Group Q & A January 9, 2007
Lou Brown:
Question:
J. R. says, “As you already know about the legislation relating to lease options in Texas, I was told there was a way to achieve the same results using land trusts. Would you happen to know…how that would be possible?”
Answer:
Well, J. R., that’s a very interesting question. Those of you on the call who are not aware of this, Texas has passed some legislation making lease options difficult. Of course, our street-smart system is to move folks in under a long-term lease option, and have them, eventually, in a position to buy the property, if they do what they are supposed to do. Of course, if they don’t do what they are supposed to do, you get your property back and there’s no problem. In the meantime, you’ve made some option fees along the way.
A vote getting, or vote attracting, legislator in Texas right before the legislature…was putting forth some new legislation that would make it more difficult to do lease options in Texas. It’s not impossible and not outlawed, but more difficult. What they did basically is said, “Hey, lease options need to be limited to a six month time frame.” So. That’s what J. R. is referring to.
Question:
He asks, “I’ve heard that you can do and achieve long term results with lease options with some other ideas around land trusts.”
Answer:
Well, J. R., you’re absolutely right. I do have an idea here that it’s going to blow some of the folk’s minds on this call. I want you to remember that we do this group’s q and a not as an elementary session, but there’s some advanced information that comes on these group q and a calls from time to time, and this is an advanced conversation.
Let’s take this scenario. What if we take the property and place it into a land trust? As many of you know, when that property is owned, you don’t own the real estate anymore the real estate is owned by the trust. What you have is a beneficial interest in the trust.
What if we move someone into the property and we gave them an option for the beneficial shares of the trust that owns the property?
Interestingly, that is not included in the legislation in Texas. They don’t mention anything about beneficial interests in land trusts and setting that aside. So, one could option to buy the beneficial interest in the trust…separate from the lease. So, we could have a lease with the individual. In other words, the trust would have a lease with the individual, and the individual would have an option for the beneficial interest in the trust that owns the property.
Therefore, the trust issues should suffice to have that kind of bypass. We know that sometimes we have to do things to bypass ridiculous legislation such as the Due On Sales Clause. We have got a way around that, and I think this might be a way around the problems in Texas.
If you are in Texas, and you are hearing this, and your friends weren’t on this call, tell them, “Boo-hoo, too bad, so sad.” Maybe they ought to get on this coaching training cause I’ll bet they haven’t heard that solution.
Question:
Okay, Stephania Booth says, “Hello Lou, my name…it came from Stephania, but it’s actually Adam Booth. My name is Adam Booth and my wife and I live in Florida. We have an issue.
A house we have is under contract with a lease option expiring April 1. The tenant has decided not to go through with the option. She sent us an e-mail, and she decided that not to go with the option, nothing official. Well, she thinks that since she’s not going to buy the house she doesn’t have to continue to pay attention to the rent or the option. Our contract, not yours…unfortunately, it’s a contract before we met you, states specifically that she’s responsible for the option even if she doesn’t buy.” That’s interesting Adam, but that’s not going to get you over the hump.
He goes on to say, “We only got half of the option up front, and she was adding an additional $200 per month until April to pay for the other half. We sent her a letter stating that she’s responsible for the option per our contract. We sent it certified mail, looks like she’s too lazy to go get the letter at the post office. There have been two attempts to deliver already. What can…should I do? I think she still wants to rent, but not pay for the option. We want to sell the house not rent it. How can we get her out of the house or to pay?”
Answer:
Well, unfortunately Adam, the agreement controls…you have an agreement with her. It does state that it’s an option. If you were to go to court, even though it states that she’s obligated to pay the option fee, I don’t believe the judge would uphold it and here’s why.
Basically, it’s an option. It’s an option to purchase the property. The judge would say, “But she’s telling you she’s not going to purchase the property, therefore, you’re not entitled to any more money.”
Now has good old Lou got that solved? Of course I do. We do our paperwork different than that. What I would suggest in the future, Adam, is any money that they do not bring to closing, that you were expecting, should be reduced to a promissory note. It should not be included in the agreement.
You go ahead and give them the option to purchase; they sign separately, a promissory note paying over time. Of course, we go into more detail on how to do that at the…MPI, Massive Passive Income, because that’s a great strategy to get people in your properties when they don’t have enough money.
Now you go on to say, “If we had your contract before this happened, this situation would not have occurred. Unfortunately, we didn’t.” Well, I’m glad you recognize that Adam. “All right this is what we were thinking about doing. Of course, if we can do it, if it’s legal and it will accomplish anything at all.”
All right, you go and say, “We were thinking of transferring the deed to a land trust as a gift so no fees occurred etc. Then we were going to present her with a new contract…yours. Can we legally do this? Her current contract is through April 1, 2007. Lou, I know you’re not a lawyer, but you’re much more in touch with the legalities than we are and most attorneys are. Suggestions or referrals are always welcome. You are awesome, thanks for the great help, Adam Booth.”
