Do Down, No Payments, No Risk Real Estate Ownership

NO DOWN, NO BANK QUALIFYING REAL ESTATE FINANCING... A GROSS MISCONCEPTION

Too often, when someone mentions the term Equity Holding Trust Transfer," many who may have a general idea what it's all about will pull up a negative image of an esoteric creative financing scheme that is an alternative to something else such as: lease options, lease purchases, wraps, land contracts or equity shares. However, if that isn't the perception, then one's take might be that the procedure it is only viable for use by over-the-barrel ("OTB") buyers or sellers that are forced to deal with troublesome, upside-down or no-equity properties. None of these perceptions is accurate.

The fact of the matter is that the EHT Transfer helps in all of these areas: but within itself it is merely a logical legal shield, and "the way to do" ALL of these other things. It is not an alternative to something else. It is instead a means for accomplishing the objectives of virtually any creative financing method, without the inherent risks and burdens they may present.

A list of the negatives that can be associated with creative real estate financing would include: 1) The need for subterfuge; 2) Open and dangerous title transfer; 3) Lender's due-on-sale violations; 4) Exposure of the property's title to personal and legal difficulties; 5) Insurance problems; 6) Negative cash-flow and Vacancies; 7) lack of any transferability of income tax benefits, short of title transfer; 8) lack of control; and 9) overly burdensome and costly management and maintenance responsibilities.

In an EHT arrangement, neither the buyer, the seller, the investor or the property itself need ever be in a compromising position . The process provides a means of real estate benefit transfer that is highly preferable to virtually all so-called seller-assisted "creative financing" devices. Either full or minimal "down" can be charged in an EHT conveyance; or a seller can opt to carry 100% of the upfront moneys. Acquiring parties can come in great credit, or no credit at all. The property can be in perfect condition and hold plenty of equity; or can be in in run-down condition with no equity...and still be best served by the EHT process transfer to the great benefit of everyone involved.

Let's discuss some of what the EHT can do for ANY investor, seller or buyer-irrespective of anyone's poor, marginal or limited credit, limited cash or other extenuating circumstances (or absence thereof).

FLIPS AND ASSIGNMENTS: "Flipping" generally refers to one's acquiring a property one day (...week/month) and selling it the next, before any money has to be paid out by the initial purchaser. In other words, one agrees to open an escrow to buy the property at, say, 60-70% of value, and then opens a second or simultaneous escrow to sell the same property to an investor at 75% or 80% of value. After repairs and improvements, this second buyer will then most likely sell it to the end user for 100% of its value. The idea here being that when the second escrow closes, it should provide the "flipper" all the money needed to close the first escrow, plus (hopefully) a few thousand left over as profit. An "Assignment" is similar, but is the process of one's merely assigning its right-to-acquire to another person, without the need for a double escrow. In other words, the "investor" may acquires an option to purchase the property, and then assigns it to someone else who can now exercise the option and own the property. In either case, the investor starts out with "nothing" and ends up with "something": this is true no-Down, No Qualifying real estate dealing.

POTENTIAL PROBLEMS WITH FLIPS AND ASSIGNMENTS: Escrow companies often shy away from double escrows; flip and assignment buyers often don't want the seller to know the acquisition price; a flip or an assignment prohibits long-term holding for the "real" security and profit to be had in real estate investing. As well, the government is becoming increasingly involved in (and opposed to) the overall process of flipping (though, for the moment, their complaints have primarily to with situations wherein prices are artificially inflated for the naive and unwary buyer, resulting in large opportunistic profits for unscrupulous and deceitful investors). This negative press obviously negatively affects anyone engaged in the practice of flipping. As well, many, if not most, lenders today are requiring at least a one-year holding-period by the owner-seller before approving a new loan (in order to eliminate or discourage the practice of flipping).

TA DA...ENTER THE EHT : The original seller places the property into a simple land trust in his own name (no escrow required) and appoints the first buyer (e.g., the flipper) as a co-beneficiary with a written agreement compelling the seller to forfeit its own interest to the co-beneficiary when asked to do so (note that there is no due-on-sale violation). The first buyer then merely assigns his interest in the trust to the investor for a fee (no loan approval or title transfer required). After fix-up and/or refurbishment, the property is then sold to the end-user via an ordinary mortgage and a purchase of the property from the trustee of the trust...or by a further assignment of beneficiary interest to the end-user. The entire transaction is a personal property transfer and not a real estate transaction...thus avoiding due-on-sale issues, capital gains issues, seasoning issues, credit issues, eviction difficulties, insurability problems, etc..

