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Option vs. Land Trust

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  • #5057
    Avatar of homesavers
    NULL
    Member

    I have been struggling with the complexity of the NARS Trust and how to explain this to Sellers I talk to on a regular basis. Whenever I bring up the word “Trust” I have to spend a lot of time justifying and educating. However, in my research of different RE Strategies I have discovered the Option. Many investors recommend this over using a Land Trust to complete a Double close aka A-B-C transaction. Are there any caveats in terms of using the Option method then placing the property into an EHT Trust?
    I am all for KISS (Keep it Simple Stupid) when it comes to selling Sellers and Buyers. I get a lot of “confused minds”

    #26709
    Avatar of getsmart
    getsmart
    Member

    you might be barking up the wrong tree, or howling at the stars when you need to focus on howling at the moon. i am sure the members here aren’t well educated on the option method.

    youre asking burger king to approve mcdonalds value menu, its just not going to happen at least not the way you are hoping. with any method you use, there will be pros and cons with each, you hae to know where your comfort level is, because if you aren’t comfortable with a subject it will come out in your presentation.

    gl

    #26710
    Avatar of mtnwizard49
    mtnwizard49
    Member

    To start off, the word OPTION violates the DOSC, and the IRS considers your transaction to be a disguised sale. I’d learn to talk to my prospects rather than use an inferior method because I can’t explain it.

    Here’s Scott’s list:

    1. A Lease Option violates the Lenders Due-On-Sale Clause. The Lender CAN call the Loan Due in full within 60 days.
    2. The Tenant has a claim of Equitable Interest in the Property.
    3. The Tenants Judgment Creditors CAN attach a lien on the Seller’s Property.
    4. Only 14% of all Optionees ever exersize their Option
    5. Damages
    6. The Seller can’t evict a non-paying Tenant/Buyer, they must FORECLOSE.
    7. Negative Cash Flow
    8. More Risk and Liability
    9. No Asset Protection
    10. Since 1917 the IRS ruled that there is NO SUCH THING as a Lease Option. It is a DISGUISED “SALE”, period.
    11. The Property can be reassessed for tax purposes.
    12. Loss of 1031 Exchange Privileges.

    #26711
    Avatar of getsmart
    getsmart
    Member

    @mtnwizard49 wrote:

    2. The Tenant has a claim of Equitable Interest in the Property.

    The interest is in the contract, if the contract is null and void then the claim is lost. You can also give the tenant a few dollars to leave or make the tenant an offer they can’t refuse. You can always get a baseball bat and go Barry Bonds before his investigation.

    @mtnwizard49 wrote:

    3. The Tenants Judgment Creditors CAN attach a lien on the Seller’s Property.

    Place a clause that states if this option is recorded then it will be null and void. You can have the deed to a house and you don’t have to record it to have ownership, although it is wise to record to keep someone else from claiming.

    @mtnwizard49 wrote:

    4. Only 14% of all Optionees ever exersize their Option

    This goes with any creative methods, according to a local site only about 10% of the houses in Charlotte sold in the month of July that were listed by realtor. Which comes to only 3100 out of 30,888. Concerning the 14% any little bit helps when it comes to fsbo vs by realtor.

    @mtnwizard49 wrote:

    5. Damages

    You have damages with anyone and the way to overcome it is suggested to file suit.

    @mtnwizard49 wrote:

    6. The Seller can’t evict a non-paying Tenant/Buyer, they must FORECLOSE.

    Thats the idea when buying as long as you stay to your terms. Again when the contract is breached there isn’t a tenant buyer only a non paying tenant, the money put down isn’t refundable.

    @mtnwizard49 wrote:

    7. Negative Cash Flow

    No it all cases

    @mtnwizard49 wrote:

    9. No Asset Protection

    What do you mean?

    @mtnwizard49 wrote:

    10. Since 1917 the IRS ruled that there is NO SUCH THING as a Lease Option. It is a DISGUISED “SALE”, period.

    According to Bronchick, most of the reclassifications of a disguised sale is for long term leases of more than 3 years. One or two years isn’t if you allow the price to flactuate up with the market and you can’t give more than half of the rent as credit. He also mentions don’t let the tenant pay the taxes and hazard insurance. Those are cost buyers normally pay so be careful with that one.

