Lou Brown:

Hi everyone and welcome back to another installment of our group Q and A where you get more street smart every time we meet.  I always get excited about our group Q and A because I am think that you have sent in these questions for a reason because you did not have this information and I always know that knowledge is power.  You have probably heard that term before and there certainly could not be truer words said then that.  So, we are giving you more knowledge and these questions are going to be answered by the end of our call and it will be a wonderful thing that you will have new power and new gained knowledge because of this.

Now we have had an interesting last month and last two weeks.  We had our MPI, massive passive income, event in Atlanta.  It was a resounding success.  We had terrific attendance and excitement by folks that came and I was just really pleased to get the feedback from everyone who did attend.  It really opened their eyes and it is an interesting thing that is learned from repeating courses that you have taken before that you are a different person when you repeat that course.  Things that are said you were not ready for when they were said before and when you are that new person six months later or a year later, all of the sudden things percolate and make a lot more sense then they did before.  I even had comments like have you actually said these things before.  I was here but I did not hear that and I am really ready for that now.  It was fascinating that we had some folks there with 60, 70, 100 properties and of course thought they knew everything there was to know about property management.  Then all of the sudden they take the training and hear all kinds of things.

Many of them had 8…one of the had, I remember this, 8 pages front and back of a ah ha’s and of course you know that ah ha’s are usually one sentence notes that remind you of things that you just learned.  So, 8 pages front and back from a seasoned veteran in the property management business is a very exciting testimonial for me of just the knowledge that was gained from that event.  So, if you have not been to our in depth live trainings in the past you absolutely need to come because there are things there that you simply do not know.

Now let us jump into the questions and we have had some interesting questions come in, in the last couple weeks as well.  We have got Byron Mcdade of Ohio.  What is the best way to approach a bank to get their best price on an REO property they hold?  Would any of the short sale logic work, high crime maps, sex offender maps, etc.?  Byron the answer is absolutely all of that works and remember that when a property has gone to the bank they have actually already completed the foreclosure process.  So, short sale is not on the possibility list only because there is nothing to short sale.  Their loan is literally eradicated and wiped out on the day of the foreclosure so there is no loan with which to short sale.  There is only the property itself.  The day of foreclosure the bank takes title to the property by virtue of the agreement that they have with the borrower that gives them the permission under their power of attorney to take the property back if they do not make the payments.  That is exactly what a foreclosure is and that is what the foreclosure process is.  So when that bank now receives that property they do have a process of their own.  Typically banks do not want investors calling them and asking them what is the price.  What typically happens is the property goes back to the bank, the bank now owns it, they immediately list it with a local realtor.  Many times these realtors are very savvy, been in the business for many years and even have their own list of potential buyers.  So, they have got a wholesale buyers list typically made up of investors.

So, what you really want to do is get in relationship with these kind of folks, Byron, and they will help you to be able to negotiate with the bank although they are looking out for their best interest as well because their commission typically is based on the price of the property.  Their amount of gain or their amount of profit that they are going to get out of that is going to be more the higher the property sells.  So naturally it is in their best interest to sell it for more but you do not be trapped by that and just merely pay what you agree to or what you feel it is worth.  Using our cost to sell worksheet built into your buying volume one is a real good thing to do.  It is also built into your seller’s presentation kit but this worksheet allows you to take into account what it is going to cost the bank to sell the property.  We typically work backwards from there, in some cases even including that with our offer to the bank to show them, look this is how much you are going to spend to get this job done.  Obviously they do not have to pay the real estate commission but in addition to that there is the holding cost, there is all the other costs that go with holding a property long term.  I would use the cost to sell worksheet as part of your package.  I would include pictures of all the repairs that need to be made and I would include a list of the repairs that need to be made.  I would include a definitely high crime maps and sex offender maps.

However, Byron, I want you to keep in mind that you might not be best served by buying in those areas.  Remember that you are the one who has to sell that property after you buy it.  Be careful what you buy and in what neighborhood you buy in.  I have learned that the best way to really build your business plan is to build a business in your own backyard, draw a circle on the map 5 miles out from where you live, drive all the neighborhoods inside that 5 mile radius and then start looking for properties in those particular neighborhoods that you pick out and say to your self I would love to own property in that neighborhood.  Now I do not mean high priced properties, I mean mid priced properties that have the largest audience of potential buyers.  Great question Byron.  I hope you all learned from several of the answers I gave Byron.