Okay, I do see that you could play the game of transferring the property into trust and saying, “Listen we don’t own the property any longer; however the new owners have some new paperwork they want to go over with you.” Then you approach her, and say, “Listen, the new rent is X, it’s going to be the higher amount including the $200that you are owed.” If she doesn’t like that number, then you are going to have to wait it out until April 1.
That could be a method of going ahead and getting a deal to change in mid-stream here… otherwise your just going to have to wait it out. That becomes an inexpensive seminar that we could have avoided if we had it. Of course, you don’t know what you don’t know. So, I’m not yelling at you, I’m just saying that we’re going to have to be more careful in the future…and you’ll be taken care of.
Question:
All right, next question. We have an asset protection question from Jill. It says, “Dear Lou, I am trying to set up my real estate business in Texas for the best tax advantages and asset protection. I am a little confused. I have reviewed your Street Smart systems volumes 4 and 5, which recommend using trusts. Street Smart systems volume 1 suggests having a company name instead of using my own name for housing marketing and contracts.
Question one: in naming my company, does the name have to be a business entity such as an LLC? Or does it have to be registered at all? The legal advice that I have received is to form an LLC, and have everything go into it, bank accounts, etc., and have it as the beneficiary of the land trust.”
Answer:
Oh, baby. Okay Jill, first of all, lets not do that. Let’s back up to your question one; in naming the company does the name have to be a business entity?
Well, no Jill. You can do what’s called a DBA, a doing business as. So, let’s say that it’s Jill doing business as Home Solutions…yeah Home Solutions, let’s call it that, or Home Buyer, or Home Seller Solutions, or whatever. That does not have to be an entity.
If anybody ever sued that entity, it would come through to whomever the owner of that entity is, which is not an entity. I know that sounds a little confusing. If they sued that name, they would find that there was no one there. So, what they would do is they would come after an individual.
Now Jill, lets say that that individual is you. Well, if you’ve done your homework, and you’ve transferred all your properties into trusts, then you don’t own anything. Therefore, if they came after you, you wouldn’t own anything. I think that might be a real smart place for you to be.
So, to advance that question, you say the legal advice is to form an LLC and to have everything go into it, bank accounts and beneficial interest. Well, of course an LLC, if it’s set up, does have to have its own bank account. It doesn’t necessarily have to have the bank accounts that all the moneys coming through though.
So, we can have the LLC as a beneficiary of the individual land trust, but that LLC should not have or be exposed on the public’s eye. Therefore, it can exist, but we don’t want anyone to see on public record that it owns anything.
You see the thing that attorneys don’t ever think about is that…lets say that you had ten properties; all ten were owned by one LLC. That LLC gets sued, guess what? The judgment goes against everything it owns. All ten properties, but instead having each property in its own land trust, gives us the protection that we need, and it also gives us some great privacy.
We can still use the benefits of an LLC, but no one sees that it owns anything on public record, because…it doesn’t. If they look up that LLC, they don’t find that it owns a thing. I think that’s a great place for us to go.
You go on to say, “Number two: I have been told if I was to have trusts, I would be taxed at a high rate. How does this work? Are there any tax advantages to trusts?”
Well, first of all, the folks that have said that to you don’t understand trusts. The kind of trusts that I am teaching you about are about land trusts, and these do not have their own tax tables. You’re correct…that complex trusts have very high tax tables, but not our kind of trusts, which are called simple trusts.
These types of trusts have very low tax tables or, in fact, they’re the tax tables of the beneficiary, whomever the beneficiary is. That means if the beneficiary is an LLC, it has the tax tables of the LLC. If the beneficiaries a corporation, it has those tax tables and so on. Hopefully, that cleared it up for you.
All right, you go on to say, “The attorney told me that land trusts in Texas are not popular, and have not been tested to hold up in court. What is your knowledge of Texas’s trust cases?”
Well, I don’t have any knowledge about trusts being challenged in Texas. I will say that just because there’s not a lot of case law is not a bad thing. Sometimes not having case law is just as good as having a lot of case law. That means that it would be very expensive for someone to challenge you, because to have a solid decision it would have to go up through the appeals court. That would be a very expensive process for someone to do.
So, someone could be struck down in the lower court, and to appeal the decision that would have to go to a higher court. Be very expensive so, I would say, “Carry on, there’s no restrictions to using land trusts in Texas. I would absolutely do it, if I was in Texas, if that tells you anything.”
Number four: “How do I find an attorney that understands land and personal property trusts?”