WRAPS. "Wraps," "Wrap-Around Mortgages" or "All-Inclusive Mortgages," as they are called, are mortgages or deeds of trust created by a seller, wherein a large loan is made to a buyer by the seller, which loan "wraps-around" the smaller loans that are already secured by the property. In other words, for a property worth, say, $100,000 that has a $50,000 loan against it: a seller can create a note from a buyer for $100,000, and from it, collect payments that are large enough to easily cover the monthly payments on the first mortgage, with plenty left-over every month. Or...perhaps this same seller might require a $20,000 down payment from the buyer, and then create an $80,000 All-Inclusive Mortgage, with a portion of the buyer's monthly payment going to pay the first mortgage payment, with a sizable sum still left over each month.

POTENTIAL PROBLEMS WITH WRAPS: First off, they constitute a clear due-on-sale violation. Other problems have to do with the open title transfer to an unknown (usually unqualified) entity which transfer can severely jeopardize the property and the seller (or investor). Furthermore, the property becomes the first target for either party's lawsuits, creditor claims, tax liens, bankruptcy claims, divorce actions, etc. Note too that upon either party's' death, the property they own or have interest in can become hopelessly entwined in their Probate proceedings (I'm currently in a Probate that's been going on for over six years). Eviction of an errant owner is impossible without a full foreclosure process, and quite possibly even a further Ejectment and Quiet Title actionto follow...not to mention months of headache, and thousands upon thousands of dollars spent for nothing.

TA DA (again)...ENTER THE EHT : The same seller places his property in to a land trust, conveys a 90% beneficiary interest to the buyer for a fee, with an agreement to forfeit his 10% at the trust's termination. The co-beneficiary then leases the property from the trust: thereby receiving 100% of the benefits of Fee Simple Real Estate Ownership without the necessity of further title transfer. In so doing, there is no due-on-sale clause violation (i.e., the property has not been sold or transferred beyond the authorized trust...only leased out). There is no possibility for any creditor's lien or claim attaching to the property. The co-beneficiary interest (especially if held as an LLC or Ltd partnership) is virtually non-partition-able to satisfy judgments. Neither party has to worry about the effect on the property or the legal or personal misdeeds of the other party. Moreover, Dispossession of an errant co-beneficiary tenant is by simple eviction and/or unlawful detainer action; and a default by a co-beneficiary tenant deprives him/her of any further interest in the land trust as well.

LEASE OPTIONS: A lease option is basically a simple long-term rental agreement wherein (most prudently, by separate contract) a tenant is given the right to purchase the property at some future bargain sale price (the "strike price"). Typically, a lease option requires a non-refundable Option Fee in advance, and monthly payments that are somewhat higher than normal rent. This amount above normal rent is generally (though not always) credited, along with the Option Fee, toward the ultimate purchase price of the property...if and when the option to buy is ever exercised (most are not).

POTENTIAL PROBLEMS WITH LEASE OPTIONS: 1) Should the option itself, or a Memorandum of Option, not be recorded, an errant optionor can, at will, easily take out another loan on the property, or sell it--or even lease it to someone else--without the Optionee's knowledge or permission. 2) As well, a disgruntled Optionee can default in its payment obligation with impunity, claiming that the transaction is not bona fide because of the lack of recordation. On the other hand, if the memorandum IS recorded (and is recorded as a Lease Option), then the lender may be alerted to a violation of its due-on-sale clause, which clause firmly prohibits such options without the lender's prior written approval. (12USC1701-j-3). 3) One's evicting a lease optionee can be very troublesome, time-consuming and expensive should they refuse to pay and then seek to claim in court that they are immune from eviction due to having an "equitable interest" in the property (attested to by way of their Option Fee and higher than Fair-Market Rent). 4) Another serious shortfall of the lease option is that income tax benefits can not be conveyed to an tenant optionee, which severely hampers one's justification for paying higher than normal rents. 5) In addition, a question as to whether the optionor is making timely payments to the lender and maintaining his part in the financing properly is always at the forefront, as failure to do so will easily costs an optionee all of his money, and his home. Finally...a lien against either party can attach to the property or the option can seriously affect the other party, preventing the property's sale or purchase.

THE EHT to the rescue: Via the use of the EHT , the would-be optionor places his/her property into a land trust, thereby naming the would-be optionee tenant as his/her co-beneficiary in the trust, with full income tax benefits. This co-beneficiary then obtains thier use and occupancy via a lease agreement with the trustee (wherein he/she agrees to pay an amount sufficient to cover principal, interest, taxes and insurance to a 3rd party collection service appointed by the beneficiaries), and wherein the resdient co-beneficiary takes-on all of the property's management and maintenance expense (i.e., "Full Risk and Burden of Ownership" as per Section 163(h)4(D) of the IRS Code). The "buy-out" agreement stipulates that at the end of the trust, the beneficiaries will sell the property at Fair Market Value to anyone who wants to buy it. However, the co-beneficiary may choose to buy it at the same price (FMV); but his/her own cost of acquisition will be minus all of what he is owed due to his participation in the trust: thereby avoiding the necessity of an option per se.

