I am looking for a consensus of which method is preferred and why. Both options: are low risk, presumably no money down (of your own), requires you to find another buyer (retail or tenant).
Under what conditions would you chose one over the other?
Thanks,
Debra
I probably speak for the majority here in that subject-to is always favored before lease/option. I say this because in subject-to you own the house… you can lease option it or offer owner financing and you don’t have to worry about the seller not signing closing documents. You OWN the house with subject-to… you can do whatever you want.
In addition, you definitly want to own the property. You can always put the title in escrow if you do a L/O deal but like I said you don’t own it. You get the tax benefits if you own the property. You may as well on a L/O but I don’t believe so. In addition, you can use the property as collateral when dealing with a private lender. If you L/O you’re limiting yourself. In fact if you’re not using private lenders, you should start immediately!! In my business I had a sweetheart deal that “would have” given me a $50k payday. However, I was using my own funds and couldn’t give the seller the measly $10k they wanted. That pissed me off enough to get myself moving to using private lenders. It’s easy and there’s tons of info products about it. Look on EBay for “private lending”. Also, some more friendly advice: if you buy a property “sub to” ONLY INSTALL A TENANT BUYER THAT YOUR MORTGAGE BROKER TELLS YOU CAN QUALIFY FOR A LOAN, PREFERBLY 100% FINANCING IN 6 MONTHS OF LESS!!! If not they’ll probably just waste your time and never cash you out. TRUST ME!!I KNOW!! I hope this helps and best of luck.
Submariner,
You have provided good information for me to use. The information about the Private Lenders on eBay is great and so is the advice about installing the Tenant-Buyer.
I have some other questions related to lease options that I haven’t found answers for yet:
Under what conditions would a lease option be preferable over a subject 2?
Who makes the mortgage payments on the property between the time you sign the contract and you get a tenant buyer into the property?
Who is responsible for major repairs to the property after the tenant buyer is in ( I realize the T/B will fix smaller problems like leaky faucets or doors that don’t close properly, etc. - what about the heating unit that breaks down)?
If the seller has signed a contract for a set purchase price to be paid when you exercise your option, what motivation would a seller have to put out that extra expense?
I am assuming that on a subject 2 deal the answers to the mortgage payment and the major repair cost questions would be you - is that a correct assumption?
Debra
For those of you interested in a more complete answer to my original question - which is better a Lease Option or Subject To - I have found a pretty good answer about this topic on this website in the “Articles” section (I found this after my original post).
Wendy Patton has a very good article “When to Use Lease Options vs. Getting the Deed”. It is pretty comprehensive and has given me a much better understanding of when to use which option. I thought I would share this with anyone who might be interest.
Debra
Can Submariner or someone else tell me what it means to “put the title in escrow” I’m trying to get a better understanding of how and when title to property is conveyed if owner financing is involved.
Thanks,
Bill
Debra, Wendy Patten has a good book that covers both methods for $20 and its at some librarys.
You can’t just buy with Sub2 unless the seller is willing to sign the deed to you and you want a lot of equity.
LO (lease option) are simpler but lack the tax deductions of ownership.You only want to do a LO if the seller is financially secure and sign a memorandum of option.
There is less chance of a DOS clause being called with a LO vs. a Sub2 but there are safe guards you should use i.e. land trust.
Once you own the Sub2 home there’s no looking back, but with a LO you have a choice.
Search this site more free info. on both topics. Herbster
id do both.
take over sub2 using a land trust then simulate a lease option within the trust.
i have the IRS code that i can give to the tenant/buyer’s CPA or tax attorney so they can take the tax deductions while leasing, without being on the loan, and without being on title.
i have a huge advantage over the lease option investors. i dont have to worry about the DOS clause either since i have the federal code for that as well.
i dont give rent credits and i make the 5% refundable.
nothing is applied to a predetermined purchase price.
seller, investor nor tenant/buyer can claim equitable interest.