Well, Jill, I’d say, “Good luck.” You’re probably not going to find that critter. What I would recommend is that you attend the MAS, the Maximum Asset Shield training that we have January 25 through the 28th in Atlanta. That is a four-day event.
There we’re actually going to do the trusts in class. We’re going to do a land trust in class. We are going to do a personal property trust. We’re going to do a living trust. The good news is you can bring your own deed to class, and actually experience doing it yourself.
So, while I’m doing it from the front of the room, you’re going to be doing your own as a workshop. The process is going to be very, very clear to you, because you’re going to be able to ask questions during the process, and make sure that you’re with me all the way. You don’t get left behind.
We’re also going to talk about moving…vehicles into trust. We’re going to talk about setting up trust bank accounts. We’re going to talk about tax benefits of using trusts. We’re going to talk about living trusts, and actually going to do one of those in class as well.
All the documentation is included. One of the great benefits of this, is when you graduate, you will actually be presented with an auto-filled disk, that allows you to fill out one page at an automatically auto-fill all of your forms. That’s one of the great things that is a gift from me to you after graduating this class.
People say, “Well, why don’t you have that in your regular course Lou?” I say, “Because an untrained individual with an auto-filled disk is a dangerous person indeed. They don’t really understand what they’re doing. I want to make sure you go through the training, so you understand.”
By the way, we’re also going to cover corporations, LLC’s, limited partnerships, and how they relate. We’re going to build a financial fortress for you there at the event. So, you’re sure not to have and make the mistakes that other people do without even knowing that they are making the mistakes.
So, I highly encourage everyone on this call to get on the phone tomorrow and call 1-800-578-8580. That’s 1-800-578-8580. Anytime…and someone will get back to you if the lines are busy. We will take care of you guys. Since I think everyone on this call is a whole enchilada junior owner, you qualify for a $1,000 travel allowance. That really helps you to get to the event, and actually learn what this is all about. So, definitely get yourself registered for that. We are almost full. So, don’t waste any time getting yourself registered. Call the office as soon as you hear this.
By the way, we’re including your spouse, or family member, or significant other, at no additional charge. That’s for our Street Smart students, you get no additional charge. So, you get the auto-fill, you get designated as a certified trust specialist, and you also get all the forms and the manuals there at the event to actually follow along and do it there. You get to bring somebody with you, and you get the $1,000 travel allowance.
Boy, is that a deal or what?
Question:
John K. has another trust question. He says, “How is your land trust system different from Bill Gatten’s system?”
Answer:
Well, good question. Some of you have heard that there’s another type of trust out there in the world. It’s from somebody named Bill Gatten, and he has a different approach to it than I do.
His approach basically is that for the purposes of avoiding the due on sale clause, he and his company actually act as intermediaries between the…seller and the buyer. They actually collect the payment from the tenant as like a management company. Then they pay the mortgage payment on behalf of the seller.
It’s a complex process. It’s expensive as well. If I thought it was what you should do, I would absolutely do it. I find that the way that I’ve been teaching you and, in fact, doing it myself for well over 20 years, means that that step is an unnecessary step in my opinion. So, I’m not downing his system, I’m just saying that it adds another level of complication that may not be necessary.
Question:
All right, question number two: “Doesn’t the previous owner have to stay on the land trust as a beneficiary according to the Garn-St. Germain Act? Aren’t parts of the land trust considered?”
Answer:
Okay, well let’s answer that one next. The answer is that that’s exactly how we set up the trust. Initially, we set up the trust in…with the seller as the beneficiary. Then we do have that documentation.
Then, there is a separate document called an assignment and quit claim of beneficial interest, wherein the seller quit claims their beneficial interest to a new trust. That is your trust. It’s a personal property trust.
We have that set up so that the seller is no longer in control, however we do have documentation that shows that they indeed were the beneficiary of the trust if we ever had to provide that. By the way, I’ve never had to provide that. So, I would not be concerned, overly concerned about that, John.
Question:
Now you go on to say, “Aren’t parts of the land trust considered an executory contract which is outlawed in Texas for creative transactions?”
Answer:
Boy, all the Texans are on the call tonight. That’s a good thing. All right, so…in fact John, your information is a bit skewed. What you’re referring to is a land contract versus a land trust. You’ve gotten the term land trust confused with something different, called a land contract.
In Texas, you’re absolutely right; an executory contract is created in a land contract, but not a land trust. So, therefore, we have no issues with using land trusts in Texas. Okay, great. I thought we’d moved the trust questions instead of from the end, we’d moved them to the front of our conversation tonight. So, you guys could get a taste of that.
By the way, we’re going to be doing a…trust only call as a bonus for you guys on Thursday night. We’re going to set up a special line, and we’ll be sending you an e-mail on this to invite you to that special call. You can, it’s all about trusts and my special guest will be Al Aiello. We recorded this several months ago. So, you’ll get the benefit of hearing a number of questions that were sent in by people who were particularly interested in that topic of trusts. If you want to learn a lot more about trusts, just tune in for that special call on Thursday night.