Velva has a question about vacant houses.  Hello.  There are a number of vacant homes only a few year olds near by.  250 to 350,000 in value, no signs in the yard yet, code enforcement notes on a few.  My thoughts are short sale candidates.  I am tracking down the current taxpayer by phone.  If unsuccessful how would you word a letter?  Would you send a hand written invitation style letter or a priority mail envelope to get their attention, certified?

Well Velva I do not want you spending money on certified mail when you can probably get to the people in several different other ways.  Let us say that these are in neighborhoods that you know you have already determined that they are vacant properties so you have already driven those neighborhood.  It would be a good additional step to go ahead and talk to the neighbors.  Do you know where the people moved to, do you know the people?  I pay referral fees, I am able to buy this property I will be happy to pay you for having given me the lead in the first place.  Then even if they tell you that they do not know where the people are and they do not know anything about them.  Often we get telephone calls back from the people and they say I understand you visited the neighborhood, blah, blah, blah.  It is because they have taken our card and they have given it to this third party.  They have taken our card, called up the owner of the property that is and they have told them that we are interested in buying their property.  That is where we get calls back from.  So that is one source that you want to use.

Another is from the post office when you do a mailing be sure and put on your mailer address correction requested.  Then if the person who has vacated the property has posted with the post office a new address then you are going to get that new address and know how to contact them directly.  A few more thoughts, how would I word a letter?  Simple is best in a situation like this.  They have already moved out of the property so I would write a, you have heard the word yellow letter, most of the people on the call have heard that but just get out a yellow legal pad and hand write a little letter that says I may have some money for you.  I know that you have vacated the property at 123 anywhere street and in many cases I can pay you if you are interested in selling the property.  Would you please call me at and then this is my cell phone number.  Give them all the ways that they can contact you and that should solve your problems right there.  Velva, that is a good question.  I hope everybody learned from that one.  But again no certified mail, not high cost situations okay.

We have got a subject two question from Janice ____(1003) who says hello with regard to insurance on a subject two purchase with an agreement for deed sale, please help.  Using your land property trust set up am I purchasing a normal homeowners policy with the mortgage company as the named insured, am I the additional insured or is the trust the additional insured?  Is the original property owner on the policy to avoid raising flags?  As you can see I am a little confused.  Thanks so much for your help and thanks for a great MPI.

Well thank you too Janice and thank you so much for your testimonial.  I really do appreciate it, Janice sent a full-page testimonial, it was very exciting and uplifting and I do thank you for that Janice.  First place for all of us to go when we have insurance questions is to go to your land trust guidebook and right there, there is a checklist in section 3, steps to take when purchasing or transferring property insurance for real estate and that is on page 137.  One of the easiest ways to actually do this is to take that page and fax it to your trustee insurance agent and tell them…one of the humorous things that is on that page that usually gets the attention of the insurance agent is…let me go ahead and turn this page and tell you what it says…first of all it says find a reasonable insurance company with a cooperative agent and then it goes on to say explain that you wish the insured on the policy to read as follows.  Your trust name, trust and your trustee name as trustee, now that is the insured.  Three explain that you are to be shown as additional insured since you will be dealing with the property in a management capacity and should be listed on the policy as follows.  Your name as their interests may appear which is also sometimes shortened to ATIMA.  Then four give the agent the mortgage lender information to be listed on the policy as a lost payee.

But I go on to say in my note that many times it is the unknowledgeable, uninformed, no can do agent who cannot accurately or effectively communicate with the insurance company’s underwriter about the trust who states that the company cannot insure a trust.  If this is a problem you may have to find another agent.  That is a subtle way of just passing on the information that you have onto the agent.  It clearly defines exactly how they are supposed to set up the insurance.