In Ohio, a set up similar to this required the investor to be a licensed real estate agent. I suspect other states will come to the same conclusion if it ever gets before them. I don’t know how close your set up matches the one in the Ohio case, which was a Bill Gatten set up.
I’d be interested to see the code that allows a TB to claim tax deductions available to homeowners yet prevents him from equitable interest in the property, especially when the IRS claims a lease option is a disguised sale.
I hope the Federal code for your DOSC claim is not the Garn-St Germain Act. First problem is that any contract that changes the right to occupy the unit triggers the DOSC per the Act. Second, and more pressing problem, is the agency charged with enforcing the Act, the Office of Thrift Supervision, maintains the position that the Act only applies to owner occupied property. You have a very high hurdle to leap in order to get a judge to agree otherwise when a Federal agency has taken a contrary position.
im using the gatten method. i havent closed any yet but i do have several properties under a 90 non exclusive option agreement
i read that ohio article and the investor modified gatten’s documentation and didn’t use the system properly. what the investor did was unethical because he left the homeowner high and dry. the investor didnt even properly set up a contingency fund to handle the defaulting tenant and didn’t collect enough up front to mitigate that risk. also the investor didnt even try to remarket the property for a replacement tenant/buyer. it looked like the ohio board blackmailed the investor to write this article to clear out his fines and just put all the blame on bill because of his failure. that’s my personal opinion of that article.
i have an option towards beneficial interest of the homeowner’s land trust. i understand that you dont need a license when you have an option and purchase agreement with the homeowner. isnt this how people are doing wholesaling or lease options where it doesnt require a license since we’re making an offer as a principal for loss or profit? im buying on terms and reselling on terms(technically assigning a portion of my beneficial interest).
my purchase offer is towards acquiring a beneficial interest/personal property of the land trust. its NOT a purchase offer towards equitable interest/real property.
im not a CPA but here’s the code IRC163H4D
yes that is the federal code we can to give to a lender in case the lender does call the loan due. i know of 2-3 investors using this exact method did have the loan called and sent out this federal code to countrywide and wells fargo and both lenders apologized. i know one investor who calls the lender up front and tells them about the title conveyance and the lender had no problems with it.
wouldn’t doing a regular straight lease, or any type of lease option, contract for deed, land contract, wrap around, AITDs, etc trigger the due on sale clause because it changes the right to occupy? also it would be insane for the lender to call the loan due especially when the payments are being made.
gatten’s method has been working since 1984 with over 1200 transactions. i had bronchicks lease option course but i was still uncomfortable with the risks and pitfalls. im also aware of the common risks and pitfalls using lease options, wraps, AITDs, CFD’s, sub2, wholesaling/assigning etc, and i believe gatten’s method is the best that ive seen so far. after overanalyzing all of the creative financing taught in this forum, i prefer to use this. right now im just focused on making my offers, offers, and more offers and converting them into closed deals.
defcon,
I don’t quite see how the Internal Revenue Code concerning the home mortgage interest deduction goberns whether or not a lender can exercise its rights under the due on sale/transfer clause.
Perhaps there is another section of the federal code you meant to cite. If not, then this one went completely over my head and I need you to walk me through how this code section gives you grounds to prevent a lender from calling a loan due under the provisions of the due on sale clause…
im just a computer guy.
my disclaimer: im not a cpa nor an attorney
Because the would-be buyer is named as a co-beneficiary on the Land Trust and has contractually committed himself to all of the costs of ownership, he qualifies for the interest and tax deduction offered by the IRS as stated in IRC #163(h)(4)(D) RE. SPECIAL RULES FOR ESTATES AND TRUSTS
http://www4.law.cornell.edu/uscode/26/163.html
The Trust Assumption allows a transfer of ownership benefits without compromising the lenders due-on-sale clause. It is allowed and protected by US Banking law: US Code Title 12 Chap 13 [§1701j-3(d)]
http://www4.law.cornell.edu/uscode/12/1701j-3.html
let me know what you think
That letter didn’t reduce his fines. He still paid something in the order of $30K fines. Unfortunately, bad law sometimes becomes case law. It doesn’t really matter what the investor did. There is now case law regarding how the structure should be perceived. Every Gatten-type transaction in OH now requires a RE license. While not required, judges or regulators in other
states may use this case as precedent if there is a similar issue before them.
