Good evening (where I am in the world);
I havent been active on here in too long! Currently deployed on a ship somewhere in some ocean, with really bad internet.
I was going through some REI resources I have on my computer, reading "Picking Up Pre-Foreclosures In good neighborhoods without cash, credit or a bullet proof vest" by Bill J Gatten. I forget where I got it (maybe here?) but I was pleasantly surprised that it actually has some meat, and isnt all fluff like so many eBooks.
In it he talks about a land trust strategy that can be used to ensure you dont get hit with the "unconscionable advantage" when dealing with people in foreclosure in states like where I live, Ca. I understand land trusts, at least I think I do, but I have a few questions about how he discusses them.
I know this is really long, sorry, here is the quote
"Might an unwritten exception Number Seven come into play here? What if no one had taken "unconscionable advantage" of the defaulted party (the homeowner in foreclosure)? What if all dealings were at full Fair Market Value? What if we don't take any of the homeowner's equity? And what if the property is not in foreclosure when we exercise our control, remedies and profit potential in the first place? Are there still ways to make good money, working occupied residential foreclosures? Well, I think so! Think about the following in terms of a so-called “Foreclosure Bail-Out”:
Whether in default or not, couldn’t virtually any homeowner transfer his or her own property’s legal and equitable ownership to a trustee in a bona fide inter vivos trust, and then lease the property from the trust? Wouldn’t they then be leasing from a trustee as the owner of the property (i.e., therein becoming the lessee of a property they no longer own...a lease-back)? The answer is “Yes”...so long as income tax benefits are not altered or enhanced in the process.4 As we’ve discussed in other chapters, federal lending regulations fully authorize the creation of inter vivos trusts of all types, requiring only that the borrower creating such a trust remain “A” beneficiary (a very important indefinite article, that “a”). Federal regulations also authorize the leasing of the property to anyone (not excluding the party creating the trust) assuming that such lease would continue in effect for no more than three years and that it would not contain, be accompanied by, or involve an Option to Purchase.
Therefore, couldn’t a benefactor (i.e., you, the investor) agree to provide the distressed homeowner with the amount required to bring his/her loan current, if he/she will then have the property deeded to a land trust with a neutral third party trustee? Couldn’t this trustee then be directed to lease the property back to the homeowner (i.e., the former homeowner: since in a land trust, it is the trustee who is the sole owner of the trust property)?
In so doing, an agreement among the co-beneficiaries would specify that in the future the benefactor/investor (investor co-beneficiary) would receive a full refund of the “contribution to the trust (i.e., the cash that brought the loan current)”. That would accompany a reasonable percentage of the net profits derived upon sale or refinance of the property at the trust’s termination and the end of the related lease agreement. Perhaps the investor beneficiary may even have been receiving a positive cash flow along the way.5 Such increased monthly payment obligation on behalf of the tenant beneficiary would hardly be prudent for, say, twelve to eighteen months, after the problem had been completely eliminated and the tenant beneficiary’s financial problems had been rectified (or at least have had a chance to have been rectified).
The question that should arise at this point is: “Yeah, but wouldn’t the resident party still be seen as having been deprived of his equity if he defaulted again and got evicted?” The answer would be affirmative if that were all there was to it. However, that’s not what happens in an Equity Holding Trust arrangement...assuming the process is carried out properly.
It works (should work) like this: the Beneficiary Agreement that is a part of the Equity Holding Trust documentation structure states that: In the event of an eviction for cause of any tenant who is also a beneficiary in the trust, the eviction within itself shall serve as constructive notice to the non-defaulting beneficiary/ies of the defaulting party’s intent to sell its beneficiary interest to the remaining (non-defaulting) beneficiary/ies...at full Fair Market Value.
At this point, such offering price by the acquiring (non-defaulting) parties could be just the loan amount plus a dollar or two. But should the defaulting party challenge the offer as being insufficient, the challenger must prove it within thirty days of constructive receipt of the offer. Parties mutually agree by contract that this proof (of more money owned) is to be procured by, and provided at the sole expense of, the defaulting party if the amount offered is deemed insufficient. And as per the contract, such proof must be by a full M.A.I. (Member American Appraisal Institute) Appraisal.6 Further, any such amount verified by the appraisal to be owed to the defaulting party is to be paid--less a reasonable default fee that is specified within the Beneficiary Agreement (e.g., $2,000.00 is standard); and less all past-due payment amounts, late fees, other penalties, unpaid charges or special assessments. The standard Beneficiary Agreement stipulates that any such amount proven to be owed to the defaulting beneficiary is to be paid...in the form of an unsecured promissory note, which note shall be retired only upon disposition of the property at the trust’s termination.