Now, let me go deeper.  You asked specifically about subject two.  Subject two is a bit different so let us review the facts in a subject two.  First of all you have come in, you have taken over and existing loan on the property.  This existing loan has an existing policy on there.  Now this policy typically is a homeowner’s policy.  Why is it a homeowner’s policy?  Because a homeowner was living there.  What our exit plan typically is, is to put a renter of some kind in there.  Sometimes that renter is really a rent to own customer but still in the eyes of the insurance company they are a renter.  So, that means we are going to have to cancel the existing policy on the property, which was the homeowners coverage, and now we are going to replace that with the landlord tenant policy that you have obtained through your insurance agent.  So with that being the case no absolutely not do we want to put the other sellers name on that insurance policy.  Since you now have the deed to the property in trust we do not want the old sellers name on there anywhere.  We have replaced that coverage now and the lender cannot do anything about it because of ____(1438) act and therefore the deed is now transferred into trust and we are going to leave it just there.

Now you go on to say with an agreement for deed sale.  How are we going to do this?  Well now subject two is a little bit different with an agreement for deed because essentially what we have done is put a policy in place in order to not have the lender call the loan due so we have put that landlord tenant policy on there.  Now if we turn around and sell the property on an agreement for deed then our new buyer is going to need to get a homeowners insurance.  Now we use the word new buyer and in the case of an agreement for deed you typically are acting as the bank.  If you are going to be the bank then that new homeowners policy is going to be naming you as the mortgage company.  So, it could be the trust that is selling them the property that is actually quote, unquote, the mortgage company and that is who would be listed as the lost payee under the mortgagee clause and the mortgagee clause is what outlines who gets what and under what circumstance.

We have covered subject two, we have covered agreement for deed and if you are purchasing a normal homeowners policy you are not because as I described is going to convert now to a landlord tenant policy if you are moving in a lease optionee.  If you are moving an owner finance agreement for deed then that is going to be different.  I am going to in a lot more depth and show you some examples that MAS in August…that is August 21st through the 24th in Atlanta and oh my gosh if you have not been to the trust training you absolutely need to be at the trust training.  As we have learned you need to repeat it if you have been there because it is continuing education and opens up some doors you have not even thought of before?

We have got another question here.  It was probably…oh let us see, Janice says hi Lou, thanks for a fabulous MPI.  It was probably the best seminar I have ever been to.  Yay.  All right here is my question.  On a subject two purchase does an agreement for deed sale eliminate the possibility of doing a 1031 exchange?  Okay for those of you who do not know what at 1031 is let me just spend a few minutes on that.

This wonderful thing in the tax code was created called a 1031 tax deferred exchange.  Now what that means is let us say that you bought a property for $100,000 and now today you are selling it for $150,000.  That is a good day the only problem with that is that the IRS is going to get about a third of that plus your local state government is also going to get another piece of the action depending on what your state charges for capital gains tax.  So now it could impact your deal significantly up to 40 even 50% of your profit.  Now suddenly we have lost 20 to $25,000 that we could have kept in our pockets.  Well there is this wonderful thing called a 1031 tax deferred exchange and what happens with this procedure is that you are able to take the money from the closing, not touch it, send it to a facilitator.  This facilitator holds your money in anticipation of you buying other property.  You have to identify your replacement property within 45 days and then you have to close within a total of 180 days after you have sold the prior property.  This gives you an opportunity to replace and reinvest your $50,000 profit into new property without having a dime of capital gains.  Is that not a wonderful thing?

In fact we shared at MPI that we have an exchange wiz who is one of our affiliated providers that we found has a very good deal and a very good offering for all of you who are involved with our exchange wiz.  He gives you a huge discount on their fees when you are a Street Smart licensee.  Just call the office 1-800-578-8580 to find out more and we can connect you with our exchange wiz who has a coupon and if you ask when you call into the office what is the correct coupon we can give that to you and you will get a discount on your 1031 tax deferred exchange.

So, Janice’s question is when I do a sale on an agreement for deed does that eliminate the possibility of a 1031 tax deferred exchange?  The answer is yes it does and here is why.  Because when you sell a property and you sell it for cash that qualifies for a 1031 but when you sell a property and you sell it over time that qualifies as an installment sale and that lands in a different part of the tax code.  That installment sale now means that you only have to pay on the gain as you receive it over time.  If you use my technique with 40 year financing and you are receiving $50,000 gain, that gain is actually spread over the 40 years of the note until they actually pay you off.  So, it can be a wonderful thing to, when you sell for cash use the 1031 but when you do not sell for cash use the installment sale technique.  Great question.