Question:
Okay, now we’ve got Ed and Becky Casavan, who are one-on-one of our coaching clients as well, and they have a question. “We received an inquiry through our street smart selling web site with a couple with fairly good income.” Well, first of all, congratulations that you’ve got some Internet traffic on your selling web site. I like this part about they have fairly good income, but poor to fair credit.
Of course, as you know, Ed and Becky, and all of you on the call that’s exactly the kind of customer we’re looking for. Someone with…we love to have people with great credit, but it doesn’t happen that often. Typically, people that are interested in our system do have poor or fair credit.
You go on to say, “They would like a, to purchase a condo for $359,000and have to come up with $30,000to put down. They want us to be involved in structuring a purchase for them.”
So, I think what you are saying here, Ed and Becky, is that this is not your condo. It’s someone else’s condo. They have the $30,000. They want you to help them buy somebody else’s condo with their $30,000down.
“They want us to be involved in structuring a purchase deal for them. Would the next step be to contact the condo owner, and see if they’re open to a lease option in order to set up a wrap-around? How do we deal with these kinds of requests?”
Answer:
Well, first of all this is an unusual request. We’ve had it happen certainly but we don’t’ find a lot of third parties asking us to do third party transactions for them. They figure things about real estate, and you’re a third party. So, as a disinterested third party you will probably do the right thing. I don’t blame them for looking for that.
Here’s what I would do in your case. If you recognize what you would really be in this transaction, effectively you’d be a realtor or an attorney. Either one of those positions requires a license. However, if you buy the property and sell the property…no license is required.
Here’s an idea. Go to the owner, option the property…option to buy the property, then go to your buyer and sell it to them. Now, remember that your option has got to have the…better term than you’re going to offer to your client, the one who has the $30.000.
In other words, you want to buy it for less than the $359,000, and you want to buy it for less than $30,000down. So, you can make the difference in the transaction. You can… once you’ve got the deal put together, have a total transaction where you are the purchaser from the seller, and you are the seller to your new buyer.
It’s called a sandwich lease option. So, you can lease option from the seller, and sell to your buyer. Remember that you can also do a subject to transaction if they would let you take over the existing financing on there…that would be my favorite. You take over subject to, and you sell to your buyer on a lease option. Hopefully that helped. Let me know how that goes.
Question:
All right, Lisa has a question on subject to’s. Simple question. “Subject to buys, what is the best way to do it?”
Answer:
Well, good question Lis. First of all, you’ve got to gather the information about the loan. We have a seller questionnaire to do that very thing. That’s basically your script to ask the seller exactly the details about their existing financing on the property.
I’ll tell everyone on the call, listen, you guys are trying to do transactions without enough information. Almost daily, we get offers in the office where people are saying, “Hey Lou, what do you think about this deal? Or would you partner with me on this deal?” They simply don’t have enough information. Not a good plan. Can’t help you, you got to get the information.
The deal begins with the details. The devil is in the details. So, Lis you’ve got to get that information. Then once you’ve got the information; if it’s a good loan, if it has a good interest rate, if it has a good terms, if it has good payments, all the details, then it makes sense for you to do subject to.
So, I would follow the checklist that’s in volume 4, page 148, which is your subject to checklist. That guides you through all the paperwork you’ll need to do your subject to.
First things first, you’ve got to follow volume 1 to determine if it is a good deal, and actually determine the cost of sell and all the other considerations. Then subject to is one of the ways that we can buy the property.
All right, to learn more about other ways to buy property, you do need to attend Millionaire Deal Maker, which the next ones coming up in March. There we actually go into numerous different ways that you can structure a transaction. Not one or two, but numerous ways.
Question:
Next, we’ve got a financing question from Chris Conklin. Chris says, “Lou, picked up a property that was 100% investor financed. The loan is an interest only fixed rate loan for six years. Then it converts to principle. What are your thoughts on interest only loans for investors?”
Answer:
Chris, that’s a great question. I’m sure a lot of folks on this call have that exact same question. Here’s the deal. It really depends on your goals. If you have long-term goals, then I would say you’ve got to think long term. You’ll have to…pay more costs and re-finance later if you take over this loan. I would consider those costs when I buy. I’m going to look at appreciation, but I’m not going to buy because of appreciation. The appreciation is actually a gift that you get because you bought the property.
I like fixed rate loans. I like loans that I can control. You see, I have no idea what the market’s going to do in the future. One thing I know is that the loan is not going to go higher, if I have a fixed rate loan. I figure I can adjust, and I can use all our different Street Smart ways to buy and sell. We can get that thing handled with…if we get in trouble later. Such as the interest goes through the roof, or we get disinflation or something weird happens. We’re still protected on our fixed rate loan.
