Wow, are these fun to read and learn from.
I recently started investing using a sandwich L/O. (so far 11 properties in 5 mo). I make sure my Lease and my Option are on the same form with my seller. On the other hand, my forms are separated with my tenant/buyer. No lawyer told me to do so, just made sense. Make it look like I’m buying the house from the seller (so he can’t “evict” my T/B) and make it look like my T/B is just renting. Maybe I should get leagal advice (or psyciatric).
Typically I’m able to get 1-2% as an upfront payment which I always count $350 of that toward a refundable deposit (minus $100 carpet cleaning, if they do not decide to buy) again keeping with the “their renting” theme. So far I have not had the benefit or frustration of getting one my T/Bs to purchase/refinance. I am working with a couple of banks to help this go smoothly when the opportunity presents itself.
I must say, Mr. Locke, I respect your experience and advice. You always seem to put things in perspective. I am curious though about the whole lien on the property by the seller and how to mitigate this risk. I know very little about trusts and I’m still learning so I can’t speak to them with confidence (not that this sounds like the way to go) but… It’s a bit un-nerving to know these great deals I think I have may not be as great as I’m assuming them to be. Knowing that I’ve been able to help quite a few sellers from damaging their credit, foreclosure, etc… I’m worried these same people I helped may get a loan with the little equity they do have or worse yet get 125% equity loan on the property I now control over creating a tough situation down the road when my T/B decides to buy.
Any guidance here, be it reading material or an opinion would be beneficial.
Thanks in advance and good luck to those in Texas!
Do you happen to be my brother who has the same name and initials? A couple of points in response.
Tax Writeoff. In a trust, the buyer is always entitled to take the mortgage interest writeoff according to the IRS.
Collecting Payments. In the trust, the Trustee collects the rent and makes the payments. Property management is the responsibility of the Beneficiaries.
Buyer refi at the end of 3 years. It is a given with the trust. If your buyers in a L/O are able to refi, it is because they are considered to have an equitable interest in the property. That is why if they should go in default, you may have to foreclose. Eviction is not available if that is the case.
Maintenance and Repairs. The big difference I have found is that the tenant in a trust is not only getting the tax writeoff, etc., but is sharing in future appreciation. “Getting the property back” is rare. If that happens, we always have two payments in reserve, and it is a simple eviction process. We can then easily find another tenant. I’m not saying it can’t happen, but it is rare.
Land Trusts and the DOSC. With all due respect, Raj, land trusts do not violate the DOSC. That is not my opinion, but the law. Garn-St. Germain, section (d) (8). That’s why investors use them.
Oh, and by the way, I don’t sell the trusts, I use them to acquire and manage my properties. Thanks for your interest and good luck, Roger.
Glad to meet you and thank you for your kind words.
This is the way I see it. Many new investors start out using the Lease Option method until they discover it is just as east to get the deed to the property.
This eliminates anything from happening to the property, liens or encumbrances from attaching to the property through what your seller does after the point you record the deed.
This gives you total control of the property and in our business it goes along way in protecting the investor and our buyer from having to explain why a lien or encumbrance attached to the property come time for the buyers to exercise their option.
Seems like you are doing a great job thus far and if you can do 11 deals in 5 months then I would say “great job”, just make sure everyone is covered legally and we should be seeing you on the Guru Circuit in a few years.
Trusts are structured in various ways. Some have more than one beneficiary, so these folks like to split their deals up with everyone and take less money, however, this is not my way of thinking. So if you decide to use a trust make sure you are in control and don’t give away your hard earned money to others. If you want partners structure your deals with entities.
Control my friend or “be in command of your deals.”
In my current L/O contracts I can give the property back to the seller at any point, no questions asked. I make this perfectly clear to the seller before they sign…they run that risk. Obviously I try to get another upfront payment and put someone else in the property but if the first of the month rolls around and I don’t have a T/B lined up, I can give the property back. Now depending on the deal, I may eat a months rent and pay with my own cash if the property shows well and there’s a good backend profit. With a Subject To, I’m stuck, I dont’ have that option…right? If a T/B bails on me I must cover the payment to the seller. If I don’t it turns into a foreclosure situation?
John,
I’ve seen many posts recently arguing the validity of both land trusts, lease options, subject-2, etc. Given your knowledge of sub-2’s and the experience in the field maybe you can settle settle this argument and inform the board once and for all. “HOW DO YOU AVOID THE DOSC”. We have heard everything from “the landtrust dosn’t violate the DOSC due to different law’s,regulations, etc.” up to “you must inform the lender and if you tell them they won’t care”. Please provide your insight on the matter since it seems to be a deadlocked issue right now. Thank you in advance.
It’s not a deadlocked issue at all. The ONLY way to legally avoid the DOSC using a subject 2 is a land trust. Lease Options ALWAYS violate the DOSC. Don’t take my word for it. The last time I communicated with John he was leaving for Florida to take it easy and go fishing. I did find some past quotes from March of 2005, so perhaps JCL’s input will be of some assistance to you in clarifying this issue:
“If the bank finds out I do not think it would make much difference whether it is a Subject To or Lease Option a tranfer is a transfer. I have no statistical information to back up my statement, but most people associate the DOS with Subject To investing, probably because the Lease/Option folks have done a better job of covering up the fact.”
John $Cash$ Locke
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Here’s another: "I think you need to do a little more detective work, as to what triggers the DOS clause because it is a transfer of interest not the title.
(d) Exemption of specified transfers or dispositions
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
So, Lease/Options fall under the DOS clause.
John $Cash$ Locke
I hope this helps. John is using the Garn-St. Germain Act of 1982 to demonstrate that lease options are a violation of the DOSC. We know the same law makes subject to’s a DOSC violation also. Ironically, it is the same law that exempts land trusts and makes them legal for the rich and famous.
Wow there are lots of important issues to look at with L/O.
It sounds like some of this may vary by state. However, they all sound like they could be a major setback if not prepared for and handled properly.
Can anyone answer this question though???
[b]Is there a certian amount of money that the investor needs to give to the motivated/distressed seller in order to make the contract legally binding in the state of FL???
If so, is it the same for L/O, Straight options, and purchase contracts?[/b]
I am interested in starting a matching service for L2P deals. I would bring together people that want to LP their homes with T/B. Any ideas on where or how to start something like this. Any ideas will help!