Okay we have a lease option question from Brenda Barrot who says if your lease option tenants still do not qualify for a mortgage after three years is it advisable to offer them another type of deal eg owner financing with a balloon, agreement for deed etc. or let me go find a new tenant?  I guess you mean a new property.  Well Brenda my philosophy is this, your time should…the maximum or the majority of your time should really be spent on acquiring property and building your portfolio because you are going to make far more money in the acquisition area then you are going to make in the holding area.  Over time holding is going to prove to be the best strategy and it is going to make you the most money over time.  So we really have to look at focus.  My philosophy is keep the property filled if you possibly can or if you attended MPI you know I call it killing vacancies.  No matter what we want to kill vacancies.  In this case you have got a customer, been there three years, I presume they have been paying you as agreed so they are a good customer so why do we not just try to keep them as a good customer and the way you want to do this is work with them.  Find out do they have any additional down payment money they can give towards converting to your agreement for deed program, your owner financing program.  If they do then we can take their original option fee plus the credits they have earned over this last three years plus any new cash they can infuse and then convert them over to the owner financing program and now finance them for 40 years using the techniques that I outlined in volume 10 owner financing.

That should give you every tool, technique and form that you need to be able to do this and do this right.  Remember there is…it is divided into two parts.  There is a buying side and then there is a selling side.  In this case we would be selling the property on agreement for deed and absolutely that would be a great strategy to keep your customer long term.  Now you mentioned owner financing with a balloon.  You do not have to worry about that because in my agreement for deed I have got built in an option to call and that means that you have the option to call that loan after blank period of months and I usually write it at 60 months so I get at least 5 years of customership from that customer before I have the right to call the loan or you can have a provision separately in there for prepayment penalty which I do have built into the paperwork as well.  It is a blank line so you can choose zero percent prepayment penalty or you can choose to put an amount in there.  It is a great technique it really works and I absolutely want to keep my customer.

Now let us take this one step further Brenda.  Let us say that your customer does not have additional funds and cannot convert to your owner financing agreement for deed program.  Fine, charge them something, 500 or $1,000 to renew their option for another year that way you have gotten some cash on our cash now program and you have also given them an incentive to stay and to also to stay in the game because most times when people’s options expire they just expire and that is the end of the story.  Whereas with this strategy you are able to actually to get them in, keep them in and put together a real good, long term relationship with that tenant and doesn’t that make more sense.  Absolutely.

Now we have a subject two question here from Larry Hogan who says I am working on the paper work for my first short sale.  Are the steps outlined in the trust paperwork section of my website up to date as far as what needs to be done for a subject two purchase.  Larry, the answer is yes of course.  On your website and what we are talking about, those of you who are not aware we have the street smart investor website and you can see them at streetsmartinvestor.com, click on the website and do a little PowerPoint tour there or call into the office at 1-800-578-8580 and they will give a tour, a free tour to allow you on your computer to actually see what these great websites are.  There is a front side for credibility and then there is a backside that only you, the investor sees and it is private just for you with your personal information about your leads that get stored there.

One of the things that is also there is a button for paperwork.  You click that on and open that up and there is all your Lou Brown paperwork.  Based on the pieces that you own you click on land trust, you open that up and as Larry mentions there is a checklist there for subject two.  When you are buying property subject to the existing financing and in that checklist it tells you step by step exactly how to purchase that property from the seller helping them place their property into their trust then having them transfer their beneficial interest in the trust to another trust and there is a whole process that goes with that.  So, the answer Larry is absolutely.  All the details are right there.  By the way those of you who have our websites, we update the forms there automatically at no additional cost to you.  Once you get the websites you got the latest and greatest everything right there on the backside without having to buy an update disk or anything else.  It is a great thing.  If you do not have the website you absolutely need them.  There is no question about it.

