All Forum Posts by: John Payne

@David McErlean, @Dave Foster, @Cody L.

Thanks so much for your input! I'm diving head first into creative financing, and there's an ocean to swim in. It makes sense that 1031 would be a no-go, but I still have some flexibility to renegotiate terms. I really like the idea of removing the lien from the property, if my seller would be willing. I could see why people would say that's crazy, but I look at it as making sure I'm building a relationship with a potential private money partner for future deals. I want to go the extra mile for any seller financing. I'm trying to solve a current need or pain, but still trying to maintain a relationship by continuing to find ways to add value.

Scenario: 

John is an older investor looking to fund his passive cash flow while getting out of his real estate investments and Susie is a young energetic investor that is just getting started with all the knowledge she's getting from BP.

John Q. Public, property owner, is providing seller financing for a mutlifamily property (Property A) to Susie Q. Jones for a 10 year term, amortized over 30 years. Susie Q improves the property, reduces expenses, increases rent giving her the ability to cash-out refinance and still cash flow (hooray for Susie!). She's able to do this 1 year into the deal through hard work, and is successful with the Refi. John is now on the hook for taxes for his equity windfall from Susie. John and Susie have built a good relationship over the course of the year, and John is comfortable enough to continue to finance and partner with Susie. Susie thinks she has a great idea to help him out, but is unsure of the process. Ideally, she would like to take his windfall and use it for another property with the most tax-advantaged method possible for John. She wonders if she'd simply be able to take that cash windfall and apply it to another piece of real estate with him as the financier/partner and her name (or entity) on the deed. Or, with a 1031 exchange, she thinks he could buy a new property to defer the overall tax liability (following all the 1031 rules) and she immediately (within 3 months) could purchase the property from him on seller financing terms to continue to provide his cash flow while stretching (decrease) his tax liability over time.

Questions:

What are John's options to preserve his capital without the tax liability? 

Is he able to do a 1031 exchange to a new property with the windfall of capital? 

Can he employ this capital in a tax-advantaged way?

Commentary:

I'm trying to read up on the finer points of 1031 exchanges and creative financing options. I'm currently working on a seller financing deal to house hack (live in one unit) on a multifamily property while building a solid relationship with the current owner. This scenario is based on a possibility before we go finalize the contract. I'm trying to ensure that I have some flexibility on terms if I would like to refinance, but he wants to ensure he keeps a consistent cash flow to meet his needs.

Any input is greatly appreciated!

*All names in the fictional scenario are deliberately, and obviously, fictional to avoid any conflation with reality. Hope that covers any legal mumbo jumbo

@Jay Hinrichs that makes sense and I've been following a few blogs that have the court cases and the rulings. I want to be able to give someone options which may include subject-to, but if the numbers don't work...they don't work. I plan on giving the potential seller a standard offering packet with 2-3 options with explanation of the pros and cons to each approach. Being upfront and honest is essential, but part of that would also be a notification asking for permission from the lending institution for that option to be viable. I just want subject-to as a tool in my toolkit. I know it still works in other markets, as well.

@Jay Hinrichs That's great for California since I live here.  What were some of your exit strategies for when the bank called the loan due? Did you have cash reserves, or were you able to get financing?

@Ron S. No feelings frayed here. I tend to take hard stances in discussions because I feel we can get a little closer to the heart of the matter. And after new data and new information, I can do more research and decide the better approach and change my opinion. And yes, I do actually try to put my college degrees to use for critical thinking rather than going to sleep with Leonardo Dicaprio and Christian Bael every night. I try to find original sources and court cases to explain the subtleties. I definitely do not have the experience in the banking industry that you have, and I appreciate your relevant insights.

I do want to understand the example you gave though. The borrower, the agent, and the straw purchaser misrepresented (by omission) info on the PSA which constituted the fraud, not necessarily because an investor took the property subject-to. Is there a difference from your perspective? I understand that the bank has the obligation to comply with federal policy and can get in trouble if they don't. But is every person currently doing subject-to deals (many on BP) committing fraud simply by engaging in taking title subject to the existing mortgage? In your opinion, is it wholly illegal for a subject-to arrangement?

