How to sell half of property to a partner without triggering DOS!

Question

Hey all, I'm new to the world of REI and recently purchased a duplex (Dec '16) that was supposed to be a 50/50 deal with a partner. At the time of closing, my partner did not have the funds because he was still closing on another property and wanted to use those funds (via 1031 exchange) to buy into the duplex (all this was disclosed up front and OK with me).

We initially created an LLC together to hold the property in, but then Wells Fargo told us we could not put title in the LLC's name because it would (read: could) trigger the DOS (due on sale) clause. I decided I would stick with having the property in my name, and purchase an additional umbrella policy, which gave me ease despite the fact that I'm stuck paying the $800 LLC fee in California for this year even though we will not have even used the LLC.

Anyway, the problem is my partner now has come up with his portion (50% of downpayment) and wants me to transfer 50% interest in the duplex to him via a grant deed. When I checked the wording on the mortgage docs (mortgage is solely in my name) it says "We do not allow a contract for deed that results in a change of title to another party, as this may require us to declare your loan due and payable."

Now i'm confused, how do we do this? Neither of us have partnered up in a deal like this before, and were not aware of the hurdles we would face. How do partners normally handle this? Do I have to put him on title, or can we have an outside contract drafted essentially granting him half interest? Or, can we put his Trust on title, would that satisfy the "estate planning purposes" exemption, or would it have to be for my estate?

Any advice on how to proceed would be much much appreciated, as I am not getting my money until we resolve this! Also curious how the write-offs will work at the end of the year, if I get a 1099, can he write off half the interest even though it was all in my name as long as I wrote off only half??

I may have left out some info, so please feel free to ask!

Thank you all!

Account Closed · Answer

Don't mess with the title.

You can't, and you shouldn't.

Every possible outcome is more negative than positive.

What you can do is sell him an option now to purchase half interest at some point in the future which you identify, in return for the DP that he did not have, plus whatever you think is appropriate in the meantime to earn half the equity increase.

He will not share in the income, expenses, depreciation, etc.

Real estate law and federal tax law are fairly specific, you don't have a lot of alternate choices, and almost no do-overs.

I hope this helps.

Good Luck.

P.S.  There is another way, but not what I should be discussing here.  PM me if you want to pursue it.

Dan Bryskin · Answer

@Baha M.

You got a few options.

1. Transfer property in the trust. Trust is one exception to due on sale. Now make him 50% beneficiary of the trust. That document is not public and bank has no way of finding it out.

2. Secure his interest in the property by the lean and operational agreement. Say he gives you 50k. You can put a lean on the title in his name for 50k. It will look like you have a second mortgage, your bank is 1st on the title and can't object. Now his 50k is secured. Sign an operational agreement entitling him to half of income, proceeds of sale and what not.

For taxes, what we do - party with the loan will have a few extra deductions: depreciation and mortgage interest for example. Whoever takes depreciation is responsible for recapture. You can have an LLC, lease the property to LLC, and both get 1099's from LLC. If one gets a little more in deductions, another one can get a bit more cash from the company. Hope it helps.

Dan Bryskin · Answer

Account Closed

Care to share details? I was thinking of using trust for upcoming deal. Never heard any "horror" stories, all attorneys said it is a way to go. Would appreciate your prospective. Thank you.

Dan Bryskin · Answer

Account Closed

I guess everything is possible. We typically secure partnerships with the lien and operating agreements, as it is fast and simple. The only time I dealt with trust, I got a written opinion from bank's legal department stating they would not object to property being moved to the trust. I did not have any issues.

I guess the difference is if the loan is in the good standing or not. It it is, I don't think bank will bother with the trust. If loan is in default, they may have some legal means of funding responsible party

Dan Bryskin · Answer

Account Closed

You don't need a skip tracer to find a trust. It will be on the property title. Trustee ( usually an attorney) is known. But beneficiary is confidential, known only to trustee. Depends on the state law, descendants and or relatives can find out. The reason trust doesn't violate due on sale, is because it is used for estate planning. That creates a workaround to due on sale. I am not an attorney, but with the few clicks google will provide you with the tons of info.

Baha M. · Answer

hey guys, thank you all for your replies, great stuff here!

I'd like to re-direct the discussion back to the primary purpose: learning how to transfer 50% interest in the property to a business partner who will be paying me 50% of my downpayment in return for sharing in all profits, appreciation, costs etc etc.

If I cannot grant title to him, how do I go about ensuring him his 50% of the downpayment is secure and he is half owner of the property, without jeopardizing triggering the due on sale clause? I'm happy to keep the property in my name and do not want to complicate things by going through an LLC. He has sent me a grant deed and I have told him I cannot transfer title to him, but would find a way to secure his interest in the property. That's where i'm stuck, thanks in advance!

How to sell half of property to a partner without triggering DOS!

Most Popular Reply