We have a deal question here from Brian ___(2720) who says I have a deal I wanted your advice on.  Here are the specifics.  The building is a mixed use building with 4 rental units and 3 retail units.  2 of the residential units are 2 bedrooms and the other 2 units are 3 bedrooms.  The 2 bedroom rents for $700 and the 3 bedroom rents for $725 a month.  Of the 3 retail stores 2 of them are approximately 700 square feet and third is approximately 1,250 square feet.  The 700 square foot units get $700 per month while the 1,250 gets $1,250 per month.  The owner wants $320,000 for the property and after speaking with the owner he said he would be willing to finance 80% with a 20% down payment.  A concern of mine is heat and water are not separately metered.  Living in Massachusetts this concerns me.  Well Brian it should.  Here are the annual operating expenses according to the owner.  Heat, $6,500 $2,800 trash, $2,800 electric, $240 insurance, $3,983 in taxes and $3,528…looks like there is a little break here.  I guess heat, there is two numbers here, 6,500 and 2,800, trash 2,600, electric $240, insurance 3983, taxes 3520, repairs $1,200.  The building is in decent shape.  All electric is updated and separately metered.  It has 4 parking spaces and mostly on street parking.  There are also three car garages current not being rented.  The owner says his NOI, that is net operating income, is $36,543.  Assuming the owner will finance 80% what if anything should I offer?  Would you stay away from the retail mixed use?

Brian, this sounds like a real opportunity here.  No I would not stay away from it, in fact commercial is great.  One of the draw backs to commercial is it can take a long time to get a tenant but if they have a successful business and a successful business model and they are good business people then they tend to establish themselves really strongly in that area and at that location and they tend to stay a very long time.  So, you have a good opportunity with commercial property and in keeping them long term.  What we have to really evaluate is what you have got here.  First of all I would say that the 3 bedroom units at only 725 a month are very low.  You should be able to get a lot more then 725 on a 3 bedroom because after all it has a 3rd bedroom.  I would say that you should be able to get at least a $100 more per month for the 3 bedrooms then the 2 bedrooms.  Let us say that he is spot on with his rents and you cannot get a dime more because that is exactly how I want all of you evaluating deals.  You evaluate it on today’s dollars.  Exactly what their currently getting now and no more and then…  I love realtors who come along and say you can get this, you can get that and I say well why don’t you do that and when you do that come back and see me and I will be glad to talk to you about buying this property.  You have got to be careful about all these you can’s because those you can’s are toucans and it can put you in a world of hurt.

So, let us see here, we have got $5,500 a month appears in rent.  Now that is times 12 for those of you who are like out there in the real world that is times 12 but my quick measure is just 5,500 times 10 because I usually take a month for taxes and a month for insurance and that usually covers a lot of my expenses.  Now here is what is interesting about…you got $66,000 income that means that is the gross income with no vacancies.  Now you have to put a vacancy factor in there and I always say 10% is a good vacancy factor.  It is a bad one but it is good to always take into account how bad it might be.  Now that brings your number down to 59,400.  Let us say that his numbers are accurate and who knows if they are or not but with heat at $6,500 and $2,800 I guess is another heat bill or something, you forgot to tell me what it is, anyway I am going to add it in and then we have got trash at $2,600.  We got electric at 240.  We have got insurance at 3983…let me clear that…plus 3520 in taxes and 1,200 in repairs which sounds very low.  That is $20,843 in expenses.

Now I will tell you right now exactly how a bank would look at this.  A bank would take your $66,000 and then they would take about 42% of that for expenses.  See banks say you are going to have management costs.  They do not care if you are going to do it yourself they still figure hey at worst case scenario somebody is going to have to manage this thing and it is not going to be that banker in his nice suit coming out there so they are going to always factor in costs over and above what you can get it done for.  Now let us take the $66,000, let us subtract that from 27720 and now that gives us 38,280.  Now that 38,280 becomes our NOI, net operating income.  Fascinating, his net operating income in actually lower then that at 36,543.  That is good news.  You see I like to back into my numbers, I like to look at the generally accepted numbers out there and then I like to compare that to the seller’s numbers.  So, his numbers are actually lower, that makes them even more believable.  So, NOI is net operating income.  Now what you do is take your net operating income and you put that on a top line and then you take your rate…it is a formula called IREV, which is income over rate equals value.  You divide your income of 36,543 and let us say that you wanted to get a 10% rate of return then that would be your rate.  You would multiply that times the 36,543 and of course that would give you 365,430 as the value and you tell me he wants $320,000.  So that actually is good.  In fact you are going to get an even better rate of return at the 320.

