Home › Forums › General › EHTrust/EHT Topics and Creative Real Estate Financing › RB payment at inception
November 13, 2006 at 7:24 pm #2722
Regarding refundable costs to the RB at termination, on page 75 of “A Fortune in free real estate” your example shows refunding the entire amount the RB paid at inception. This has me confused. Lets say the RB pays $10,000 at inception that includes three $1,500 payments totaling $4,500 to set up the contingency fund. The remaining $5,500 is then used for setting up the trust and paying a fee to the IB. Is it my understanding then the RB would receive a credit back in the form of a home reduction cost totaling $10,000? This eventually leaves the entire setup cost of the trust being paid by the IB.November 15, 2006 at 6:35 pm #18144
From my understanding the RB contribution to the trust is a non-recurring cost and it paid back to the RB at the termination of the trust not at the inception..by the trustee following the trust agreement stipulations which is explicitly stated on appendix I in your doc manual..
If you use 10K as an example the trustee needs min 1 month contingency fund to accept the title vesting and you can put in two to better secure the settlor beneficiary in the trust.
Now you have 8500 average costs of trust total is say 4000 just using round numbers now you are at 4500.. unless there are specific rider agreements or limited power of attorneys you should be able to pocket a couple grand.. Oh I forgot advertising costs you need to deduct but I know Scott M has the seller cover that part so I would have the seller pay for those if possible..
You need to figure what the costs are to do your transaction and if you are NARS members you get specific discount especially if you create the trust via the NARS webiste and Mr Cain can assist you with all that . Why are you putting in 3 months to the trustee for a contingency fund..?? that does not make sense..
You should if you know the cost put some monies at the front end into your pocket..
As to the termintion side well the RB as long as he abides by the trust and beneficiary agreements can either get a credit for his 10K as you mentioned if he buys the place and/or has first rite of refusal so if he leaves and you need to bring in another RB that initial RB can not reclaim or be made whole until the property is sold..
There should be enough monies to setup the trust if done right for you to make some profit..
If the RB comes in with a minimal amount then the settlor may have to cough up a few bucks or the IB if the deal is viable..
Run the numbers by Joe Cain in doc and he will advise as to setup costs etc..
If I can help further my number is 702-400-7632
Im sure other members will answer this post as well..November 16, 2006 at 12:06 am #18145
Lets say the RB pays $10,000 at inception that includes three $1,500 payments totaling $4,500 to set up the contingency fund. The remaining $5,500 is then used for setting up the trust and paying a fee to the IB. Is it my understanding then the RB would receive a credit back in the form of a home reduction cost totaling $10,000? This eventually leaves the entire setup cost of the trust being paid by the IB.
Let’s see if I can help clear it up a little. Just for shitsandgiggles let’s say the MAV is $250,000 and the Seller’s current Loan Balance is $225,000. That means that they are leaving $25,000 in equity. If you’re going to split some of that with them that doesn’t matter for this example since it is just to show you the distribution of proceeds. I’m going to use full retail pricing for Closing Costs.
$2500 NARS Facilitation Fee 1% of MAV
$ 500 Trust Setup
$1000 Misc Costs (I’ve gone high)
$3000 Contingency Fund ($1500 x 2)
$1500 First Month Payment
$1500 Investor UpFront Profit
$10,000 Total Move In
Ok, here’s the deal. Let’s say that the property appreciates at 7% per year for the next 36 month. In 36 months the RB will finance the property. The Seller/Settlor will remain as a beneficairy with a 10% interest of which they will give up to you at termination. You will hold 40% and the RB will hold 50% which means you will be splitting the Net Proceeds 50/50 with the RB.
At 7% appreciation the property will now be worth approximately $305,000 in 36 months.
Remember, the order of distribution goes as follows…
1. All encumbrances are paid (i.e. loans etc.)
2. Any Broker or Realtor Fees still owing are paid
3. The Seller/Settlor’s Beginning Equity is paid
4. The Investor Beneficiary is paid there beginning contributions or equity
5. The Residents beginning contributions are paid (i.e. the $8500)
6. The NET Proceeds / Profits are split 50/50 in this case between you and the RB.
* The RBs refundable contribution is only $8500 because $1500 is the first month’s payment with 2 months or $3000 to the Contingency Fund.
