Safely Assume Non-Assumable Loans Without Down Payment or Loan Qualifying, and Without Subterfuge or undue “Due-On-Sale” compromise! By Bill J. Gatten
Remember that TV ad of a few years back? The one where a guy eating a chocolate bar rounds a blind corner and smacks into a lady munching a peanut butter sandwich and Voila! the Reese’s Peanut Butter Cup is born? Well, something similar has happened within the world of creative real estate. Grossly underrated, and all too frequently misunderstood, the Title-holding Land Trust has collided with the “Triple Net Residential Lease,” with some astounding results. Both devices-the Land Trust and the Net Lease-have been around for centuries; but only a select few professionals know beans about trusts in general; and even fewer have the slightest idea of what a “land trust” is. Talk to 100 attorneys and you might find one with a clue as to what happens when an Assignment of Beneficiary Interest in a title-holding trust is structured in tandem with a triple-net lease (i.e., a lease wherein the lessee pays all costs of acquisition and possession).
Despite an almost universal ignorance of land trusts, even among attorneys (…even among trust specialists), the fact remains that anyone residing in, and making payments on, a property owned by a revocable, beneficiary directed, inter vivos [“Illinois-type”] title-holding land trust (phew!), need only be made a co-beneficiary in it, in order to reap the myriad benefits of home-ownership. For the resident beneficiary, this trust/lease arrangement actually provides pride of ownership, use, occupancy, equity build-up, appreciation and income tax write-off [i.e., see Belden, 70 TCM 274, Dec. 50,802(M) re. IRC Reg. 1.163-1(b); IRC 163 (h)4(D); Rev. Rul. 92-0105, etc.].
- Passive Seller-Carry’s with minimal risk of attachment to the property later on due to the other party’s creditor judgements, tax liens, bankruptcy or marital dissolution. In other words, all the benefits of Lease Options, Wraps, Contracts for Deed, Installment Sales…or even Equity-Sharing all without their inherent risks, downsides and dangers.
- Legitimate payment take-over of virtually any loan, whether “assumable” or not: specifically including VA, FHA, FNMA, GNMA and FHLMC loans. he only exceptions would include loans to business entities, and “Land Sale Contract Loans (e.g., “Cal-Vet” type loans).”
- Airtight seller-financing, which puts a stop to unscrupulous sellers quietly (purposefully or negligently) encumbering a property further, or clouding its title to the detriment of.
- Safe seller carry-backs wherein a defaulting party is stopped from claiming “Equity” (asserting tht he/she is an owner vs. being a tenant) in order to thwart or forestall simple eviction, thereby forcing an expensive and time-consuming foreclosure action.
- Income property can be acquired with virtually nothing down and nothing per-month (when a a resident beneficiary is paying all the bills): with no management, maintenance, vacancy expense or negative cash flow! One need merely become a co-beneficiary in a land trust, appointing a third party as a co-beneficiary to live in, and cover all expenses related to, the property…i.e., ‘in exchange for the full benefits of income tax write-off, use and possession, mortgage principal reduction and some or all of its appreciation potential (e.g., say, 10%, 50% or 100%).
- First, a seller, willing to keep the existing loan in his/her name (for a while), creates a land trust in his/her own name and places the property into it: i.e., Robert and Mary Jones vest the property with “The Robert and Mary Jones Trust.” In that the trust is an intervivos (i.e., living) trust; and because it is directed solely by Robert and Mary; and since no sale of Real Estate has taken place; and since the trust is in the borrower’s name only: there are no income tax consequences, and the lender’s due-on-sale clause is not violated. As a matter-of-fact, holding one’s real estate in this manner is a prudent estate-planning device, whether conveyance of ownership is the objective or not [e.g., see: Get That Property out of Your Name-Using Land Trusts for Privacy and Protection, by Wm. Bronchik]. Federal law (the Garn-St. Germain Act of 1982) emphatically prohibits lenders from taking exception to a borrower’s right to place its property into such a trust and lease it out (so long as the lease is for less than 3 years and does not contain an option to purchase).
- Next, along with the property’s use, occupancy and possession, a co-beneficiary interest in the trust (10% 50%, 75% 100%, etc.) is assigned to a second party. Note that, although it can be forfeited at termination, at least a 10% beneficiary interest should always be retained by the seller, in order to conform to the IRS’ 10% rule (i.e., no land trust beneficiary may hold less than a 10% interest); to discourage and due-on-sale disputation; and to avoid a property tax reassessment.
- Then, an Agreement for Use and Possession between the trustee and the new co-beneficiary is created, whereupon the IRS, and most states (Tennessee and Louisiana not withstanding), characterize the resident beneficiary as an owner of an “IRC -163 Qualified Property,” even though the real estate has itself been converted by the land trust to personalty. [See IRC -163(h)4(D) pertinent to real property held in estates and certain trusts, in which ownership is characterized as personal property]
Start by identifying the “Don’t Wanters”, whose owners, in order to alleviate their burdens, would keep the existing financing for a while. The newspaper is chock full of these properties under: “Tired Landlords,’ ‘Exasperated For-Sale-by-Owners’ and ‘The Very Desperate!”
Next, advertise for the “Must Havers” who-for ownership and tax deduction without Loan Qualifying or Down Payment-will eagerly assume the responsibilities of home ownership (the ad might begin: “The Benefits of Home Ownership can be Yours-No Bank Qualifying-No Down-Closing Costs Only”).
The “Don’t-Wanters” and the “Must Havers” are in endless supply! To help them both, and make money in the process, one need merely seek them out and stand in the middle.
Then order the book NO DOWN, NO NEW LOAN
- All documentation, consultation and trust set up – Fee Schedule provided upon request
- We will speak with your clients, buyers, sellers and brokers to help facilitate your transaction
- Establishment of the requisite Corporate Trustee
- Bonded collection service. Collection and impounding of all monthly payments, and disbursement to all payees, plus notary, recording and special mailing, if any Legal services (evictions, foreclosure, substitutions, assignments, delivery, etc.) – Fee Schedule upon request
Note: We are not a law firm, accountancy or real estate brokerage. All interested and/or inquiring parties are encouraged (directed) to seek independent legal, accounting and real estate agency advice and representation relative to the EHTrust(tm) or doing business with our company.