NARS trust in TEXAS

General Real Estate Investing
1

Hello everyone, I am a beginner investor in the Houston area, and I am in serious need of mentorship. So here it goes…

About the new L/O law:
Is getting around the law as easy as separating the contracts (lease and option) and making no reference to one another? Some investors would lead you to believe this way, but I am hesitant to just jump into a deal on my own interpretation of the law. I have talked to some RE attorneys who seemed like they had no idea of what I was saying. It seems like I will talk to one who will tell me to talk to someone else, then someone else and so on. If someone could refer a good attorney in the Houston area (who has worked with these types of transactions and knows the new law), I would greatly appreciate it.

So maybe simply separating the contracts is deemed to risky in Texas nowadays. Would a seasoned investor in Texas rather buy Subject-to and wrap to another buyer or do a NARS trust. I know these all have risks associated with them, I am just looking for advice. Again I am new, so be patient with me.

Thanks, David

2

Hi Rendon,

To answer your question, The NARS Trust is 100% legal in Texas. The new Texas 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.

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This is the response of our attorneys to the question you posed:

The NARS Trust 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 totally independent of one another and do not refer to one another.

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 Trust transactions, there is no “sale” which helps to avoid the due on sale clauses and tax reassessments.

Rights of first refusal and options are different things as well. A right of first refusal means that if a seller receives a bona fide confirmed offer from a third party, the person holding the right has the opportunity to match that bona fide offer, however, there is no obligation by the seller to sell to the person holding the right for any amount other than the bona fide amount. An option is a contractual right held by the optionee that requires the seller to sell the property for a certain price dictated by the option.

In our scenario, the beneficiaries only have rights of first refusal, not options.

3

Very good information. I appreciate it.

4

it would seem to me any option contract that had as an underlying commitment that the person with the option to buy has to satisfy the underlying loan before being able to buy. This way they still have the right to purchase, but unless they can pay off in full the underlying loan it becomes invalid.

Wouldn’t this be the same thing? And if the lease and option period was less than 3 years it would save the DOS thing.

How about this scenario?

Normally the smart investor would record his option for the future. But instead of recording the option at the court house, get it notarized, have a Confession We Give signed by both parties pertaining to the details and have it held in Escrow at a Lawyer’s office. This would be a lawyer retained by both parties to act as mediator in the deal. Then the lease and sub lease, which would be less than 3 years, would be fine and either have an agreed upon date limit like any option that the parties involved have to perform. The original owner has full rights until the exercise of option, if it does get exercised, barring the rights of the lease tenants.

5

Framer35

You are wrong about an option contract being legal in Texas no matter its length. A lease option contract is now illegal in Texas. Period. 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.

The bill also requires that any seller of a property under an executory contract own property FREE AND CLEAR of all liens.

The NARS Trust is legal because its type of conveying is not of realty but personalty, and does not pertain to the execution of a contract to purchase real estate.

I suggest you Google an attorney in Texas named Brian Dunklin who is an expert on the legality of land trusts in Texas and has written a lengthy article on it online. I don’t have the link available.

6

Framer 35,
Gary is 100% correct in his interpretation of current Texas law. Recording an option violates the lenders security interest in the property, regardless of the length of time. Period. The 3 year lease is a specific exclusion within Garn-St. Germain.
As long as you’re somewhat prudent in your dealings in Texas, you’ll be OK. Don’t try anything extreme l(ike a FC Bailout where you leave the owner in the home,) unless you have several thousands to spend in legal fees being the litmus test. Texas just became a huge ATM Machine for those that know what we do. I’m working on a few deals there myself.
Regards,
Dave

7

that is why I wondered if you merely had an agreement held in escrow, and did not record the option, but used a cognovit note, or confession we give. what i said was, " But instead of recording the option at the court house, get it notarized,"

I understood that if you recorded it it would be the same thing.

I still don’t understand the trust thing, at least with all the variations, such as “The Equity Holding Trust™”, PACTrust, NEHTrust™ etc.

I found one definition in the paperwork Gary sent me.

"Overall, the Equity Holding Trust™encompasses a combination of documentation including, but not limited to:

  1. the Land Trust,
  2. an Assignment of Beneficiary Interest, "

the assignment of beneficiary interest mentioned above, Gary already told me was illegal and violated the DOS.

these trusts still involve a buyer and a seller and apparently an assignment of beneficial interest.

If you are not recording it, you are hiding it. Is that fraud? I just wondered if it was any different from escrowing an option agreement for the future. At least with the later it is merely an option, no actual transfer until the time agreed upon if all conditions are meet. After all what if the conditions are not met. Then the transfer would never take place. And if it did, then the underlying loan would be satisfied. But in either case the residency issue would be a problem.

but that is okay, I am only concerned with Michigan. And despite, what Bill Bronchick, Bill Gatten, and Gary say, it is not recognized as a real transaction. While not specifically against any statute in Michigan, doing so sets you up for fraud charges. And as I pointed out using a trust to transfer the beneficial interest still is against the DOS. That is per the Garn-St. Germaine Act. Setting up a trust is not.

Mind you they might not know about it. But if they decided some time in the future to investigate any properties put into a trust, and see who was living there…

That’s okay, I just need to find an easy way to invest in Michigan. And I don’t think a Land Trust, NARSTrust, pac Trust, or any of them are very easy. How would you get a seller to follow all of that I don’t know.