Upon purchase or re-finance by the co-beneficiary at termination, any amounts owed to the acquring party will include equity build-up from the loan's principal reduction, appreciation, and a full refund of any contingency funds or reserves having been held throughout the term of the Agreement. In addition, most often, such refunds to the co-beneficiary purchaser include all other non-recurring closing costs that were paid at the trust's inception.

In this overall scenario, since the trustee holds both legal and equitable title to the property, the courts will ignore claims of "Equity" or of their being an "equitable mortgage" which such claims are fabricated in order to forestall eviction and force a time-buying foreclosure process. And, too, since in a "EHT " neither party "owns" the property (the trustee does), liens, lawsuit and creditor claims against either party cannot attach to it. And above all, expedient removal of an errant "EHT " tenant is by a normal Eviction and/or unlawful detainer action, and can take place is as little as 30 days in most cases.

LAND SALE CONTRACTS, CONTRACTS FOR SALE (CONTRACTS FOR DEED; LAND CONTRACTS, INSTALLMENT LAND CONTRACTS): In many states, the preferred method of seller-carry financing is by land sale contract. Basically, such an arrangement is no more than a glorified "lay-away plan," wherein the property's ownership is not transferred to the buyer until the property is fully paid for. In other words, the seller holds the legal title until the buyer makes the final installment.

POTENTIAL PROBLEMS WITH "LAND SALE CONTRACTS": In such scenarios, all the same risks and drawbacks of the Wrap-Around (above) exist: due-on-sale violation, impossibility of simple eviction; legitimate claims of "equity" and "equitable mortgage." In addition, the property can easily become embroiled in either party's legal and personal problems: specifically including lawsuit, divorce, tax liens, creditor liens, bankruptcy and probate proceedings. As well, a Land Sale Contract does not generally convey any income tax benefits to the buyer relative to Mortgage Interest or Property Tax deductions, until such time as either-1) the property is paid for, or 2) until (unless) the entire transaction is recorded as a contract FOR sale with all the consequences and ramification of a Sale. Such land contracts FOR sale are seen, for example, in "veteran benefit installment land contract loans," as seen in California, Alaska, Minnesota and Texas and Oklahoma (e.g., the "Cal-Vet" Loan). In these kinds of contracts, tax benefits are available to the buyer even though either the seller or the lender remains the owner of the property until it is paid for or refinanced. Again, unless the contract is FOR sale, rather than OF sale, the question of who can be trusted to collect and/or make the payments to the lender can be a major problem.

ONCE GAIN... THE EHT TO THE RESCUE: In order to achieve exactly the objectives of a Land Sale Contract without the negatives and with enhanced protection and legal-shielding, and tax benefits to the buyer, a seller can merely vest the property with his own land trust trustee, and then sell (assign for a fee) only a beneficiary interest in the trust. By virtue of the fact that income tax benefits can be conveyed in this manner, the EHT tenant beneficiary will likely pay (and be able to afford to pay) considerably higher monthly payments, and be more likely to accept full responsibility for all maintenance, management and other monthly obligations. Under the EHT arrangement, an errant co-beneficiary can be dispossessed of its interest without a drawn-out legal process. Since the trustee holds Legal and Equitable Title, the tenant simply cannot claim having an Equitable Interest in the property, in order to thwart Eviction and to force foreclosure: thereupon acquiring even more time and free rent. Overall, nothing changes as far as the original intent and objectives are concerned...other than that protection of all parties is greatly enhanced; risk is all but eliminated and the overall desired benefits are far greater on both sides. Payments are collected and processed by a bonded 3rd party bill-paying service.

EQUITY SHARES: "Equity Sharing" is a process originally instituted in the first part of the 20th Century by the Federal Housing Administration (FHA) as a means to encourage and facilitate low cost home ownership. The original idea was that, in order to supplant down payment burdens, when one took out a loan to purchase a home, he/she would be given only a portion of the ownership: the other portion being held by the Administration and relinquished little-by-little as the debt was paid down. The concept was poorly conceived and not well promoted, and died-out after only a brief run. But equity sharing emerged again in the mid-eighties when it became a popular form of creative financing. In this latter design, the idea was that one party would make a down payment on a property as a real estate investment, while another party lived in the property and made all the payments and handled all recurring costs and responsibilities, in exchange for tax benefits, a portion of the potential profit on sale, and all other incidents of home ownership.

The other variant of the equity share is, of course, the "seller-as-investor" equity share. In the seller-as-investor form, a property's current owner, having already made the down payment and taken out a loan, becomes the investor co-owner along with a resident co-owner. In either case (outside investor or seller as investor), the participants would then hold title as to an undivided half interest as tenants-in-common. Then, at the end of the prescribed term of the agreement, the property would be sold, or re-financed by the resident, at which time all net proceeds of sale would be shared by the parties in proportion to their percentages of ownership.

