Archive for the 'Land Trusts' Category
Buyers Be Careful With Lease Options – Land Trusts are Safer
December 30th, 2010 categories: Land Trusts, Real Estate News, Seller Financing
[youtube]http://www.youtube.com/watch?v=c9M-4D1L8ek[/youtube]
Recently I was talking to a potential client who was wondering if there was any way I could help rescue his lease option tenants. Last year, he had done a lease option on one of his rentals with a nice couple who put down a healthy option payment.
This year, his financial affairs are forcing him to file for bankruptcy, and the BK trustee is going to sell that rental right out from under the nice couple with the lease option. So, unless they have a way of getting either cash or a bank loan, and can buy the property from the BK trustee, they are going to lose everything…
Their option money, and the chance to own a
property they’ve put a lot of time, money and love into.
The seller feels bad, but there’s nothing he can do. He can refund their option money, or find them a replacement property, but as he’s in the position of filing for bankruptcy, there’s very little chance that he has the money to do either. The nice little couple is out of luck.
With all of the ‘reorganizing’ of people’s financial lives right now, there are a lot of BK’s, liens and judgments flying around that can easily attach to a piece of property, changing everything.
Besides that… with the uncertainty of the real estate market, a lot of agents I know who used to feel good about putting their clients into lease options now consider it a bad move for their clients, and one that represents unacceptable liability that could come back to haunt them…
If you were the one representing that nice couple, and you got them into that lease option that went south, wouldn’t you be a little bit worried when they called you after finding out they were losing their entire investment?
And even if nothing like that happened, in many areas, it’s likely that home values will be below the strike price, making it financially unsound to exercise the option that they spent their hard-earned money for.
So… what are the options?
If you have at least a 5% down payment, see if the seller will sell to you in a straight owner carry transaction, with a note and deed of trust or mortgage . That way, title is in your name, and shrapnel from the seller’s exploding financial world won’t embed itself into your life and real estate holdings.
Alternatively, have the seller place their property into a land trust and become co-beneficiaries with them in the trust. There are many benefits of using the land trust:
- protect the title from liens, judgments, bankruptcies, probate and divorce issues
- protect any existing financing against acceleration
- privacy of ownership and potential tax benefits
- get sellers to agree to take a small amt of money up front, because they don’t have exposure to foreclosure
You get the benefits of ownership without many of the risks. And fewer risks for buyers means less liability for the real estate professional working with clients who are looking for lease option or owner financing opportunities.
Think twice before you get into a lease option, or put your clients into one.
From the buyer’s perspective, (and often the seller’s) owner financing, and/or the intelligent use of land trusts offers more benefits and fewer risks.
Check out the Note Queen Store!
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Even High End Luxury Homes are Forced to Slash Prices, Even if They’re Willing to Get Creative
October 11th, 2010 categories: Land Trusts, Real Estate News, Seller Financing
More and more sellers (and their agents) are realizing that to be able to sell their properties in today’s market, they’re having to reduce prices and, frequently, offer seller financing.
I was reading a recent article about how even the super wealthy are feeling the pinch of the ever softening real estate market:
Rich and Famous Slash Prices on Their Mansions but Many Also Hold Out for Top Price
I thought one of the last lines of the article was funny…
“While many home sellers can be slow to adjust to the market, the very wealthy can be the slowest of all.
Still, it’s a rule of thumb that the longer a listing lingers, the less desirable it often seems to buyers.”
I guess most super wealthy people have the luxury of being slow to respond to changes in the market, and that’s fine… probably frustrating for their real estate agent, but more power to them if they can hold out for their perfect picture, or hold on forever, whichever comes first.
But if you really do need to sell your high-end home, you’re going to have to be responsive with a combination of price reductions and flexibility. When a buyer does not have to arrange bank financing to purchase your home, they’re going to pay a higher price, and you’ll have more buyers to choose from.
Being flexible means being willing and able to lend a buyer some of your equity and/or your existing financing ….if it’s attractive… yes, only good-looking loans wanted
We frequently use the Title Holding (Land) Trust in these situations, which also has the added benefit of deferring any applicable capital gains for the seller.
Occasionally, when we are brought in to engineer the transaction, we can help these sellers create notes that they can sell to raise more cash than was available at closing from the buyer’s down payment.