8

By the way gary, I do thank you for the info link.

Seriously, for me it is confusing. I prefer plain language and linear, logical thinking. To me A is A. The trust so far as this Nars sounds, seems contradictory. Either you are transferring the beneficial interest or you are not. It can’t be both.

9

The key is transferring beneficial interest (personalty) and keeping recordation off the books other than the transfer to the trustee (Which is completely kosher under Garn-St. Germain). The assignment of beneficial interest (as Personalty) requires no public recording. Hang with it, you’ll get it.
Regards,
Dave

10

David

The funny thing is I told Gary, that is the way my cousin does it, and it sounds like the same way Bill Bronchick does it. However when I explained that to Gary, he said that was illegal.

I understand that it is in Texas we are talking about. Texas has weird laws. Don’t be a repo man, because the “owner” can legally shoot you for repoing their car for the bank. I wonder can a person who bought a house from you on contract shoot you if you try to foreclose on them?

Either way, in Michigan, if you do this and then in turn sell it to someone else, L/C or lease option (both violate the spirit of the DOS by the way) or whatever you set yourself up for fraudulent conveyance.

The trust is legal, for the first parties. The trustee and the Beneficiary. But as soon as the assignment goes in it becomes shaky. If the seller never gets cold feet or listens to a Lawyer you should be fine. However if the seller all of a sudden feels they were cheated, no CYA letter will cure it. The Courts in Michigan do not recognize the transfer of interest because the title ownership change was not recorded. You on the other hand have entered into a legally recognized form of contract, the L/O or LC with someone else to sell to them something you do not own. This is fraud. Using the trust to get around the DOS is silly, and full of potential consequences.

If you owned up to the fact that you, or your corporate entity, have taken title to it the worst that should happen is you have to come up with financing

So when you say with one breath that transferring the interest is illegal and then in the next that it is legal I wonder about the validity of the advice. Call it what you will “personality” or what ever. “A rose by any other name…”

11

sounds like the same way Bill Bronchick does it…
Kind of, with several key differences, most inportant being trustee set up and the settlor retaining beneficial interest.

Either way, in Michigan, if you do this and then in turn sell it to someone else, L/C or lease option (both violate the spirit of the DOS by the way) or whatever you set yourself up for fraudulent conveyance…
Agreed. I’ve never said otherwise.
The Courts in Michigan do not recognize the transfer of interest because the title ownership change was not recorded. …
Incorrect, the transfer of title to the trustee is recorded in strict adherence to Garn-St. Germain.
…entered into a legally recognized form of contract, the L/O or LC with someone else to sell to them something you do not own. This is fraud.
You must have me confused with someone else? I don’t LC or LO. I do, however, control the property through my beneficial interest, lease the property on a NNN basis and offer the tenant first rights to buy the property at FMV. Doing so in this manner has no DOS ramifications.
…If you owned up to the fact that you, or your corporate entity, have taken title to it the worst that should happen is you have to come up with financing .
Key to what I do is I never take title to the property, the trustee does for the benefit of it’s beneficiaries. This is for the protection of everyone involved.
…So when you say with one breath that transferring the interest is illegal and then in the next that it is legal I wonder about the validity of the advice.
Again, I think you have me confused or misread something. Transferring beneficial interest is as legal as buying stock in a company. BTW, I control 3 properties in Michigan doing exactly this. I also don’t have to worry about dealer status. By your own admission, you say you don’t understand. Rather than criticize what you admittedly don’t know, take the time to learn it. Once you understand the subtle nuances and legalities involved, I’m certain you’ll find it to be the safest, most effective way to legally and ethically acquire and dispose of real estate.
Regards,
Dave

12

Here is where you are not understanding the process. I will speak only of a NARS Trust. The Seller places his property in the Trust and names a Trustee. I always use Equity Holding Corporation, a non-profit with decades of experience. They now own the property and the title ownership change is recorded. THIS IS LEGAL UNDER GARN-ST. GERMAIN AND NO DOSC VIOLATION CAN OCCUR.

The difference between the NARS land trust and others is that in our case, the Seller RETAINS a beneficiary interest throughout. In others, they have the seller assign his entire interest. Also, we use the trustee described above and others appoint friends, etc.

Now that the property is in trust it is personal property. The Trust NOW triple net leases to our new Tenant/RB. (Remember that the Seller is still a Beneficiary).

When you say using the trust to get around the DOSC is silly and full of potential consequences, I have to laugh. We don’t have to “get around” the DOSC. The law specifically says the lenders may not exercise the DOSC if the property is placed in an inter-vivos trust (which describes a land trust). I hope this helps.

13

framer35,

Here is a definition of a land trust that may make it more understandable for you and others:

A Land Trust has been in use throughout the United States for more than 100 years. It has the effect of converting ownership of real property to ownership of personalty, even though such ownership is characterized for income tax purpose as ownership in real estate. The primary purpose of the trust is to provide its beneficiaries a practical, economical (and anonymous) alternative form of real estate ownership and use.

A land trust is easy to establish and inexpensive to maintain. It is a method of real estate ownership whereby a trustee holds legal title to real estate, while the trust’s beneficiary(s) have complete control over its management and the power to dispose of the property.

Hope this simplifies it for you.