Wholesaling and straight lease options aren’t as complicated as the Gatten trust. It’s the complexity and the convolution that makes people uneasy. It shouldn’t be that complicated.
I have fears that the whole thing can be collapsed under the step doctrine. You are really splitting hairs here. The only asset of the trust is real property. How do you market your interest? Is it a beneficial interest of a trust? People don’t know what that means. They understand buying a home and that’s what you are selling. You are also claiming the TB has the right to tax deductions regarding the property, yet he has no equitable interest. That is contradictory.
Is that the right code section? That one is the home interest deduction. As to the lenders, have those cases been adjudicated? Everything is fine if the parties are happy. What if it doesn’t? I don’t want to pay $30K.
Yes, they do. My problem is the claim a transaction does not trigger the DOSC when it does.
I think so, but they have every right to call the loan.
I know a man that had been renting illegal loft apartments for 30+ years.
They only reason he stopped is a fire broke out and the tenants couldn’t get
out because the unit didn’t meet code specifications for emergency egress.
He was convicted of murder and will spend the rest of life in prison.
Gurus were pushing private annuity trusts for years, even though the smart
money said the claims were not valid and they were misinterpreting the IRC.
The IRS finally issues guidance because of the guru abuse and put the whole
industry out of business overnight.
It doesn’t matter how long something has been done or how many successful
transactions have been accomplished. Everything is fine when everything goes
according to plan. It matters how often something has survived a court
challenge intact. Gatten’s trust has failed the only I time I know where it
has been challenged. Do you have any examples where the set up was
adjudicated and survived?
Find an independent attorney and CPA to evaluate the structure. Use someone who has no financial interest in seeing it work or is involved with Bill Gatten.
I would agree the TB can take the deductions. I disagree that he has no equitable interest. How is he an owner for tax deductions, but just a tenant for contract purposes. Best case is that the judge agrees with you after a trial. Worst case he doesn’t. Bottom line is you don’t get an easy eviction if he doesn’t pay.
Take a good look and you will see that the exclusions don’t apply to contracts that involve the right to occupy the property.
Hi BLL,
I am looking for a couple of CPAs/tax attorneys to review this IRS code to get their professional opinion.
The only thing that the tenant/buyer will claim is beneficial interest since none of the beneficiaries have legal and equitable title to real property. That’s being held by a 3rd party corporate trustee which we pay them a monthly trustee fee to hold title on behalf of the beneficiaries. i wouldnt trust someone’s mom, dad, brother, sister, seller, tenant/buyer or another investor to hold title.
Tenant/buyer holds a beneficial interest in the trust and would give that IRS code to his/her CPA. I’d tell them to have their CPA look at the code first before even structuring the deal.
after the trust is created, title is conveyed between homeowner and their trustee only which shouldn’t trigger the DOS. the homeowner will retain “a” beneficial interest in their own living revocable trust and assign a percentage to investor and tenant/buyer as co beneficiaries. there’s a beneficiary agreement that will be signed with all 3 parties. then a separate occupancy agreement between trustee and tenant/buyer.
how is this not different from 3 people(seller, investor, tenant/buyer) in an LLC where it holds real estate asset and one of the LLC members will live in the property, make payments, repairs, etc? isn’t this how an equity sharing is done?
i get what youre saying about the ohio case. ill probably stay away from ohio until i can find a good attorney that understands how this strategy works. im in california so im not worried about ohio at the moment.
im having an easier time explaining it to a layman when it comes time to talk about beneficial interests and land trusts. im educating them on the risks and pitfalls first of a lease option or wholesale or contract for deed and then explain why we prefer to use land trusts to hold our interests. i encourage them to ask me questions so i can clarify or give them examples. if they dont get it, next! but you’re right though, its complex and hard for others to explain it, but ive jumped over that hurdle.