Although it may seem to some that the default provision described here is weighted in favor of the investor beneficiary; it actually is not. It is this same provision that protects the defaulting party from having its equity taken away simply because a payment was missed or because of some other dispute or abrogation of the Occupancy Agreement (damage, neglect, etc.). Obviously, were one to face losing a large sum of money due to missing a lease payment or two, it would be well worth the cost to arrange for payment of the Default Fee, to bring the payments current and rightfully claim the amount owed. However, the same clause prevents a defaulting party from maliciously and unlawfully detaining the property under the guise of having an “equitable interest (‘claim of equity’)” in it in order to forestall eviction, buy time and free rent. Recall that such “equitable interest (equitable title)” was relinquished to the trustee at the inception of the trust. That is the unique nature of the land trust and one of the primary reasons it was used.
Need a clearer understanding of this? Let’s say that in order to raise money (for any purpose, including getting his home out of foreclosure), a defaulting homeowner places his/her property into a bona fide title-holding land trust...thereby giving up 100% of the legal and equitable title ownership to a third-party (the trustee nominee... that’s what land trusts do). An escrow is then opened to sell or assign a partial personal property beneficiary interest in the trust, wherein an investor (you) brings in enough money to acquire the beneficiary interest in the land trust in anticipation of future profits (i.e., analogous to buying shares in a corporation that wishes to raise money to get out of debt). Obviously, the sum required for your participation will be sufficient to cover all current arrearages, reinstatement fees and penalties.
The former homeowner (now the settlor beneficiary in the trust, having relinquished ownership of the property to the trustee) names you as his/her co- beneficiary, specifying that some percentage of beneficiary interest will be held by you (e.g., you may be given from 10% to 90%). Upon closing, the former homeowner (now beneficiary of the trust and no longer in default) executes a “triple-net” lease agreement7 between himself and the trust. At this point as the triple-net lessee he/she assumes the full responsibility for all repairs and maintenance (the” burden of ownership”). In this procedure, the formerly defaulting borrower has not sold the property; and still has full income tax benefits, future appreciation potential, equity build-up from principal reduction, and some—if not all—of his/her equity has been salvaged and shielded.
The homeowner, by accepting an investor as a co-beneficiary in the trust, has covered all arrearages, penalties and fees and reinstated the loan. But note carefully that the property has not been sold; the owner’s equity is still intact; and from this point on, any default by the former owner (who is now a lessee in the trust property) will result in a simple eviction. And his/her dispossession from the trust will be at full Fair Market Value vs. being forfeited or relinquished under duress. Voila! No sale. No deception. No “unconscionable advantage.” And no dealing with anyone at less than Fair Market Value.
Of equal importance, after the establishment of the co-beneficiary land trust, the property itself is now very effectively shielded from the impact of either beneficiary’s Probate, lawsuits, bankruptcies, marital dispute actions, creditor claims, state and/or federal tax liens and other legal proceedings against the beneficiaries. In addition (the list of benefits goes on), the same hazard insurance and title insurance remain in effect. Since no sale or unauthorized transfer has taken place, there is no compromise of, or threat by, the lender’s skulking little due-on-sale clause: i.e., 1) the borrower has transferred his property to an authorized inter vivos trust; 2) the borrower is, and shall remain, a beneficiary in the trust; 3) the trust is revocable; and 4) the trust itself does not relate to the granting of occupancy rights to anyone (that’s done by a separate lease agreement). [In re. Garn St. Germain 12 USC 1701-j-3] Without a doubt, this same concept works equally well when the defaulting party has no intention or desire to remain in the property. The only difference? You, the investor, become the lessee in the property, leasing from the trust...with the irrevocable right to sub-lease and/or sell your interest to someone else. You can assign all or a portion of it to a third [resident] co-beneficiary who would cover all your costs and live in the property. This co-beneficiary remains responsible for mortgage payments, repairs and maintenance—in exchange for income-tax benefits and/or a share in future profits, mortgage principal reduction and pride-of-ownership."
haha ok now that the massive reading is done. Am I missing something here? How do we go about selling this property without the "seller" going back into default? Where does the check come in? Its probably right in front of my face but I cant see it.
Thanks a lot.
Like I said, internet is terrible on here, think dialup, so I appreciate any replies even if I dont respond to them.
If I broke any rule by including that quote, I apologize and please take it down.