We’re not protected at all with an interest only loan. I know what these interest only loans are. Typically, they’re below market interest. Then they adjust later…which is basically the bank’s idea of, “Hey you don’t have enough money today. Lets still do some business.” Does that sound familiar?
We do the same thing. We’re actually acting as the bank when we sell our properties, and carry back financing or provide lease options. We’re doing the same thing the bank does. So, I’m not crazy about interest only loans.
Now, if…let’s say, that you were able to take over this property and had a significant equity in there. Say for the interest only loan, we could get somebody moved in, work with their credit, and get them to buy the property, then we don’t have to worry about this loan later.
So, I would say, the fact that this is a 100% financing property, I am just not excited about it. I think we need to buy…remember Chris that I teach you, you get your profit going in. We get out discounts going in. We may not realize that profit until later when we sell the property, but we have got our profit locked in when we buy it. This one just doesn’t look like a good deal. I like pay as you go. You can’t dig a hole that you can’t get out of. Hopefully, that made sense Chris.
By the way, all of you on this call…we do have layers of coaching. So, this is our group
q and a, where twice a month I take all your different questions, and answer as many of them as I possibly can. We never get to all of them, sorry. There’s just not enough time. So, what I do is forward them to the next call. I try to get to them on that call. That’s the challenge of what we do here is there’s so much to teach.
So, we’ve got another level, and it’s the individual q and a. Where you can fax or e-mail questions individually, and we get those taken care of for you on a direct basis. You send a direct question, you get a direct answer. We want to make sure you guys get taken care of. So, that’s what we do there.
The next level is our one-on-one, where you get to be coached by me…on a 25-minute call, once a month. Each one of these levels includes, I mean the direct includes the group. The one-on-one includes the direct and the group. So, you’ve got that level. This is to help you when you’re about to buy 100% financed property, before you buy it.
Now you can communicate with Lou, and Lou will guide you. I just want you guys to know that you can land on the chance card in our game of Louopoly, and turn up the wrong card, and take you out of the business. This coaching program was designed to make sure you guys don’t have that problem. It’s just critical for your future.
Question:
All right, next we have a Pamela DeHaven asks, “About your whole enchilada junior program in Daytona Beach last week at the __29:42 boot camp. I missed most of the
q and a last night and want to download it from the web site. What is the web site address for the q and a download? Looking forward to the next call, can’t wait, thank you and God bless.”
Answer:
Well, Pamela you should right after the call, receive the next day an e-mail from us. In that e-mail is your pass code to listen to that downloadable q and a. That means you can download it to your MP3 and walk around and listen to it…and it’s all good.
So, if you can’t make the call on the night we have the call, don’t worry we have a replay, but be sure and open your e-mails from good old Lou and street smart, because without it you miss out. You do have to know the code. Pamela if you need that, call into the office 1-800-578-8580, and we’ll make sure to get you taken care of.
Question:
Now, we’ve got a question from Roy Schultz on deal structuring. He says, “We sent out letters to our area owners and got two responses so far, not bad for fifty letters.” I agree with you. “Both have unique situations, and we are not sure what offers to make or to just pass on both.
They are one; owner has moved out of state, and taken out a bridge loan on the vacant house. Listing with a realtor has expired also. They’re asking $320,000The loan is for $283,500. House is worth $305,000to $310,000. The $283,500loan is probably too high for taking over subject to and putting a tenant buyer in. I planned to offer all cash at $230,000based on the cost to sell worksheet. Am not sure if there are any other offers that we can make.”
Answer:
Well, Roy, you could take it subject to. They pay you to buy, because lets face it, at the 230,000 they are going to have to pay off that $283,000loan. So, they can pay you, you just take over the 283,500. Now you have a big fat monthly, excuse me, you have a big fat wad of cash that you can use to make sure that those monthly deficits get paid while you have got your customer in there.
Let’s say that you put that property out on a lease option or an agreement for deed. We get some down payment money from that new person moving in, and you start working with a credit. Then in quick fashion, and I can help you with that, because we have credit whizzes here where we can help you to clean up credit, yours and other people’s credit.
Now, you’ve got your customer who’s getting a credit clean up, and that means that soon they will be able to qualify for a loan. So, maybe you only had to carry that $283,000loan for a few months, and not at much of a deficit either, because we’ve got the customer sitting right in the property.
Likely, you’ve sold the property at $339,000., because you can mark it up very nicely with our lease option and agreement for deed exit strategy. That allows you to make a nice spread between the 283 and say 339. The other good news is, you get a nice hunk of money down. The other good news is that we can get rid of this loan as soon as you get them qualified. So, that may be a solution for taking over over-financed properties, and in fact, it’s not maybe…it is a solution for taking over financing.