yes youre right. i dont market beneficial interest. no one knows what that is. the way i market is
just take over our payments, and we’ll give you one of our properties.
no down, no bank qualifying, no credit needed, no new loan
just 5% plus 1st month and its yours.
i got over 100 interested tenant/buyers within 1 month of advertising my properties that i have under option. unfortunately majority of these properties have high payments and bad loans. loan modification would be the key to cut these payments down to make them more marketable
tenant/buyer is a co-beneficiary with beneficial interest and leasing from the trust based on a triple net lease agreement. they’re entitled to take those deductions as a beneficiary based off the IRS code. they would need their own CPA before even dealing with us. that IRS code had nothing to do with the DOS clause.
in regards to my claim of the DOS, as i said, i just have to give a written letter with that federal code to the lender if they call the loan due on us. youre right about the lenders that can call the loan due but i am prepared for that. most investors or agents that i talk to who are doing lease options or wraps dont even care about the DOS. at least i can explain it to the lender saying that we’ve structure the homeowner’s property like a commercial type strategy using a triple net lease agreement within their own living revocable land trust. so it makes it a stronger performing asset for the lenders and mitigates the risks for the homeowners to avoid the burden of double mortgage payments, negative cashflow, landlording headaches. i would also tell the lender we’re sending payments to our trustee’s collection service to pay them the monthly mortgage. most would have to trust the seller or investor to make the payments and for all we know, they can just pocket the money and do rent skimming.
BLL, i respect your opinions and i completely agree where you’re coming from. these are the risks and im using gatten’s methods to mitigate these risks. i prefer to do it correctly using his documentation versus cheaply and quickly. some investors say that a land trust is not needed and investors can do what im doing in a simpler way. however i prefer this complicated method because im comfortable with it and it answers a lot of the risks and pitfalls most gurus never explained/taught to me. they’d either dance around the issue or completely ignore it. gatten has addressed them and its my preferred tool.
that 1 case wont stop me from doing creative investing and its just a matter of having a good attorney and umbrella policy to protect me. just as long as i have an option agreement and a purchase agreement, i would not need a license because i am a principal for loss or profit. also i’m in the deal for the long haul until new financing comes into play to cash everyone out. licensed agents are not principals in the deal not unless they want to participate wearing an investor’s hat. otherwise every investor would need a real estate license and FSBO’s wouldnt exist.
you might want to check in www.landtrust.net for any other examples of court challenges. there has been plenty of debates with land trusts and gatten’s method but i dont have time to go into it.
im just focused on closing my first gatten deal safely and correctly.
much respect BLL
defcon - don’t you feel nervous that you are educating homeowners on things you don’t fully understand? It is very dangerous business to provide advice/education on things we don’t master. I would be very carefull. You may end up in a lot of trouble if some of your advice turns out wrong and people gets in trouble because they followed it… Hope this makes sense. Good luck!
im confident with what i know. i just need to know enough to take action rather than procrastinate and overanalyze something that’s already a proven model. i have a risk chart that i show homeowners and tenant/buyers about the lease options, wraps, contract for deeds, equity sharing, sub2, etc.
where do you see that im struggling on something i dont understand? are you talking about the infamous due on sale clause? are you talking about land trusts? please let me know so i can clarify it.
there’s nothing hard about explaining what a non exclusive option is, due on sale clause, purchase agreement and a title holding land trust. the hardest part that im struggling with is closing a deal with a property that has good low payments and a tenant/buyer with cash.
also i give them the IRS code so they can give it to their CPA. at least they have something tangible to show to their CPA or trusted adviser. i also tell them to seek legal counsel so they can review my documentation and to let me know what they dont like about it so i can make adjustments or renegotiate the terms. some investors just take quit claim deeds or have them sign option agreement without explanations. there are also agents and investors out there that are giving rent credits and taking non refundable down payments and applying them to a predetermined purchase price which is pretty much a disguised sale. i bet that agent or investor doesnt even know the ticking time bomb they’re creating when a defaulting tenant/buyer claims equitable interest and has trouble evicting but rather a tedious foreclosure process. did the investor or agent educate the parties about the risks and pitfalls? maybe, maybe not?