The RB has the 1st Right to purchase at the Fair Market Value which right now is $305,000.
$305,000 FMV/Purchase Price
$220,000 note was paid down $5000 over 36 months
$ 25,000 Seller/Settlor’s Beginning Equity
$ 00,000 IB Beginning Contribution/Equity
$ 8,500 RB Beginning Contribution
$ 51,500 NET Proceeds/Profits to be split 50/50 between IB and RB
That’s $25,750 each after you have paid the RBs beginning contribution back or $10,000 minus $1500 for the first month payment. The RBs contribution is returned to them in full at termination out of the proceeds of sale. In reality the RB has the first right to purchase at FMV minus all their own contributions and profits. So they could finance or buy it at $270,750. Or, refinance it at the full $305,000 and pull all or most of their cash out.
That means that you will make $25,750 at termination and don’t forget your upfront profit of at least $1500 plus whatever cash flow you build into the payment.
However, with a $1500 per month RB payment against a loan of $225,000, I doubt there is any cash flow at all. If the Seller’s payment is $1500, I would want to make at least a couple hundred per month, so in that case I would make the payment to the RB at least $1700 or more. That would of course change the Contingency Fund a few hundred bucks too.
I hope that helps a little. If you have any more questions you know where to find me.November 17, 2006 at 7:15 pm #18146
However, with a $1500 per month RB payment against a loan of $225,000, I doubt there is any cash flow at all. If the Seller’s payment is $1500, I would want to make at least a couple hundred per month, so in that case I would make the payment to the RB at least $1700 or more.
Don’t forget the $140 / month trustee fee making the RB payment $1840… right?
EdwardNovember 17, 2006 at 7:39 pm #18147
I should have taken the time to log in so I could edit my previous post and make the quote look right….
I also realized that the IB contribution is $0 – don’t you usually do CMA or apprasial, check for outstanding liens, advertising, and stuff like that? Or is that included in what you listed as Misc Costs that the RB is paying for?
EdwardNovember 17, 2006 at 10:41 pm #18148
Don’t forget the $140 / month trustee fee making the RB payment $1840… right?
Nope, $140 is the MAX. On a $250,000 MAV, according to the fee schedule the Monthly Trustee Fee would be $104. That’s $250,000 X .5% = 1250 divided by 12 months or $104. However, I don’t think I’ve ever paid more than $70 on any property regardless of value. NARS Members also get 50% off the monthly Trustee Fee.
Also, I was just trying to keep things simple to just illustrate disbursements upon termination of the Trust. So yes if I wanted to make $200 per month I would add the Monthly Trustee Fee in that equation.November 20, 2006 at 5:23 am #18149
Would any one like to share their best spreadsheet with a built-in NARS formula?
thank you,November 21, 2006 at 1:41 am #18150
Why does there need to be a spreadsheet or formula? How hard is it to figure 1% of MAV plus $500 for Trust Setup, add whatever Escrow Fees, $250 for Legal and Accounting. That’s it.November 21, 2006 at 3:52 am #18151
I have always used checklists and systems when building homes or superstructures.
Picked up the practice when learning how to fly, because I didn’t want to forget anything when building a superstructure. I figured pilots use checklist so they didn’t forget anything. I try to depend on systems because it is easier for me to teach someone on my team and I don’t forget anything. I have found that systems free up the teams efforts to devote on the things that are more important. Being from the construction business, I need all the help I can get. Figuring out how to multiply is easy. Figuring out a thought out plan takes more effort and that is what I am trying to develop for my team.November 21, 2006 at 6:53 pm #18152
I will make a spreadsheet this weekend and post it by monday or tuesdayNovember 21, 2006 at 11:05 pm #18153
Sorry guys, I just have never found it necessary. It’s as easy as 2+2 in my book.
I always just tell RBs that it’s 5% and leave it at that. The actual costs are 1% plus $2000 or .5% and about $1000 if that much. I always charge the RB 5% and everything left over goes in my pocket. It’s alreay on the Appendix #4, which is a speadsheet. Why reinvent the wheel?
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