Question:
Now, another solution is…well let me go on to your question number two. “Second response came from a lady who has moved out of state. Property is in her name and her life partner. Her life partner has passed away.
She currently has a tenant buyer in the house who were supposed to buy the house two years ago. Tenant is now two months behind on rent. We’re not sure if we can even buy the house since the owner is deceased. She is really motivated and is looking for help. ARV on the house is $280,000and she owes $85,000.”
Answer:
Oh, baby, Roy. This is a good deal. This is a great deal. She only owes $85,000. First of all, you could take over the existing financing. That’s good news.
I understand that one of the owners is deceased, but we can work through the probate process and get that transferred. If both names were on the deed with right of survivorship, you’re not even going to have to go through that problem. However, if JTROS which, is joint tenants with the right of survivorship, is not on the deed, then you will have to go through the probate process.
Here’s some good news. You’re one of the, because you’re street smart, you’re one of the very few people that could actually maneuver that solution. Most folks that she’s going to call will not know this solution or even what to do. So, I would say…take over the existing financing, put a lease optioning in the property, work with her to get this deed cleaned up, and transferred. Then you take over subject to.
In the meantime, you say the ARV is $280,000. You’re going to use the cost to sell guidelines. You’re going to get that significantly reduced, and then you’re going to get her to carry back owner financing. Work out a payment arrangement with her to pay the balance over time with monthly payments.
You didn’t hear me say interest either. The way I teach you to do this, you’re not going to pay any interest, and she’s going to love you for it. So, you’ve got some real good options here.
One more option on your question number one is the possibility of a short sale with the bank. Those are another solution to get the bank to take less than they’re owed for their mortgage, because of the cost to sell.
Question:
Now, Randy Michelson has a question about deal structuring. He says, “Lou, just purchased a whole enchilada license and received the CD’s and books this week. Here’s my first potential deal.
Naples, single family residence with a guest house, appraised at $600,000. With a mortgage balance of 330, excuse me, 371,000. Owner can no longer afford the $3,200a month payment.”
Those of you who are on the call, who have never heard of Naples, Florida, just understand that is a slum house in Florida. That is a very inexpensive house in Florida. Interesting, isn’t it? Not in Florida, but in particularly Naples is a highly moneyed area.
We just bought a property there for a little over a million dollars. It’s valued at 1.6 to 1.7 million dollars. So, we got a very good discount on that with a short sale with the bank. So, it even proves that you can do it in highly appreciated hot markets like that that the banks will take discounts if you approach them right.
So, let’s go on with Randy’s question. “Current mortgage rate is high due to bad credit.” So, instead of subject to I prefer to get a cheaper loan with my better credit. I am proposing to purchase for 400,000with 6% seller contribution, and allow the owner to rent the main house. Guest house already rented. I need to learn quickly how to set up the trust you recommended. Your thoughts and advice please.”
Answer:
Okay, well it sounds great to me, Randy. Obviously, you want to justify that huge discount using the cost of sell guidelines. It’s…I tell you what Randy, even with the fact that you have better credit, you’ve got a $371,000first mortgage there. Gosh, I’d be very attracted to just leaving that in place. You didn’t tell me how much the interest rate is, but let’s factor in what the cost is going to be for you to obtain this new loan even though it’s at a lower interest rate.
It may make sense…even with that for you to take over the existing financing and keep your good credit for a deal where you have to pay cash. This is a great situation that you may not have to pay cash. We saved our ability to qualify for only cash deals.
I like the fact that the guest house is already rented and you’ve got an income with that.
So, you go on to say about the trust. Well, follow the checklist, page 148 of volume 4, Land trust has my subject to checklist if you’re going to do a subject to on that. If not, just follow the checklist in the guidebook on land trust, which is volume 4.
By the way, if anybody is on this call and doesn’t have the trust paperwork, you need it. You need this thing. So, just call the office and get the volume 4 land trust and volume 5 personal property trust. You’re going to find that this is a very significant part of your overall strategy, of not only buying right, and buying cheap, and selling fast, but also holding right and holding in these great things called trusts.
Follow the checklist in the book, page 20 on volume 4, and that will guide you through how to set up a traditional land trust without the subject to. Randy, I answered several different questions in there for you, some you didn’t even ask…but hopefully that is valuable to you.
Question:
All right, Dan, the electric tree man. Hello Dan. “Dear Browns, I have a deal that could be had. Two actually, first deal, the lady with three children and a four year old ARM, adjusting for the second time, and the notice of default has been posted for her foreclosure on October 17.