    @mtnwizard49 wrote:

    12. Loss of 1031 Exchange Privileges.

    Thats the point when you want your house off your hands and is sometimes better than foreclosure. You want to be done with your house. Most things with the option can be overcome by having the right paperwork signed and notarized.

    #26712
    Avatar of dbhenderson
    dbhenderson
    Member

    Keep it simple. Ask these kinds of questions:

    1. Can you pass through the homeowner tax deductions?

    2. Can you share up to 100% of any appreciation during the time of the lease?

    3. Can you evict instead of foreclose in case of a default?

    4. Does your Lease Option program repair his credit while he leases?

    5. What is your success rate with achieving home ownership with your clients? Especially after only 12-24 months?

    6. Can you give me examples of the lessees you have made homeowners? And, how you did it?

    7. Do you refund the up front money 100%?

    8. Can your Lease Option program build Instant Equity?

    9. At the end of the lease term can the lessee re-finance as an owner occupied?

    10. Can you protect the title against liens, judgments, etc.? Even IRS and State Tax liens?

    DavidB

    #26713
    Avatar of getsmart
    getsmart
    Member

    @dbhenderson wrote:

    Keep it simple. Ask these kinds of questions:

    1. Can you pass through the homeowner tax deductions?

    No because if you do it is a sale. A lease option isn’t a sale if done properly, its a lease with the right to buy later.

    @dbhenderson wrote:

    2. Can you share up to 100% of any appreciation during the time of the lease?

    anything is negotiable.

    @dbhenderson wrote:

    3. Can you evict instead of foreclose in case of a default?

    it would be a simple eviction, anyone that wants to foreclosure on you, is a retard. its much easier to evict.

    @dbhenderson wrote:

    4. Does your Lease Option program repair his credit while he leases?

    What programs builds credit? A person offering a lease option, wants to sale the house, but the person wanting to buy is responsible for securing a loan.

    @dbhenderson wrote:

    5. What is your success rate with achieving home ownership with your clients? Especially after only 12-24 months?

    There is no success rate, a lease option is a lease option, its up to the person that buying the house to get their things in order. Don’t confuse this with a licensed mortgage broker.

    @dbhenderson wrote:

    6. Can you give me examples of the lessees you have made homeowners? And, how you did it?

    Whats the point in this question, if you are that skeptical then you need to get a loan. i mean is this a question you ask a mortgage broker?

    @dbhenderson wrote:

    7. Do you refund the up front money 100%?

    Do you know what an option fee is?

    @dbhenderson wrote:

    8. Can your Lease Option program build Instant Equity?

    that is something you have to negotiate, any time you ask a question you have doubt and don’t look confident. that is a rookie question.

    @dbhenderson wrote:

    9. At the end of the lease term can the lessee re-finance as an owner occupied?

    This is up to the lender of the lessee. If anyone says otherwise they are lying.

    @dbhenderson wrote:

    10. Can you protect the title against liens, judgments, etc.? Even IRS and State Tax liens?

    DavidB

    Sure, as a lease optionee i would, but not something i would offer to tenant, because the deed is protected.

    #26714
    Avatar of dbhenderson
    dbhenderson
    Member

    GetSmart,

    I might be a rookie, but boy, do you have a lot to learn.

    #26715
    Avatar of getsmart
    getsmart
    Member

    @dbhenderson wrote:

    GetSmart,

    I might be a rookie, but boy, do you have a lot to learn.

    that means a whole lot until you correct me where i am wrong, so you believe.

    #26716
    Avatar of dbhenderson
    dbhenderson
    Member

    GetSmart,

    Here’s my rookie answers:

    1. Can you pass through the homeowner tax deductions?

    If I am a beneficiary in the trust that holds the property and signed on a triple net lease I can take the tax benefits clearly stated by the IRS (IRC 163(h)4(D) without causing a sale. No sale! You can’t do that with a LO!

