Pedro Machado
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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
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
I have used ListSource.com. It’s owned by Corelogic as well (same data as RealQuest), but you can buy the list without having to pay for a subscription. You can use very targeted criteria.
http://www.listsource.com/homepage/index.htm
Pedro
Reg 1.1234
But it does not state it explicitly. This article explains the rational for it being tax deferred.
http://www.wkblaw.com/articles/article_105.pdf
Good luck.
Pedro
I believe it’s best to keep the forum to members (a few reasons: avoid spam, bad advice, and having less control on who sees what one writes).
To increase participation,I would integrate the forum with email. There could be a daily digest of forum activity with “click here to reply” links and perhaps the ability to send email to a certain address to post.
I don’t log in everyday and I know I would participate more often if I could do it without logging in.
Pedro
Jackie,
I am planning some marketing campaigns and I am curious about your list selection criteria. I have selected an area that is close 40% of our county. (our county has about 900,000 people).
I am targeting houses that would be worth between $75k and $225k (our median price is around 120k these days) with at least 40% equity.
That results in about 800 houses with absentee owners and 5,000 owner occupied houses.
My initial plan was to only target absentee owners, but if I get ratios anywhere close to yours, I would not be able to buy but a few houses and am shooting for 6-10 houses next year.
How often do you mail to the same person? What kind of sellers and properties are you targeting?
Thanks,
Pedro
I have also experienced the same in my area. A service that tracks rental houses in our area estimates rental inventory increased by 70% or so since April, most likely due to unsold inventory made available for rent. Big property management firms have higher vacancy rates.
The thing is that I don’t really feel comfortable renting with a low deposit. I want to have some money in my pocket when they move out.
But most people in my area will rent with 1/2 to 1 month rent in a nice property. Also, I know at least one landlord who is taking a note as part of the security deposit. I felt the pressure when I had two houses for rent a few weeks back.
Jackie,
What additional screening do you do when you take a low deposit (assuming the house is in good shape)?
On a house that does not need work, my preference would be to offer 1/2 month rent free and take a full deposit so I have some money in my pocket when they move out.
Does anyone else have any ideas?
Thanks,
Pedro
Patrick,
Good job!
When pre-qualifying your buyers, do you run their credit or just ask them some questions about their income, debt, and self-stated credit?
I continue getting some leads through one of my websites after I rented the house I had on it, but I have not qualified the new leads beyond a few questions I ask on the online form.
Thanks,
PedroAll:
I can see a clear benefit to the seller when comparing a fixed rate master lease to hiring a property manager: no vacancy and the master lessee’s incentives are aligned with the seller’s goals, among other benefits.
What would you say are the benefits to the seller when comparing a performance master lease to hiring a property manager?
Thanks,
PedroI understand you need to report interest paid on deb taken subject to under “Other interest” instead of “Mortgage interest paid to banks” to avoid triggering an audit. Apparently, the IRS matches the amounts reported on the 1098 to what you report on your return. If the SSN differ, they will find an inconsistency.
Pedro
One thing that might help keep the forum on top of people’s mind is providing the ability for users to subscribe to a weekly or daily digest of all messages. Also, having the ability to post by sending an email may help increase use as people don’t have to log in to reply.
In any case, I’m surprised we don’t see more people tapping on this great resource.
Pedro
Another alternative would be calling the note holders and showing them how the house would make sense if they lowered the interest rate.
Read John Schaub’s newsletter on this subject http://www.johnschaub.com/news1.cfm?ID=23
If they agreed to lower it to 5% or so for several years, you would save close to $600/mo in interest (assuming your average rate is 10%) and the house could make sense as a rental.
Or you may be able to sell it on a wrap or land contract for $150k at a higher interest rate.
I like Jackie’s idea of doing the HBS. In that call, she also talked about having people bid on the down payment and you carrying the balance.
Let us know how it goes.
Pedro
Jackie,
In this particular deal (5-year lease/option), we had the closing attorney do the title search, prepare all the documents needed to transfer title (and to clear the seller’s title if we defaulted) and hold the documents in escrow. The sellers felt more comfortable with a formal closing.
Who do you use as the escrow agent to hold the deed when you do your own paperwork?
Thanks,
Pedro