POTENTIAL PROBLEMS WITH EQUITY SHARING: In such an arrangement, either party's misdeeds or careless actions can cause liens, suits and judgments to attach to the property. Either party's death will result in the Probate milieu Evicting an errant co-owner is impossible without a judicial process (and probably with the ensuing added time and expense of ejectment and quiet title). Tax benefits are curtailed by IRC 280-A (re. deprecation by the non-resident co-owner). The granting of title interest obviously creates a distinct due-on-sale violation. Differences of opinion (arguments) between parties cannot be effectively dealt with, as they each wield too much power via their title interests to be able to resolve all conflicts with arbitration. And, again, the question of who can be trusted to collect and/or make the payments directly to the creditors is always of major concern.

AND HERE COMES THAT EHT AGAIN: Achieving the same end-result with a EHT without the legal problems and risks is quite simple. As the property is placed into the land trust, the Settlor (seller) grants only a percentage of the beneficiary interest to the co beneficiary (50%, 25% 10%, 90%, etc.), along with a proportionate share of future profits on sale at the trust's termination. In so doing, there is no difficulty in evicting an errant co-beneficiary, there is no due-on-sale violation; there is pure secrecy, privacy and anonymity relative to each party's ownership. The property and each participant is effectively shielded from the untoward or illicit acts of either party. Further, if either party chooses to sell or assign all or a portion of its interest (assuming all parties are in agreement), the transfer can be done with a simple assignment, rather than a complex sale process. In addition, a bonded bill-paying agency collects and disburses payments to creditors.

PROBLEMS THAT COULD BEFALL, LIMIT THE USE OF, THE EHT: 1) Inability to identify a suitable 3rd party trustee, 2) Inability to arrange for a suitable and experienced collection and bill paying service, 3) Problems in locating a knowledgeable escrow and/or title insurance Company, 4) Parties could object to needing to confer with one-another re. capital improvements, 5) In the absence of a Power of Attorney, the trustee can only respond to mutual direction of all beneficiaries, 6) Locating a knowledgeable attorney is always a problem, as very few attorneys know anything about land trusts in general, and will often shoot down the idea in favor of doing something they understand better and can make more money on, rather than undertaking any research. 7) Thorough documentation, and directions to the trustee, collection service, lenders, insurers, escrow and other creditors must be carefully drawn and can appear complex to the novice.

Obviously, space and time limitations here prevent an in-depth discussion of all the other uses for the EHT Transfer; however, we'll conclude with a brief mention of a few of them:

BRIDGE FINANCING: A buyer who may not be able to qualify for a loan or come up with the required down for another six months or a year, can in the interim (assuming the seller's cooperation) have the property placed into a EHT and hold a beneficiary interest therein until the credit or money problem clears. This gives them 100% of all ownership benefits, including tax write-off, even though they are not yet titleholders ("owners").

FORECLOSURE INVESTING: An investor can have An owner in default place the property into his own land trust, thereupon bringing all loans current in escrow. The investor would then take an Assignment of Beneficiary interest (e.g., 90% with the seller's agreement to relinquish its 10% at termination) along full Power of Direction. In so doing, there is not compromise of regulations concerning foreclosure specialists or consultants. As well, in so doing, there is no sale of the property per se and therefore no due-on-sale violation or Redemption Period with which to be concerned.

RENTAL INCOME LAYERING: An investor holding a property in a EHT is not restricted to only selling Use and Occupancy (Rent). He/she can charge incrementally more for the various salable layers: Appreciation (all or part); Equity Build-Up from Principal Reduction (all or part); existing equity (all or part...called a "down payment" or "equity contribution"); Income Tax Write-Off (all or part); and so on. Doing so will thereby double and triple net rental income while eliminating all management, maintenance, vacancies, negative cash flow, etc.

ASSET PROTECTION: One can use the EHT to shield the property from virtually any potential threat: tax liens, divorce actions (including dower actions), bankruptcy, creditor judgments, Probate and Estate Tax. That is... to "armor plate" one's real estate holdings.

INTERIM OCCUPANCY PROVISIONS: While awaiting a protracted escrow or loan approval, a buyer can begin enjoying home ownership benefits including tax deductions immediately while awaiting finality of the buying process.

All-in-all the Equity Holding Trust Transfer is indeed the future in create real estate financing. But above all, one must bear in mind that the EHT is Not Just Another Way To Do Things: It Is The Way To Do Everything!

Check with author for resources utilized. Bill J. Gatten, No. Amer. Rlty Svcs, Inc., West Hills, Ca. 1 800 207 4273

Canon HF10 Low Price
Canon Rebel XSi Price
Canon SD880 on Sale