    Even the IRS does not recognize a Lease Option as “Just an Option”. In their eyes it is a SALE, period!

    It doesn’t matter to them who has an Option, however if the one who holds the option is also the Tenant, you’ve got big problems.

    The IRS has determined that Lease Options are nothing but a “Delayed” or “Disguised” SALE!

    “When a Lease Option is a masked land sales contract, the Tenant with a purchase Option becomes an owner of the property with equitable ownership in the property! [McClellan v Lewis, (1917) 35 CA64]

    A “masked land sales contract?” What is that?

    According to the IRS, a masked land sales contract occurs when, “the Tenant is in possession of the property and makes the payments, which apply in part against the purchase price, but has not yet received the deed.” In other words, if it smells like a duck, walks like a duck…

    So what . . .

    A Sale means that the Lessee now has a claim of equity in the property and therefore may not be evicted but must be foreclosed.

    A Sale means that ALL the Lessee’s creditors also may have a claim against the property and be able to force it’s sale to satisfy their claim or at the least prevent a future sale until their claim is satisfied.

    A Sale means that when the Lessee files for Bankruptcy or Divorce that the property is now subject to that suit.

    A Sale means that the Property may be re-assessed for Tax Purposes, and that is huge in some California Properties.

    A Sale means that the Seller, even though it sounds like you don’t think it is a big deal, that the Seller may lose Capitol Gain Exemption. If you were the one who put this deal together, don’t you think they would come after you in a law suit? I would!

    A Sale means that you may have Violated the Leaders “Due on Sale Clause”, especially as used in a lease option transaction.

    The City of Cincinnati has just passed an Anti-Predatory Lease Option Law and as of September of 2007 the State of Texas has outlawed Lease Options altogether. These Laws are based on Arizona Legislation that has been in place for years

    Here is a list of five things that may violate the law and cause the judge to classify the transaction as a “disguised sale”. This is not my list, but the list prepared by a Judge in Arizona who actually co-authored Arizona’s landlord/tenant laws:

    1. Collection of more than 1.5 times the monthly rent as Option Deposit.
    2. Collection of an Option Deposit or Rent Credit to be credited to a Purchase, or to discount the purchase as in a Down Payment.
    3. Predetermining a Purchase Price, as in delaying or disguising a sale.
    4. The Lessee also holding an option on the same property they are leasing regardless if it is one document or two separate documents.
    5. The Lessee being responsible for maintaining the property. If the lease is not recognized by the court as a lease, it doesn’t get the benefits that go along with a legally recognized lease. If the judge feels a sale has taken place instead of a lease, the rules governing foreclosures will apply. For this reason, possession of the property will be decided by a judge in position to decide matters of title and the process can be extremely expensive. Costs can run $10,000+, not including having to pay the back mortgage payments during the life of the suit.

    2. Can you share up to 100% of any appreciation during the time of the lease?

    Yes, anything is negotiable, but how many times has an optioner ever paid the tenant any appreciation? Not in a LO for sure!

    3. Can you evict instead of foreclose in case of a default?

    Not so simple! The guy you are calling a “retard” is the judge. The first time you go in front of a judge for a unlawful detainer hearing to evict a defaulting tenant where the tenant has paid money for an option to purchase, received any rent credits or any of the above mentioned unlawful things and makes a equity claim. Invariably the tenant prevails forcing the property owner into a full judicial foreclosure and ejectment process (i.e., in order to reclaim a right of entry and possession) which can be expensive, exhausting, never-racking, time-consuming and often a futile exercise. You will learn real quickly how retarded that judge is when he tells you he cannot hear your case in his court. You will need to get a hearing in foreclosure court and that foreclosure process will take 9 months at best and your defaulting tenant will be living in your house rent free Not to mention the cash draining brouhaha draining your cash while his attorney is working on a contingency basis knowing full well that if it can be stretched-out long enough, the claimant will cave-in and settle rather than continuing a losing battle. The tenant wins, either by receiving moving expenses and months of free rent: or being handed a free house, should the judge actually turn out to be against the landlord, and sometimes it does. Especially since more and more lease options are considered unlawful. Pretty dangerous in my book. With a NEHTrust there is no equitable interest established and eviction is a simple process that takes less than 30 days.