@Scott T. I think you're on to a niche that can definitely use the help, but with any creative financing strategies there are pitfalls because some of the strategies sometimes work in a grey area. There are plenty of predatory lenders and investors and scammers that really do make it a tough space to work in. But we definitely have some examples here at BP of investors doing it the right way and with integrity.

@Scott T. @Nick G. @Ron S. @David Dachtera

I step away for a few days and it blows up!

Great insights and definitely different aspects to look at the issue from.

Ron, my only issue from your stance is the insinuation that it's unethical, illegal, or immoral practice. We could definitely discuss the ethics all day long, but to add the drug dealing and terrorism topic is a red herring and a statement that gives the impression that this practice is clearly illegal, when it's not so clear cut. 

One argument I think we should go deeper into is the straw purchase and mortgage fraud because many of the examples I have seen would not be considered mortgage fraud unless the person is, in fact and proven, to be doing so to hide the transaction.

 You're very nearly equating actual crimes with something that would constitute a civil/contractual dispute.

Plus, maybe you have a better example of the "due on sale" clause, but it's language is clearly meant to give the lender the right, but not the obligation (nor legal government compulsion), to call the note due.

The language would say that change in ownership in this way is absolutely prohibited. If the mortgage contract has that language, there's no debate. Intentionally hiding this fact from the lender is also mortgage fraud, but I know of plenty of investors that engage the bank with their information in order to make it work.

As far as whether or not the banks consistently call notes due....that's on the bank to do. I can see that if a bank was calling loans due inconsistently, that they would have issues.

And maybe this is just the pessimistic side of me, but I don't necessarily think a bank cares so much about the legalities or ethics insofar as it impacts the bottom line. I probably shouldn't put all banks in that category, but I don't think it's too far of a stretch for most of them. I am actually concerned the banks might employ the number of people you mentioned to start searching for ANY breaches of contract to call notes due if the interest rates ever start to increase to 6%.

@David Dachtera , 

That's great info. I never knew you'd have to annul the sale for that. It makes sense, and investors better be sure to follow up immediately with any notifications.

Nick G. That's some great info and I'll definitely take a look into the resource you provided. While I definitely look for the money making possibilities and the deal, I also want to make sure that I am truly helping the people in this situation. With that in mind, I owe it to myself and those owners to do it the right way. Thanks for that reminder!

@Nick G. & @Brett Goldsmith 

Thanks for the info! 

I can definitely see where timing and purchasing strategies may require varying degrees of communication and coordination with the bank (i.e. Having all cash to cover the purchase or short-sale vs paying the lien and taking the property subject-to).  

Can you think of real scenarios or experiences where a bank is not willing to allow a lien pay-off with a subject-to before the official date of foreclosure? I imagine it's a risk analysis decision for banks (and they do have the Due on Sale Clause at their disposal) but it still seems to me that they would prefer to reinstate a performing loan over the prospect of foreclosure.  

Maybe my logic is faulty, but what are your thoughts?

For context, I am learning more about NOD/Foreclosures to add into my purchasing strategies. I intend to use subject-to's and flip them on a lease option or long-term buy-and-hold.

Learning more and more about Pre Foreclosures and Notice of Defaults, but one nuanced question. Whether paying cash or taking the property subject-to, the overdue lien that is causing the foreclosure in the first place needs to be wiped out.  Assuming you do your due diligence, it meets your criteria, and the seller agrees, at what point is it too late to intercede to gain control of the property before the lien holder does?

@Dylan Vargas Thanks for the input! I have looked up a few real estate investment companies, not investment companies.  I definitely agree that finding what helps me long term makes more sense.  I am looking for a job that will teach me more rather than pay me more. The advantage I have is that my wife still works full time in the military, so I have flexibility and more free time during the day to hustle.