Related Links:
- If you’re thinking of selling any time in the next 10 years, don’t wait another minute!
- High-end Realtors looking for options
- Realtor fired for not understanding owner financing
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If You’re Thinking of Selling Any Time in the Next 10 Years, Don’t Wait Another Minute
August 31st, 2010 categories: Land Trusts, Real Estate News, Seller Financing
“Dawn,
You have us thinking. We would like to sell anytime between now and 5 years. What we would like out of a transaction is $100,000 a year for 20 years. Is that doable? Otherwise, it will pay to keep the building.
Meanwhile we are all proceeding to have a loan in place by 10/15. Loan is uppermost in our mind, but thought I’d give you something to think about–for us.”
Yes, great to be thinking… Just off the top of my head…
Installment Sale
- Purchase price: $3,500,000
- Buyer comes in with $1,500,000 down payment (kinda stiff – pays off existing financing and closing costs)
- You carry a first note and deed of trust for: $2,000,000
- At 5% amortized over 240 (20 years)
- Monthly P&I payment from buyer: $13,199.12 (x12 = $158,389.37/year to you)
- This also defers capital gains, but you have to deal with depreciation recapture.
- Buyer pays all taxes and insurance and maintenance
Installment Sale
- Purchase price: $3,500,000
- Buyer comes in with $875,000 down payment (25% is reasonable, more buyers can do this)
- Buyer gets a bank loan for $1,000,000
- Between DP and bank loan you pay off underlying financing and put $375,000 in the bank (for capital gains, or money to make real estate loans with at 9-12% safe returns)
- You carry a second note and deed of trust for as much as the bank will let you: $1,625,000 (alternatively… have the buyer get a private money loan for just enough to get rid of the underlying bank financing… another $600,000 or so, instead of a $1,000,000 bank loan, then you don’t have to worry about the bank not letting you record a 2nd)
- At 5% amortized over 240 (20 years)
- Monthly P&I payment from buyer: $10,724.28 (x12 = $128,691.37/year to you)
- This also defers some capital gains, but you have to deal with depreciation recapture.
- Buyer pays all taxes and insurance and maintenance
Use a Title Holding Trust instead
- You place the property in a title holding (land) trust
- Mutually Agreed Value: $3,500,000
- Buyer comes in with $1,500,000 initial contribution (kinda stiff – pays off existing financing and closing costs)
- You become co-beneficiaries in the trust
- Buyer leases property from trustee
- Monthly lease payment from buyer: $13,199.12 (x12 = $158,389.37/year to you)
- This also defers 100% capital gains and depreciation recapture until trust is terminated (1-20 years) at which point you can potentially do a 1031 exchange if you want to
- Buyer pays all taxes and insurance and maintenance
Sell to conventional buyer, cash or cash-to-new-loan and use Deferred Sales Trust
- Purchase price: $3,500,000
- You pay off underlying financing and put $2,000,000 in a DST (low risk portfolio you help determine)
- Create payout equivalent to 4% amortized over 240 (20 years)
- Monthly payout from trust: $12,119.61 (x12 = $145,435.28/year to you)
- This defers capital gains like an installment sale, but you have to deal with depreciation recapture.
Of course, these numbers are based upon your opinion of value at $3,500,000.
Selling now will get you…
- A simpler life… no management to deal with
- You are buffered against downturns in the market in the next 10 years (very likely)
- You are buffered against major improvements that need to be done, like new roof, etc., new plumbing or electrical… catastrophic events
If you’re thinking of selling any time in the next 10 years,
THE SOONER THE BETTER!!!
Don’t waste another minute. Things are stacking up to get more ‘interesting’, not less. What you need to think about is quality of life, which of course is influenced by monthly cash flow, but also stress level, and how hard you have to work to manage the property, and what you could do with your time if you weren’t managing. Wanting to travel more? Visit family? Take up basket weaving?
If you decide to sell, I would recommend that I co-list the property with an expert in apartment buildings (I know some), and I have the expertise in owner financing strategies and private money solutions that most agents lack. If I am not co-listing the property I will need to charge you an up front deposit for consulting that will be refunded to you at close of escrow when we have the buyer bring in my fees as part of their closing costs.
Anyhow, we’ll talk soon!
Dawn
P.S. Ask questions, make comments and connect on my Facebook Page!
P.P.S. My real live book is available at last: “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits“
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