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I heard Jack Miller say several times that one way to protect an option deal is to have the seller put the property in trust and give the trustee irrevocable instructions to grant the option and complete the deal.
I own both option courses and didn’t see any sample documents I could use as a base to draft this type of agreement.
Has anyone done a deal like this that would be willing to share the documentation?
Is this in any of Jack’s courses? I have most of his books and don’t recall seeing this type of agreement.
We have the opportunity to do some sandwich lease options, but I’ve never felt comfortable offering to sell the properties that we’ve acquired via lease-option. Although we try to protect the deal, there are still things that can wrong that would prevent us from getting clear title.
If I had the property out of the seller’s name like Jack recommended, I’d feel more inclined to offer to sell it (with all the disclaimers of course).
Thanks,
Pedro
Pedro,
You are correct. Excellent way to protect an option. Take a step back you answered your own question. It is as simple as you just said in, your trust put in the trustee has the irrevocable right to grant the option. It is simple, put all documents signed into escrow. Get it all done up front. You can further protect your option with a mortgage of option. This is in a perfect world that the seller/optionor will put the property into trust.
Don Wede
In Jack’s option course, advanced I think, he also has Escrow Instructions for the title company to only close the transation when certain things happen… like a written letter of instruction from the Trustee.
But start thinking like a seller. What questions will they ask about this trust? who will the trustee be? how can they trust them. Etc…
Don, Jackie,
Thanks for responding. The challenge I have is that title holding trusts don’t seem to be that common in our area. The only trusts I have access to are land trusts. While we use these in our business, most attorneys don’t understand them so it would be hard to get the seller and their attorney on board. In other words, I think I can show the seller why it’s in their best interest to get the property out of their name, but I am pretty sure that many attorneys would kill the deal at that point. It’s happened before.
I recall Jack talking about using a trust with some teeth. Basically the sellers could choose their own trustee (or maybe even be the trustee) but the trust provisions would allow the optionee to replace the trustee if the trustee or the benficiary didn’t do what they were supposed to. This would not be a land trust or the seller couldn’t be the trustee and beneficiary.
Does Jack have something like this in his trust manual?
I’ll take a look at the vault file Don suggested when I get on the computer.
Thanks again!
Pedro
Pedro
A title holding trust and a land trust are exactly the same thing.
Unless you are buying the house subject-to, I think it would be very hard to get a seller to agree to put their property in a trust. Plus you run the risk of “practicing law without a license” by advising a seller to do so.
So, let’s think this through to come up with a Plan B
What’s the problem?
What are some other solutions?The problem, if I understand right, is that you don’t want to buy with a lease option then sell with a lease option unless you have more certaintanty (control) that the seller will actually close on the option. Is that correct?
So, forget the trust completely, and just explain to the seller that you don’t know when you will be closing and they may be out of town or out of the country when you are ready to close. You don’t want to bother them in the future to come back for closing. So, you’d like to get all the closing documents ready now but have an attorney at a title company hold the docs for safe keeping until it is time for closing.
If I were a seller, I’d think that you are the “real deal” and actually do plan to close. They will appreciate that an attorney at a title company is holding all the documents. And the escrow instructions will explain when to close and what needs to happen.
But, always thinking it through…
Some title companies will not hold the docs for more than 2 years. They have a rule about the docs being “stale” after two years.
So, you need to be specific in the escrow instructions that the docs are good as long as the option is good. Five year option, 5 years to hold the docs, 2 year option, 2 years to hold the docs, 10 year option, 10 years to hold the docs.
Still thinking it through….
What if the title company goes out of business or changes names during your option period ( this frequently happens)
How will you protect yourself? What language needs to be in the escrow instructions in that situation? Should you have back up docs at a different location … just in case?
There is always a way to get things done. And usually the least complicated way is the best way because it is less intimidating to sellers.
Sellers understand closing documents. They don’t understand trusts. Just bringing up trusts in a lease option situation may scare them away.
Plan C…
What if you bought with seller financing that wraps the underlying loan instead, or subject to the mortgage. Then you could instantly move in to a trust.
You could sell the beneficial interest instead of the house. You would sell with a wrap. You could lease option or just rent it out.Plan D…
What other solutions can you come up with?
Hi Jackie,
“The problem, if I understand right, is that you don’t want to buy with a lease option then sell with a lease option unless you have more certaintanty (control) that the seller will actually close on the option. Is that correct?”
Yes, this is the issue, but I also worry about them being able to transfer good title 3, 5 or 10 years down the road (more below).
“So, forget the trust completely, and just explain to the seller that you don’t know when you will be closing and they may be out of town or out of the country when you are ready to close. You don’t want to bother them in the future to come back for closing. So, you’d like to get all the closing documents ready now but have an attorney at a title company hold the docs for safe keeping until it is time for closing. ”
This is exactly what we do and sellers are fine with it. Although we record a memorandum of the deal, the only title company I have found that is willing to take the time to understand and close our “weird deals” doesn’t like the idea of securing the option with a deed of trust so I worry about the potential for judgments, bankruptcy, etc.
I may be too paranoid, but I don’t want to offer to sell a house that may later have a judgment against it as a result of something outside of the optionor’s control (I saw a local investor lose sleep and be unable to sell for a couple of years as a result of lawsuits triggered by his teenage daughter having an accident that involved 4 or 5 other cars).
The next thing on my list to try is to secure the option with a note and deed of trust like Jack Shea suggests in his book. The note says it’s void UNLESS the seller defaults on the agreement, has judgments, files bankruptcy, etc. It’s a little more difficult to negotiate, but may be easier than asking them to put the house in trust.
Finally, I have not been able to negotiate taking title subject to with people who have good credit (most of our lease/option sellers). These people are usually very comfortable with the lease option, but are really hesitant to transfer title while being responsible for the note (even if we give them a wrap to secure them).
What’s your take on my concerns? Any other ideas?
Thanks,
Pedro
Pedro
I think you are making it way too complicated. That scares sellers away.
If you get too technical in your explanation to the seller is scares them. They say no. It is much better to not use legaleze like “subject to” or Trusts” instead, explain what will happen and why it is a good way to solve their real estate problem. tell the sellers the story about the guy who could not sell because his daughter was in a wreck. explain how a trust can solve that problem. educate in simple, easy to understand language … an example always makes the point crystal clear
listen to the replay of the coaching calls about buying subject to. You will get some golden words to use to get the seller to say yes.
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