Lease Purchase--TX

General Real Estate Investing
1

Would there be any problems with a 12 month lease purchase as long as the contract was put in place before January 1, 2006??

Thanks
Fikes

2

Are you in Dallas, Texas?

If so, I am trying to get some info on the new Lease Purchase Law in Texas. Do you know what it is or how I can get info on it. I am in the process of purchasing a pre-construction in Southeast Dallas and the home is to be placed on a lease purchase to a tenant buyer for a year by the Property Management company.

Please advise.

Thanks.

RDavis

3

The information on Texas lease option laws can be found on my website at “http://garymialocq.com/landtrust/texas.html”.

If I understand the Texas legislation correctly, this bill converts ALL residential home leases containing a purchase option into “executory contracts”. An executory contract is considered a sale under IRS tax rules, whereas a lease with option is not. This will result in DRASTIC adverse tax consequences to investors who cannot take advantage of long term capital gains rules.

Second, the bill requires that any seller of a property under an executory contract own property free and clear of all liens. There are many cases where this would be impractical, since creative financing is often a solution to a property that is difficult to sell.

Restricting the means of sale is going to result in more foreclosures in Texas. It will also limit the options of many low-income buyers who have no other means of buying a home than on an executory contract from a seller.

The only means of owner financing left in the state of TX will be:

  1. Sell subject to an existing loan and taking a wrap (aka “All Inclusive Trust Deed” or “AITD”)

  2. Let the buyer assume your note and take back a second.

In my opinion, your best alternative is a NARS Land Trust.

4

So as I understand it, outside of options:

  1. Sell subject to an existing loan and taking a wrap (aka “All Inclusive Trust Deed” or “AITD”)

  2. Let the buyer assume your note and take back a second.

The lease option is dead? I have a personal property that I’d like to allow a lease with “purchase credit” on - which could be exercised at a later date. As I read this, this is now against the law in TX?

5

The following is an interesting read regarding L/O’s in Texas (right click and “Save as …”, or left-click and open with a DOC reader).

http://www.jeremybrandt.com/jeremy_brandt/files/leaseoption_commentarydunkleman.doc

6

Funny… every single agent I’ve talked to is still perscribing the “lease option”. I got an offer from an investor (wholesale price) to take a property I own on a lease option also. Clearly this hasn’t made it’s way through the RE community…

It’s already thrown one deal out the window… ???

7

I want to reply in detail but I am prevented from advertising my own services so I’ll try to keep it as boilerplate as possible. Our NARS PAC/NEHTrust System was created from day one to abide by and follow the law, not circumvent it. No configuring or tweaking is necessary in Texas or any other state. What we offer to Texas investors is a unique asset management strategy, the ability to place the property into a NARS Land Trust to effectively provide the safest and most secure means of transfer of ownership interest.

We asked our attorneys to look at these new Texas laws and analyze them for what they’re worth, while understanding clearly that such laws are not intended to prohibit the formation of trusts or the letting of one’s own income property. Our type of conveying is not of realty but personalty, and does not pertain to the execution of a contract to purchase real estate.

An analogy might be that of the leasing of a car wherein the lessee has virtually 100% of the benefits of ownership of the car without a title transfer; but does never own the vehicle until/unless he or she would decide to buy it for its Fair market value at the termination of the agreement. The lessee has the first right to purchase, but is under no obligation to do so, and receives no more of a contracted bargain price than would anyone else buying the same car if the lessee opted not to.

The “substance over form” argument should come into play only if the simultaneous contracts were fully dependent upon one another to accomplish a stated objective. In our case, the lease agreement and the trust document are independent of one another.

If the first right to purchase clause if of particular concern, I might suggest something like:

“When the trust property is offered for sale upon the trust’s scheduled termination date, such offering shall be at no less than full fair market value as determined by a bona fide MAI appraisal, or by any other means of evaluation mutually acceptable to the trust’s beneficiaries. The right to purchase the trust property at that value shall first be offered to any beneficiary who would, at the time of termination, be a resident in the trust property: following which, prior to an offer for sale on the open market, the right to purchase at the then fair market value would go to any other beneficiary making the highest offer.”