That is not to say that you should not negotiate from there.  Brian, I would recommend that you take your cost to sell worksheet and then work backwards.  So put the $320,000 at the top and then deduct all your expenses all the way through, get down to that bottom line and then ask for you owner financing.  Say well you know when I go to sell the property these are going to be my expenses when I go to sell the property so naturally these would be your expenses as well with you going to sell the property.  So let us go ahead an factor that in and then I am more then happy to talk with you about the owner financing because of course that means I can actually pay you more for your property then if I went out into the field and got a third party loan or a commercial loan or even a private money loan.

Now, let us take another couple of factors that you have mentioned here.  I would look at the leases themselves these $700, 725 these commercial leases.  Just because the leases are in place does not mean leases cannot be renegotiated.  They often can be.  In fact when you purchase a property I would purchase it into trust and then I would come in as the new manager of the property.  The new owners have some new paperwork they want me to go over with you and by doing that many times the tenants will cooperate in signing a new lease which is the good ol’ Lou Brown lease and that way you can put yourself in a position to raise the rent or at least get them onto some of the profits centers I have got built in.  One of the profit centers is not built into my residential lease that you could build in is what is called triple net leases.  That means net, net, net your tenant pays their portion of the heat, their portion of the taxes, their portion of the insurance, their portion of the trash collection, etc.  Net, net, net means taxes, insurance and maintenance.  So it is net of those costs, net of those costs and net of those costs meaning that your return on investment and your pay comes on a net basis not gross basis.  That is good news if you can do it because as costs go up you are not trapped by the rent rate that you have and you are not squeezed by the costs going up.  Let them eat their portion of the costs.

You have got a unique situation here where you have got residential tenants as well as commercial tenants.  I would if you cannot raise the rents much higher then they are now and you do need to look at the market to see but I would go ahead and leave the residential renters alone until they turn, in other words move out and they new ones coming in I would hit with their portion of the utilities.  But depending again on the leases that he may have in place for the commercial tenants you could go in right away and start working with those folks to have them pay triple net if you can renegotiate the leases.  Now, properties and buildings like this and landlords like this often do not have paperwork and often do not have good paperwork so it may be that you were blessed with a landlord like that and that means you will be able to go in and immediately start increasing the rents and put yourself in a much better position here.  This is great news Brian so go after it.  Definitely go after the owner financing and as you know my methods on buying where you want to structure it to take the amount and let us say that after you do the cost to sell worksheet and working backwards to maybe $280,000 and then I would start with only offering 10% down which would be $28,000 and that would equal $252,000.  Then looking at your income being $5,500 a month, that means that I would take a risk of about 30% of that with no hesitation at all to put towards debt service.  That means that you could put $1,500 a month.  So we are going to take $252,000 divided by 1,500 equals 168 payments and what did we just do?  We just did a zero interest loan.  168 payments at zero interest is a wonderful thing.

Now if says well I would not sit still I have been getting $5,500 off this building, I would not sit still for only $1,500 a month.  I would say well you have to factor in all these costs so really your NOI number, all you have been taking home on a monthly basis has been more like $3,000 a month and of course I have got to make a profit on this thing too.  You could back and forth with him and get it up to maybe $2,000 a month but I would not go far beyond that unless you really detect that you are going to be able to move the rents up significantly but as soon as you do get control of the building then I would go in and start working and moving those rents up and transferring all those responsibilities of the utilities off to the tenants as much as you possibly can and get yourself in a real solid position of ownership.  Now let me tell you what else is fascinating about property like this.  Your value is dictated by your income.  It is not the traditional type of usage property.  This is a commercial property so income determines value therefore you can turn this thing around and let us say that you could raise the rents an average of $100 per unit, that is 7 units, that is another $700.  Recognize that is another $70,000 at a 10% cap rate.  That is another $70,000 in value but many people are buying properties as a much lower cap rate and some of you are saying what in the world is a cap rate.  That is a capitalization rate and the cap rate that you can get on this right now in today’s market just recognize that people are not kidding.  You know 6% on their money; they are getting like 1 or one and a half percent on money that is in the bank.  So they are looking around and they are satisfied at even 6, 7, and 8% cap rates.  Some of them even lower then that but you factor that in and that means that a $700 a month rent increase could increase the value of that building by $100,000 just on that one move.  So, you can, Brian, have a real good cash flow off this and use my long term hold strategy or you could just fix it up, rent it up, retail it up and then sell it off an many a real handsome profit on the other side because of what you did with the building.