She just wants to get out. Tried to sell it for seven months for 200 and…no excuse me, tried to sell seven months ago for $225,000., but the market was in decline in Northeast Florida. First mortgage $145,000., second mortgage $31,000. It’s a three bedroom, three bath, 2,000 square foot acre of land with a pond. Eight years old. What would you do?
Buy a sign for the round robin auction. I need positive cash flow as no income. Don’t want to lease option or subject to on this one. Do you think the second will discount as the first probably won’t? BPA, BPO, I mean brokers price opinion would not come in, right?”
Answer:
Okay, well first of all Dan, don’t…give up on the fact that they might accept a discount. You never know what situation the lender’s in, and I have seen lender’s who traditionally wouldn’t do a deal…do a deal. So, I never assume anymore that they are not going to work with me. I just proceed as if it’s a new day, and they have a rotten balance sheet and need to get rid of some property today.
So, let’s definitely attack the second mortgage. Let’s get that thing reduced from $31,000 down to no more than $3,000. Likely, I would even offer less than that. My offer would probably start around $1,500on that $31,000mortgage.
Now, how am I going to get them to accept that? Well, I’m going to use the story about trying to sell seven months ago for 225, but I’m not going to use the amount or the price. We’re going to say it’s been on the market forever, can’t get it sold. Here’s the numbers.
I want you to use your compwhiz40:57 Dan. By the way, if you guys don’t know what compwhiz is call the office and find out about it. It’s a great, great, great, great tool. For years, I struggled to get comps on properties, and now with one push of a button, I can get all the comps I want. I can get comps all across the United States and these are the comps that appraisers use.
So, Dan, you definitely need your comp, because we can pick and choose which ones we want to send to the bank, and show the bank the value, and then show the cost to sell. Show the bank why it’s a good idea for them to discount that $31,000mortgage. The fact that they are behind on payments helps us grandly in getting that discount with the second mortgage lender, because that second mortgage is going to be wiped out if the first mortgage forecloses.
So, we can do a…pay-off at a discount with the second mortgage lender. Do a work out with the first mortgage lender. Actually, work out the payments and get that thing done. Dan, I hope that helped you on that.
Question:
All right, we’ve got a selling property question from Alphonso Castille. Alphonso says, “Hi Lou, I have a property in Destin, Florida that has no equity. I am trying to sell, lease option, or vacation rental. I have tried newspaper ads but no results. What do I do to get it sold?”
Answer:
Well, understand that this is a new market, and you’re right, there’s a lot of properties on the market in Destin, Florida. Not like it was just a few short months ago when it was a very high market. This is true across the country. Lots of logjam properties for sale.
So, I would call all the realtors in the area. I would offer owner financing with blank dollars down. I would get a good down payment. They don’t have to go to the bank remember. Your buyer doesn’t have to go to the bank.
Realtors deal with people all the time. They come, talk to them about buying property, they can’t qualify for a loan. Or don’t have sufficient down payment. Or don’t have sufficient credit history. Whatever the case may be…you and your deal is a perfect deal for these realtors.
Let’s contact every realtor in town and say, “Hey listen, I’ve got a property, and I’ll offer owner financing. No, I’m not interested in listing it, I’m interested in selling it. Do you have a customer? I’ll pay you for that lead. Or I’ll pay you if you…and I’ll protect you and pay you if you bring a customer to the table.”
The other thing I recommend you do Alphonso, is study our selling system, because we do give you some very unique and good ways to get properties sold. In fact, the graduates of our MPI class got one new tool that we created, called the selling marketing checklist. It’s a number of things that we do to get properties sold. If you’ll just do those things, I guarantee you’ll get the property sold.
Question:
All right, we’ve got a question from Bryan Musa who says, “I live in Massachusetts that protects tenants heavily. I used your contract for a recent lease option, which states that the lease option fee is non-refundable. Will this stand in Massachusetts court in the event that I have to evict the tenant?”
Answer:
Bryan it really should…even in Massachusetts. Here’s what the person has purchased, and this is how you have to present it to the judge. The customer got the merchandise. What you had for sale that day was the option to purchase the property. You delivered that option to the customer.
The fact that the customer didn’t exercise their option has nothing to do with Bryan Musa. It has to do with the customer. They bought something, they didn’t use. We’ve all done that. We’ve bought things at the store, we never put on, clothes. That we bought things that broke when we got home, and we didn’t take it back. This is exactly what happens to that customer.
They bought something they didn’t use, but that doesn’t mean that you have to give them a refund. You don’t…and that’s why the words non-refundable are in there. You do have to have a good argument when you go before the judge. The purchaser received the option to purchase, when they gave us the funds.
Question:
Okay, now Daryl Lind has a question on purchasing property. “Having bought a house on a subject to basis, when we asked the mortgage company to change the name insured to the land trust, they asked us for a copy of the land trust. Is this necessary that they have it?”