We have run across this problem before, and the resolution is an easy one; that is, the hurdle that we have had to overcome in many of these cases has been that these transactions look to the untrained eye like sales-leasebacks, but they aren’t. The Texas law deals with sale-leasebacks and not transfers to Trusts followed by leases either to a beneficiary or a third party. In other words, in these transactions, there is no “sale” which helps to avoid the due on sale clauses and tax reassessments.

What Does Federal Law Say?

The Law (The Federal Depository Institutions Act of 1982) strictly prohibits ANY lender from taking exception to a borrower’s placing its property into its own inter-vivos (living) trust (such as a Title-Holding Land Trust) and appointing a 2nd party to function as a co-beneficiary or remainder agent. Further, there is nothing to prevent those same co-beneficiaries from leasing the property out to any one they may choose…say, to the 2nd co-beneficiary, for example. Overall, the process described here creates what is tantamount to a legally constructed, and very safe and well-shielded ‘Wrap-Around Seller-Carry’ device. Since the original owner of the property has named the second party as a beneficiary in the trust and leased to the property to him or her under a triple-net lease (i.e., net, net, net lease, wherein the tenant pays mortgage interest, property tax and handles all maintenance), the resident beneficiary (or investor co-beneficiary) has obtained all the benefits of a sale… without there actually having been one.

The IRS considers the Lessee who is paying the mortgage payments to be an owner for tax purposes and he/she is entitled to writeoff the mortgage interest.

8

Gary, I found information on your site.
Nice cut and paste job, BTW.

I haven’t gone over your findings, but agree that potentially this situation could be a “loop hole” - or clearly abide by the law as you point out.

Personally, I’ve got no idea how to about doing this or the time and cost involved… Can you give us a short rundown, outside of taking your course?

9

The Cost

Simple Trusts:
Trust Agreement:
$199
Deed:
$125
***Any extra documentation that is added to a Simple Trust is charged on a “per-document” basis. Each document usually runs $199
THIS IS TO PLACE YOUR OWN HOME IN TRUST.

THIS IS FOR HOMES IN WHICH YOU WANT THE BENEFITS OF A LEASE OPTION WITHOUT THE PITFALLS.
PAC/NEHtrust:
NARS Facilitation Fee:
1% of the Mutually Agreed Value
Monthly Trustee Fee:
.5% of the MAV per year (divide by 12 to get the monthly amount)

There is a minimum of $40 per month for this fee

Also, for PAC/NEHtrusts, you will be charged for the follwing items IN ADDITION to the NARS Facilitation fee:

  1. Accounting fee - $100
  2. Legal Review Fee - $150 (we send all of our documentation to our CA attorney for review)
  3. Trust Set-Up Fee: $500

The average cost for a transaction similar to a lease option is usually between $1200-$2000 and paid out of the non-refundable “Option Deposit” paid by the Lessee. This is NOT an option to buy the property, but an Option to purchase a beneficiary interest in the trust (personal property).

TIMEFRAME

The process is fairly quick and usually has taken me a couple of weeks. Here’s the procedure:

  1. A (title-holding) land trust is created in the name of the current owner (the settlor) who holds a 100% beneficiary interest. No one else is involved, only the owner and his/her trustee.

  2. Escrow is opened to facilitate the assignment, in the existing land trust, of beneficiary interest to co-Beneficiary.

  3. A Beneficiary Agreement is created between beneficiaries wherein the property’s Mutually Agreed Value (MAV) is established in order to determine settlor beneficiary’s beginning Beneficiary Contribution (equity and/or any non-recurring closing costs, etc.). This documentation also reflects all co-beneficiary contributions (equity contribution and/or non-recurring costs).

  4. A Possession and Occupancy Agreement (triple net lease) is executed between the trust and the 2nd co-beneficiary (responsibility for collections and disbursement are then assigned to PAC Management).

AT THE END

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

  5. The co-beneficiaries 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.

It sounds complicated but really is not and the legal review of every document by NARS is appreciated. What I especially enjoy about this method is that I am never on title nor on the loan. Hope this helps.