i want to do these ethically, safely and of course legally to the best of my knowledge. i will not know everything but im always learning, educating myself and asking questions so i can become an expert as i get older.
im not giving legal or accounting advice. im telling them what i know and how it works and how it protects them and how it benefits them. its up to them whether they want to move forward or not. if they dont like what they hear, next!
i have a real estate attorney to review my trust documents and accountant to review the numbers, and a documentation department to facilitate the transaction.
the major pitfall with what im doing is the complexity of explaining these to a laymen just as BLL mentioned.
Keep doing what you are doing. You are educating yourself and mitigating the risks as best you can. Your diligence and honesty will serve you well, especially if something goes wrong. I disagree with you, but wish you the best of luck and hope you never end up like the OH investor.
Alvin,
From reading you have been studying this method for over 2 1/2 years without doing a deal. Now if you had done some deals, this would certainly make your arguments stronger. Your posts do not exactly give someone the feeling of confidence in this system of investing.
A recommendation would be figure out why you haven’t done any deals and I am not talking about excuses, I mean what is the real problem? I know a few investors that use the Bill Gatten method and it works for them, so it is not a matter that it does not work.
John $Cash$ Locke
hi john,
ive done 3 deals conventionally with credit. i made good money on those even though i didnt have much knowledge back then.
ive never closed a deal creatively with no credit.
coming from a computer background i had no sales skills and i didnt know how to negotiate or talk to people. i was overcoming my fear of everything. so i was learning that as i went along. i stumble a few times, made mistakes, learned from them and being persistent with what ive been doing allowed me to grow the thick skin and confidence. im just lacking experience big time.
when i got off the fence after picking up gatten’s system, i immediately got 8 properties when i first started using 90 day non exclusive options. although i had no marketing and advertising skills, they all expired. its like id get these properties under my option and then i would just stop and do nothing. i literally thought i was going to get fed with a silver spoon and get rich. well i thought wrong and i just laughed at myself. so i started all over again, picked up more properties under my NEO and thats the cycle im running through right now.
ive focused on networking with investors and agents and told them about what im doing in this down market, so they would send me referrals and id make offers on them.
the properties that i get typically have no equity or theyre severely overencumbered and probably have a bad mortgage with high payments which makes them unmarketable for take over. the reason why i put these under my non exclusive option because no one wants them and its easier for me to get them signed and to see what i can bear from my marketing/advertising.
im working on taking over sub2 a successful loan modification to make this system much more doable and marketable with the new lower monthly payments. ive been leveraging these properties to build my tenant/buyers list which has been successful and overwhelming in the past month.
now i just need properties that are available for sub2 or lease to own with good payments. so
i have 1 of 120+ chance to close one. just one.
Here’s my list of tenant/buyer just in the month of August.
http://www.preferredvalleyhomes.com/rb.xls
I’m consistently getting 5-10 phone calls/website form submissions each day about any other properties that are available for take over.
1/3 of my pool of tenant/buyers have 5% plus 1st month. The rest have 3% or less. They all understand they will take over payments based on my terms and they will get the first right to buy at future market value.
I have something good going and i have the key to this down market which are my buyers, but i’m lacking inventory of properties. im a generous guy and im willing to split any of my 10 profit centers 50/50 with an agent or an investor or an homeowner.
I have a full time day job and a wife. I squeeze in phone calls and sending out non exclusive options and purchase agreements during my breaks, lunch hours, and weekends. I’m working on automation to keep my pipeline full of leads by leveraging creative agents, bird dogs, investors who’s doing these full time and can refer me deals they typically pass on.
I tell homeowners and tenant/buyers to refer me leads of anyone that may fit my full price offer or properties that are available for take over.
Working smarter or working harder?
My real problem is I’m not working hard enough.
What do you think? Fear of success? Performance anxiety?
BTW: I’m not going to quit my day job. =)