Great question Brian and I hope all of you benefited from that.  I do not talk a lot about commercial properties or how you evaluate commercial properties but that is exactly how you do it and I have definitely owned a bunch of apartments, a hotel and things like that so we have seen the other side of this and I teach you these things so you have the benefit of them.

Now, Kirk _____(4335) ask a question.  We are purchasing a house subject two leaving the existing HELOC in place and I want everybody to understand a HELOC is a home equity line of credit.  So in other words he is taking over the first mortgage and there is a second mortgage but it is not really a second mortgage it is really a home equity line of credit.  Current balance is $28,000 with a credit limit on the HELOC of $40,000.  Folks, that mean that those sellers can go in and they have actually got another $12,000 that they could pull down off their HELOC which would of course be a bad day if that happened to you and you had bought your property expecting the HELOC to be $28,000 when in fact the people have gone in and pulled out another $12,000.  So, you have got to do something to protect yourself and Kirk asks what can we send to the bank to keep them from drawing on the remaining $12,000.  Thanks.

All right, here is what I would Kirk.  Call the bank, use your authorization to release information if necessary and folks that is in your buying volume one which is your authorization to release information that you should always have signed by a seller regardless of whether is it s a short sale, a subject two or just a straight purchase.  You should always have that signed so you can communicate with their bank.  Tell them as their financial advisor that you ask for a cap to be placed on the balance of that loan so that no added funds can be drawn down.  Ask for a confirmation letter that this has been done.  Now, what did we just do?  So, they have a current balance of $28,000 but they could take it up to $40,000.  Now we step in call the bank, say listen as their advisor we are asking you put a cap on that at $28,000 so no matter what they cannot come in and ask for more.  In the bankers mind they are thinking oh my gosh these people are in trouble financially or these people have a drug problem or they have a alcohol problem or they have gambling problem.  You see you are not going to explain that to them, you are not going to say a word, just let the banker think what they want to think and in the mean time you get your cap.  You also say you can them to write down in writing that they have put the cap on the HELOC.

Now, you get a letter from the borrower, the seller stating that they agree not to drawn down anymore funds and now you have covered both sides of your deal and you can go ahead and take over subject two, that existing HELOC loan.  Isn’t that a good thing?  Remember that nay money that you save in cost of funds is money in your pocket.  That is a loan that you did not have to take out, that is you not using your credit, that is you being able to take over a property regardless of the number of properties you have on your credit, that is you being able to act today.  There is just so many benefits to being able to do subject two as long as you do it the right way and this would be the right thing to do.  Great question Kirk.

Okay.  Now we have got a…looks like some trust questions.  What happens when I have been filing tax returns and paying taxes and I now open these trust and no longer have income?  What does the IRS do?  Please elaborate on this.  Well Joan, here is how it works.  The thing is we do not, I repeat we do not expect not to pay taxes on these things.  We in fact file our tax returns just as you normally would.  Here is the way the IRS looks at the type of trust that I teach you about.  These are what is called simple flow through entities.  This is a simple trust.  There is also a thing called a complex trust but this simple trust, all you have to do is follow the guide and do exactly what I tell you to do in guide book.  Now, on page 138 of your land trust volume 4 I have got a story here that says what about taxes and it talks about exactly how you set up your whole tax process and I give you some ways to go ahead and set that up on page 141 which talks about IRS form 141.  Now this is not the 1031 that we talked about before.  This is the 1041 form that the IRS calls for.  According to the IRS and I have got it on page 142, they consider the simple trusts as a type of trust that flows through to the income tax of whomever is paying.  So in other words the beneficiary of the trust is who files the tax return and in this case Joan if that be you, you would file the tax return and you would be the one that would actually deal with the income taxes and the benefits of the property as well.  So, once you set up the trust the property goes into the trust, you do a schedule E, you show all your expenses, you show your depreciation and you as the beneficiary of the trust get to take all of that off of your taxes just as you were doing it before you opened these trusts, as you say.

