left that is hanging me up in the whole process as paying 30% income tax on these gains is a huge thing to take into consideration for planning.

I know this isn’t the tax forum but IMO this must be discussed in order to determine how we will structure our deals.

John please let me know your opinion on this as well as it pertains to contract for deed and sub2.

16

Sean,

Taxable event doesn’t take place at the entry of the trust or the assignment of beneficiary interest. It takes place at the settlement of the trust. You can delay Capital Gains tax on a sale for years while leaving IRC Sec. 1031 exchange benefits fully in place.

17

Sean,

There is only one person on this board that I know and trust as far as tax advice and that is DaveT, if you need help I would contact him.

Just something about a real professionals advice when it comes to tax matters. Do your self a favor.

John $Cash$ Locke

18

I agree with John. I am not a tax expert, Sean.

19

I am not asking for tax advice just simply how all of your deals have been treated when it came to taxes. I am not asking for statute, tax code, or policies.

Simply put, in all of the deals that you guys have done surely you know what the tax implications of those deals were right?

Gary I have read your list of benefits of NARS trusts that you just cut and pasted from your site # 17. How about a real example of how this has worked for you.

Please don’t take this the wrong way but I am capable of reading on my own, the reason I come to the boards is for real world experience and knowledge from others.

20

Sean,

In response to your question:

I purchased the house in Coarsegold, CA (halfway between Yosemite and Fresno) in 1999 for $175K – a 3/2 on 3 fenced acres, divorce case, slight fixer. Cleaned it up, painted, added a room. I put it in trust in 2003 and after my wife’s injury necessitated a move to a smaller house in 2004, I located a Tenant/RB.

Agreed upon value ($389K). I owed $256K (had refi’d a couple of times). My tenant took over my 1st mortgage subject 2. I traded him a 90% beneficial interest in the trust for my equity ($125K). He put $35K down as a non-refundable deposit and I allowed him a credit of $10K for deferred maintenance. We created a note for the balance of $85K, whereby he paid me $1000 per month for 3 years with a balloon due upon sale. Security for his note was his beneficial interest in the Trust. I registered this note with the UCC.

On January 30, 2006 we closed the sale at the current market value of $410K. Because I lived in the property for more than 2 of the past 5 years, my profit of $235K is exempt from capital gains taxes. If I had not lived in it for that length of time and not been eligible for the exemption, I would have done a 1031 exchange to defer capital gains.

Hope this info helps.

Da Wiz