Answer:
Okay, Daryl. Well, first of all, no…we don’t ask the mortgage company to change the, oh excuse me I misread that. We do…go to, not the mortgage company to change the named insured. We got to the insurance company.
What I generally do is cancel the existing policy. Then I go to our own insurance company and I say, “Listen…we are buying, we are going to be moving tenants in. So, we need to buy a new policy on this property we just bought. We need to buy landlord-tenant coverage.
So, when the lender received the cancelled policy, they also received a new policy. It’s a different kind of policy, because the old policy was a homeowner’s coverage. This new policy is a landlord-tenant coverage. So, it makes sense to the lender that they got the change in insurance.
Of course, we don’t pay for that insurance ourselves. If the loan has an escrow account…to escrow for taxes and insurance, then we have our new insurance company send the bill to the lender. The lender pays it out of the escrow account rather than us having to come up with those funds. Hopefully, Daryl, that makes sense to you. We will take care of you.
By the way, I would say…maybe that’s not the question we were asking. Maybe you meant to say that you’re asking to change the loan rather than the insurance. No, the lenders not going to provide a loan. Provide a change in the loan. The loan document is going to remain the same.
Question:
Okay, now we have a letter from Peter Cusamano. Peter has a question on, “Lou, my partner and I consulted with an attorney colleague about working with us on our real estate deal. I told him…it was my understanding that closing agents were not required to 1099 trust and LLC’s.
He said that the only time that was the case was if the beneficiary or members of the LLC partnership got a 1099. He also said it had to be reported somehow. Like you told us…to ask others who insist that something is so, where can I find a letter of the law on this?”
Answer:
Well, it’s about reporting requirements of the 1099 by settlement agents. Settlement agents have to report the gross proceeds of a transaction. They have to report either that the beneficiary receive the money or that the trust receive the money.
However, there are exemptions to those requirements…as to the trust. If you read the reporting requirements, the IRS is not requiring reporting on corporations, LLC’s, limited partnerships. So, that reporting is not to say that you’re not going to report your taxes, you are, but you can just do it at the time that you sell the property.
In this case, I think that’s what you are describing is the sale of a property. Yes, you would either provide that information to the closing attorney. Or they would find this as an exempt to the 1099, and you would just merely report it as you normally would.
Question:
All right, got a lot of strong questions tonight. Bryan has a question here on property management. “Hi Lou, I have a tenant that just moved in two months ago. They have been late on their lease payments both months. I have called them, and a demand payment letter is in the mail. The tenant is telling me he’s not going to be able to come up with the money. I live in Massachusetts, what are my next steps?”
Answer:
Well, that’s unfortunate, we do see situations where tenants move in and their life blows apart basically. We have to be very careful in the screening process. Make sure that they have the funds, they have a job, they have the income, to be able to move into your property. If not, get some kind of assurances. Get a cosigner for example.
As you said, they have been late on payments for both months, you’ve called them, you’ve sent a demand letter. “The tenant is telling me he is going to be able to come up with the money. What are my next steps?”
Well, in your volume 8 property management, at the back end of that book, I’ve got a lot of detail about exactly what to do when you’re working with a tenant who’s not paying on time. There’s a quite involved process…and what I want you to do first of all, is get your lawsuit filed quickly. This is a big mistake that most landlords make. They wait, and wait, and wait, for the tenant to show up with the funds. The tenant may or may not. Let’s not take that chance. Let’s make sure that that property…that you get your property back as soon as you can.
Unfortunately, in Massachusetts that might not be a quick process. So, follow exactly my step-by-step process. First of all, know your state law. Everyone on the call; since you are street smart licensees, you can go to LouisBrown.com, click on the members only section, use your serial number on your forms disk, and you can actually access that. The user name is student, and the password is the serial number on your disk without any dashes or hyphens in between. So, it would be WEJ and then the nine digit… or whatever number of digits it is, serial number that you’ve got, and that will get you into the back side.
There, Bryan, you can click on Massachusetts, and you can find out exactly what the laws are related to getting people out. You are going to have to file a lawsuit. There are services that will do that for you. If you have the time, it’s good to go through the process…just to know the process. I’m also going to teach you that we need to get that person out as quick as possible.
So, we do a little workout plan. In your property management volume 8, I’ve actually got what’s called a consent order. It’s a consent judgment signed by the judge, where we do a little workout with the tenant without having to actually follow through with the lawsuit. That little workout allows us to get the judge to sign off on our deal, without us having to go to court, sit through court, and all that nonsense.
We just try to do a little workout. Be as nice as you can with the tenant, but be firm as well. Don’t back off on the rules. You cannot survive this business without income. So, we just got to stay with the program. Bryan, you just got to stay with the program.