Now we have got a question here on after purchase and several refies, my name appears all over county records with each of my rental houses.  How easy is it for someone to crack my land trust and see the beneficiary?  Well the word someone Bill, is a broad base question.  Someone…now who is this someone?  This someone would have to have filled a lawsuit against you; this someone would have to had brought you in for depositions.  This someone would have to ask the right question in order to, quote unquote, crack open your trust.  Now, when we crack open your trust what do we find?  We find another trust if you are doing it the way I teach you.  So the beneficiary of the cracked open land trust is actually a personal property trust and in fact now they have to sepia the trustee of that trust and they have to find out who the beneficiary of that trust is.  In this example it would even be that you may not even be the trustee of the land trust.  Therefore they would have to supine the trustee of the land trust, not you.  Once they have now supined that person that person, they said okay well now who is the beneficiary of this land trust?

First of all they would say I am not at liberty to give this information but let us say that they wore them down and chiseled them down and they just started singing like a canary but the only information they ever knew was who was the beneficiary of the land trust.  Now in the scenario I just laid out who was the beneficiary of the land trust?  It was the personal property trust therefore that person who got brought in, then was asked those questions, reveals exactly what they know which is nothing.  They only know that there is another trust as beneficiary and doing it this way you have actually built yourself a very fortified plan.  Now let us say that they now bring in the other trustee.  First of all ask yourself is this expensive?  You better believe it is expensive and whomever is after you who is trying to get you…well just imagine that they are having to write checks, write checks, write checks and now they got to write some more checks to get this other person in.  So, let us say they bring in your personal property trustee.  What are they going to find out from them?  Well they might find out in fact that the beneficiary of the personal property trust now is a LLC, limited liability company.  So now they have got another problem.  They have to go hunt for those people and you just get the picture that this is going to be extremely expensive and that is exactly what our plan is.  Make it so expensive that they cannot afford to proceed and they leave us alone.  That is our ultimate strategy.

Now we have a personal property trust here from Ann and it says if I should choose Phoenix Management Trust for example for a bank account trust do I need to be concerned there is another Phoenix Management Trust?  Well, Ann no.  You do not have to worry about that because what is distinctive about your particular Phoenix Management Trust is a different trustee then the other one.  Also what is distinctive is a different address.  Also what is distinctive is the assets that is placed into the trust is different from the other one.  Now I am not encouraging you to use a name that is in use.  So, if you have knowledge that the name is in use then no, use something else and do not try to confuse because many times when you are trying to close a transaction, make a deposit or anything like that, when there is confusion there is delay.  When there is delay there is often more delay and upset and breakdown and everything else.  So I want to you to be very careful about using these techniques and using them wisely.

Wow we have covered a lot of ground here.  Now we have got another trust question from Bernice.  It says if you have multiple people as beneficiaries does each person have to file a schedule E for their share of the property?  The answer is yes Bernice, they do.  So if for example in a trust you had 4 different beneficiaries and let us say each one of them is entitled to 25% of the asset in the trust then yes each one of them would have to file their own schedule E for their portion of the depreciation of the taxes, the property taxes that is, the insurance costs, the repairs and the income and that would all be listed on their schedule E and it would be merely outlined on that schedule E that this was partial return for a partial detail of involvement on that particular property.  Hopefully that cleared it up for you.  Now it goes on to say if they do how do you set up so that they do not have to file separately?  Well they are going to always have to file their own tax returns.  What is true though is that the trust itself does not have to file a tax return because of the explanation I gave earlier that that is all taken care of when you personally as beneficiary file your own tax return.  Good question.

Also what is best way to structure your properties and still control the management of them and protect the veil of your trust, I am in Ohio.  All right, the best way to structure your properties and still control the management of them is to get your property…and this is such a wonderful thing…your property management and the control of your management is going to be controlled by the trustee.  The trustee in the trust hires the manager.  You could be hired as the manager.  How are you going to be hired?  There is a management contract in volume 4 land trust and that is exactly what the trustee is going to use to hire you as the manager.  So you are taken out of the line of fire, so to speak, and you have got yourself well connected to the deal because you control everything except the deed itself.  So, you as the manager, if the tenants do not pay you file the evictions, you go to court, you fix up the property, you hire and pay the contractors, you receive the property tax bill and pay it, you receive the insurance bill and pay it.  So everything is done outside of the purview of your trustee.  Then after all the responsibilities of you the manager have been taken care of and now you find a buyer then all you do is notify your trustee that they have to sign the deed to transfer the property to the new buyer.  Wonderful, wonderful place for your trustee to be because there is absolutely no work for your trustee to do except to sign a deed.  Isn’t that a wonderful thing?