    4. Does your Lease Option program repair his credit while he leases?

    Yes they are responsible for securing the loan, but if the could qualify they wouldn’t have needed to do a lease option in the first place. In a NEHT the system does a lot to prepare the tenant/buyer to qualify for permanent financing. First, because they are a beneficiary in a trust that holds the property they are looked at as owner occupied during the time they are leasing (even though the occupancy agreement is a straight lease). The owner-occupancy status allows them to do a refinance loan instead of a new loan. No down payment, less hoops to qualify. Second, in the NEHT system there is a contingency fund established that pays the underlying mortgage payments on time and late payments reimburse the contingency fund. Because of the accounting the tenant/buyer can request a “lender’s letter” from the lender stating that the teant/buyer has never missed a mortgage payment or even been late for let’s say 24-36 months. My mortgage banker tells me that is as good as a 700 FICO score to the new refinance lender. Third, because the up front contribution (5%) is 100% refunded and the tenant/buyer gets 50% of the net appreciation that has occurred while they were leasing, they are standing in front of the refinance lender with “sourced and seasoned” CASH! That’s why my Lease2Own using the NEHT system has archived home ownership for 95% of my deals. While statistic tell me you lease option guys have only achieved home ownership 14% of the time. No wonder they are outlawing LO all over the country!

    5. What is your success rate with achieving home ownership with your clients? Especially after only 3-12 months?

    I don’t understand how you think I’m confusing this with a mortgage broker. Your system either achieves home ownership for your tenant/buyers or it doesn’t. Statistics say LO don’t! In fact you LO guys secretly don’t want to see your tenant/buyers qualify and exercise their options. If they did your profits would be considerably less (even if you won’t admit it)!

    6. Can you give me examples of the lessees you have made homeowners? And, how you did it?

    The point of this question was you only achieve home ownership for less than 14% of your tenant/buyers and I wanted to see if you would admit that you are in a business of promising home ownership to people that you know will not achieve that goal with your system and you do it for the easy money even though you know you are screwing them out of their option money. With a Non-Refundable “Option Deposit” upfront and a promise of a portion of the rent payment (“Rent Credit”) applied to a future purchase price, it’s like a ticking Financial Time-Bomb just waiting to go off on unsuspecting prospective Home Owners. That’s fraud in my book and it won’t be long before charges will be filed against those doing this scam (it’s already happening in Texas and several other states).

    7. Do you refund the up front money 100%?

    Sure I know what an option fee is. I just explained it above. It’s an unlawful fraud practice used by unscrupulous, greedy investors that could care less about what’s best for all parties of a deal. You should be ashamed!

    8. Can your Lease Option program build Instant Equity?

    I get 5% up-front contribution to the trust which is 100% refundable. It buys the tenant/buyer a beneficial interest in the trust which gives the tenant/buyer (resident beneficiary or RB) all the benefits explained above. I seldom negotiate it. If that allows me to pass through the tax benefits (without creating a sale) and share the net appreciation with the RB, I can figure the lease payment less the tax benefits monthly and the anticipated appreciation monthly and come up with a very low net lease amount. So the difference between the actual lease and the net lease is going to be instant equity when the lease is terminated and the RB goes on the title as a home owner. I achieve that 95% of the time. Not too bad for a rookie?

    9. At the end of the lease term can the lessee re-finance as an owner occupied?

    Yes, it is up to the lender, but can your lenders approve a refinance loan for a non-owner occupied? Not very often. You can pass this off to the mortgage broker if you want, but that just further shows how you could care less if your clients are able to exercise their options and qualify to buy the house. Since you would rather not see them achieve home ownership I can understand where you are coming from. Again, you should be ashamed!

