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SB Colleteral

This topic contains 9 replies, has 0 voices, and was last updated by Avatar of vtolentino vtolentino 13 years, 8 months ago.

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  • #4379
    Avatar of vtolentino
    vtolentino
    Member

    I understand that there are NEHTrust transactions where the SB is willing to make monthly contributions towards the mortgage payments.

    The question then arises: “If the SB defaults and stops making his/her monthly contritubion, what recourse does the IB/RB have in the event of SB default?”

    I hear several ideas for recourse, such as having the SB posting a contingency fund for the amount that he/she will be paying over the trust of the term. Another idea is to have the SB put up personal property for collateral (car, RV, boat, jewlery, etc.).

    What are some other ideas for collateral that the SB can use?

    I don’t know much about retirement accounts and the like (so this might be a dumb question), but can an SB use a 401(k), IRA, or life insurance policy for collateral?

    Thank you all for your input!

    #24363
    Avatar of scott_l._moyes
    scott_l._moyes
    Participant

    I’ve only had one that the Seller agreed to make a portion of the payment but here is what we did. And this was at the advice of Bill.

    Seller is an Electrician who was tired of working for another Contractor. So he got licensed himself and started his own business. He needed all new tools, a shop and a new truck to put all his new tools in.

    His business took off cuz he’s a really good Electician. His goal was to build a bigger house for he and his family. So, he bought the lot next door and built his family a new house. However, prior to being so successful he torn down his original garage and built a really big shop on the same spot so he could park his Truck inside while still being able to have enough room to work.

    I called him off his FSBO ad and made him an offer not knowing that he took out a 2nd for all his equity to pay for his new shop, truck and tools. I realized that the payments on both mortgages were too high for my comfort of finding an RB who could afford them so I made him this proposal.

    1. He stay on both loans
    2. He make the 2nd Mortgage Payment since it was for his business, truck, tools and shop.
    3. That he allowed me to do a UCC1 against his Beneficiary Interest and his Shop, Truck and Tools in the event he defaulted on his $250 per month payment. Since these were paid off I could sell them to make his payment until the RB bought the place.
    4. That he be allowed to continue using the Big Shop he built for his business until the RB bought the place.

    This all happened almost 4 years ago and the RB refinanced over a year ago. Not once did either of them miss a payment or were ever late. Who knows what would have happened if he defaulted, I could be in the Electically Contracting Business today?

    #24364
    Avatar of eric polatty
    eric polatty
    Participant

    Is it fair to say that you should only ask for a SB contribution if you can get something secured in return – UCC filing, etc?

    Is this the only way you can have recourse if they default on their contribution? Or is there another possibility within the NEH Trust system?

    Very interested to know, given the current amount of overencumbered properties.

    related question- I heard Bret explain to a very upside down seller (bought at 540k, now worth low 400s, and payment of $4500), while he would need to contribute $1500 monthly, that he would still be able to take tax deductions associated with the property which would essentially make his monthly contribution a “wash”. Can anyone explain how this works- is he taking only the “passive” deductions of depreciation. Any explanation w/ example numbers would be highly appreciated. Thanks.

    Eric

    #24365

    Correct me if I’m wrong fellow Narsonians…

    Since the SB would be making a portion of the mortgage payment he would be able to claim the tax deductions for mortgage interest and property tax directly related to the portion of the payment made, along with the “passive” deductions. So if the SB is making 1/3 of the payment, he is able to claim 1/3 of the deductions for mortgage interest and property tax, and the RB will claim the rest of the deduction for mortgage interest and property tax.

    Monthly Payment: $4500
    SB Contribution: $1500
    RB Contribution: $3000

    SB will be able to deduct his portion contributed to the payment and the RB will be able to deduct his portion contributed to the payment made for mortgage interest and property tax.

    #24366
    Avatar of eric polatty
    eric polatty
    Participant

    I thought that the mortgage interest could only be deductible under IRS code if the seller can show that it is his primary residence, has active burden of ownership, etc…there’s like 4 different parts to the code that determines whether mortgage interest is tax deductible if I remember correctly. I understand how the RB can show this, that is drilled into our heads pretty well. But what about the SB, when they are already living in another property and deducting that mortgage interest?

    The NARS flip chart in the success pack shows that the passive participant deducts depreciation, and expenses, while the RB deducts loan interest & property tax.

    It sounded REALLY good when Bret worked it out over the phone at the seminar. He turned what most would consider a hopeless situation, into one where the seller wasn’t even taking a hit. I want to be able to do that, but I want to make sure I’m in the ballpark when explaining how a SB might be able to deduct when dealing with sellers. Can someone please make sense of this. For instance- would the SB be able to deduct depreciation, or maintenance expenses, and how would that work?

    Thanks.

    #24367
    Avatar of vtolentino
    vtolentino
    Member

    I believe after the SB has relinquished his/her property and moves out, a tax specialist would have that SB convert his/her relinquished property into an investment property. With an investment property status, the SB could then deduct the mortgage interest and property tax on that relinquished property. Of course, only a a tax specialist could give the proper answer, which I am not :(

    #24368
    Avatar of megkelly
    megkelly
    Member

    My 2 cents:

    Both the RB and SB can take the tax breaks. The SB can take all the possible deductions because the mortgage, taxes and insurance are still in his name – and he can take the depreciation if it suits his situation – always refer them to their tax professional to determine this (Bret doesn’t like going into the long explanations – especially about recapturing, etc.).

    The buyer can take the deductions because he’s in on a triple net lease that makes him responsible for the payment of those same items.

    This is the example that Bret gave me: A shopping mall owner is allowed to take the deductions on his taxes that are afforded him by virtue of investment property ownership. Then his tenants are put in on a triple net lease and are also allowed to write off the mortgage interest, taxes and insurance. Notice the common factor is the triple net lease.

    Meg

    #24369
    Avatar of megkelly
    megkelly
    Member

    Is it fair to say that you should only ask for a SB contribution if you can get something secured in return – UCC filing, etc?

    I have transaction where the buyer is coming in with the full payment amount + trustee monthly and $95 positive cash flow, but because the property is over-encumbered, the sb is coming in with $800 per month. I don’t have plans to require security on this – I would though if I was counting on it to make the payment.
    Meg

    #24370
    Avatar of scottjunk
    scottjunk
    Member

    meg, as long as your payments are fixed–and NOT set to adjust during the time of the trust–then the sb contribution is simply gravy!–so as long as they make it, more money for you, but you really dont have anything to loose if they stop unless there is not enough appreciation between now and termination to make up for the over-encumberance.

    you go girl!

    #24371
    Avatar of eric polatty
    eric polatty
    Participant

    Thanks for the Mall analogy Meg- that makes more sense to me now.

    If you are relying on the SB for his contribution (as was the case in the seminar with Bret – you’d be hard pressed to get the RB to pay $4500) what is the penalty to the SB?

    #24372
    Avatar of jim_pasquini
    jim_pasquini
    Member

    You’re relieving the SB of their over encumbrance. I have no idea how much of their debt you are relieving. I’d look for some security so they have skin in the game.

    I might still do the deal without it, but I’d sure ask for it.

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