    10. Can you protect the title against liens, judgments, etc.? Even IRS and State Tax liens?

    The deed my be protected, but any party’s liens, lawsuits, judgments, marital dissolution litigation and tax liens can attach to the property, and the death of any party can put the property into probate. You lease option conveys Equity; it jeopardizes title; it invites disastrous disagreement and litigation between parties. And any party’s business, personal and legal actions attach to the property. Thereby seriously and negatively affecting the interests of the other parties. Speaking of rookie questions . . . I’d say that was a pretty rookie answer!

    Like I said, you’ve got a lot to learn before you go on the discussion board, call members rookies and liers and defend lease options and criticize the NARS system. That’s like a republican giving a speech at the democratic convention!

    DavidB

    #26717
    Avatar of mtnwizard49
    mtnwizard49
    Member

    Get Smart: “you might be barking up the wrong tree, or howling at the stars when you need to focus on howling at the moon. i am sure the members here aren’t well educated on the option method.”

    Get Smart has apparently read some of Bronchick’s material on lease options. Bronchick, a land trust attorney, should know better but I’ve been getting bombarded by his solicitations recently so I guess he’s in the money making mode now.

    The fact is that a lease option cannot provide anywhere near the protections of a land trust and is not favored by the IRS. As to his saying you can just evict, WRONG. I was on the tenant side of the issue twice in the early 80s and met up with Sellers trying to scam. No eviction was accomplished and I won in both cases.

    Get Smart: I suggest that you live up to your username and forget the lease option minefield before you step on one. The effects can be long-lasting. I am also amazed that you would be so arrogant as to say that our members are not well educated on the option method. That is a ridiculous statement.

    The responses you gave are so weak and inaccurate that I am not going to waste my time pointing out all of your errors and misstatements. I’ll just let you find out the hard way.

    NARS members won’t fall for the sugar coated candy. It can be poison.

    #26718
    Avatar of nmc
    nmc
    Member

    Getsmart

    I suggest you ask Scott L. Moyes to send you his “Lease Option Horror Story” that actually happened to him. It is a great example of what can happen.

    #26719

    What is the difference between a Lease Option and a straight Option to just purchase the property outright?

    Which type of option is homesavers referring to, or does that even matter or change things?

    #26720
    Avatar of homesavers
    NULL
    Member

    Sorry guys I did not mean using a Lease Option vs. a Land Trust. I would never use a Lease Option to hold property. I would use the NARS Method.

    My question is some investors are using a Unilateral Option Contract to control the property. This is for short term(short sale) deals like Scott was or is still doing. It is the A-B-C transaction method. A = Seller B = me the investor buyer and C= the 90LTV End buyer.

    A Land Trust is never used to control the property at start only a simple 1-2 page notarized Option Contract. Can you do this and still have that 10 percent that the end buyer is short come out of the equity between appraised value and the agreed price with the end buyer? Example, 400K appraised value 360K contract price with end buyer 300K contract price with Seller/Lender (Short sale). That 40K needs to come from somewhere. Where? is the question. And can you use the Option Contract (not Lease Option) to do this?

    This all comes from simplicity. No red flags.

    #26721
    Avatar of mtnwizard49
    mtnwizard49
    Member

    A Land Trust is never used to control the property at start only a simple 1-2 page notarized Option Contract. Can you do this and still have that 10 percent that the end buyer is short come out of the equity between appraised value and the agreed price with the end buyer? Example, 400K appraised value 360K contract price with end buyer 300K contract price with Seller/Lender (Short sale). That 40K needs to come from somewhere. Where? is the question. And can you use the Option Contract (not Lease Option) to do this?

    This all comes from simplicity. No red flags.

    Why pose this question to NARS members? Go to the website where these investors are using a Universal Option Contract and ask them.

    #26722
    Avatar of homesavers
    NULL
    Member

    I could but I was wondering if you could combine the methods. Use EHT for long term hold and Option Contract for short sale flips and not have to explain the Land Trust to anyone. Bill Gatten says “you don’t need a parachute to jump off a curb”

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