UNIQUE SOLUTIONS FOR THE MOST CHALLENGING ASPECTS OF “CREATIVE” REAL ESTATE INVESTING,” WHICH STUMBLING BLOCKS ARE ELIMINATED VIA THE USE OF THE EQUITY-HOLDING TRUST TRANSFER™…
WHAT CAN IT DO?
Flipping and Assignments: I.e., our use of the term “flipping” is a reference to the wholesale acquisition of distressed or abandoned real property for the purpose of refurbishment or redevelopment, followed by swift re-marketing and sale to a retail buyer within a brief period of time (‘i.e., 3 to 9-10 months [perhaps a year]). Via the use of the EHTrust Transfer™ one can comfortably take on a property without needing a new loan or down payment, by simply placing it in the EHTrust™ for safe keeping until all refurbishment and re-marketing efforts have been completed.
LEASING WITH FULL INCOME TAX BENEFITS FOR THE TENANT
(RE. PROPERTY TAX AND MORTGAGE INTEREST DEDUCTIONS)
The ODWM EHTrust Transfer™ (Tax-Lease) allows an owner or an investor in a rental property to greatly increase his/her monthly rental income, while eliminating all management and maintenance expenses by giving the tenant full tax deduction benefits for mortgage interest and property taxes. In this program, one merely places the property in an EHTrust™ and names the tenant as a co-beneficiary. By doing this, the tenant is converted, in the eyes of the IRS, to the status of homeowner (although temporarily); thereby becoming at once fully entitled to all income-tax deduction (for the underlying mortgage interest and property tax …See 26 USC 163(h)4(D); IRR 92-105). In this variation of the EHTrust™, the tenant should be delighted to save the money that would otherwise be lost to the IRS.
Note that $1,000 per-month in pre-tax rental expense is equivalent to a $1,500 per-month after-tax expense: which is to say that a state and federal income tax imposition of, say, 33.3% costs the tenant 50% more than the rent itself. Ergo, the EHTrust tenant-beneficiary saves $500 per-month. At that point it becomes feasible to increase the tenant’s rent, a non-deductible $1,000 per-month to a fully-deductible $1,250 per month: thereby rendering each beneficiary an extra $250 per-month in income ($250 more take-home pay for the tenant, and $250 more positive cash-flow for the non-resident). ‘And by the same token, the non-resident settlor beneficiary (owner of record) receives, in addition to its additional $250 per-month, but also freedom from management and maintenance expenses in that the resident must be able to show having the risks and burdens of ownership if questioned by the IRS.
‘And recall, if you will, that the settlor beneficiary (owner of record or an investor) needn’t give up any future appreciation, mortgage principal reduction or income tax benefits in this arrangement. At the termination of the ODWM EHTrust Tax Lease™ the lease and the trust simply expire, and the tenant moves on…’or the trusts can remain in force for another tax-lease beneficiary.
Bridge Funding, i.e., when a new buyer can’t qualify (yet) for the mortgage or come up with the down payment in time to close: In this scenario the buyer (“acquiring party”) who is ready to buy the property, but for some reason can’t yet obtain his/her loan for, say, another six month or a year (or more) can have full ownership rights well before the loan approval or down payment is required. . At this point, the seller can hold the buyer’s full down payment in the trust’s Contingency Fund to be released to the lender when underwriting is complete.
In handling the financial “bridge” in this manner, the buyer prospect is given immediate fee-simple ownership benefits without delay, while waiting for funding. In the interim, the buyer is afforded 100% of all Fee-Simple benefit of owning the property, even though not on title and not on the mortgage (yet). The ODWM EHTrust Transfer™ can, of course, be set for any number of months or years, and/or can be scheduled to terminate or be extended at a particular date in the near future in the event that purchase-money financing would not be available after-all.
PURCHASE OF DEFAULTED MORTGAGES
The ODWM EHTrust Transfer™ can be established in advance of a property’s acquisition, and then be funded later (‘i.e., wherein the property is deeded to a nominee trustee for an “empty trust”). I.e., prior to funding the trust (i.e., placing the property into it) the trustee and the beneficiaries are named and awaiting acquisition of the corpus (the property). I.e., in this arrangement the trust is set-up first, and the property is acquired and vested in the trustee at a later date (i.e., ‘an effective means of buying a bank’s defaulted receivables without the necessity of the buyer’s name being advertised in the public record or the transaction’s impacting one’s credit or ability to continue acquiring income property. This is to say that one can set up an “empty” EHTrust™ today and deed a property to it a week, a month or a year later, with all parties’ personal data remaining wholly private and anonymous.
ACQUISITION OF HOMEOWNER ASSOCIATION SUPERIOR-LIENS
Recent legislation in eighteen US states now enables homeowner associations (HOA’s) the right to foreclose on association-managed properties whose fees are seriously delinquent (‘the requisite delinquency periods vary from state-to-state; but in, say, Nevada and Colorado HOA fees must be at least 120 days in arrears, and the current mortgage-holder must have been notified of the delinquency and the warning of impending foreclosure…’and must be given the right to cure within the obligatory time-frame.
If the lender does not cure the default within the time allotted, the HOA’s lien is given full priority over all other claims on, or charges against, the property: i.e., ‘meaning that the existing mortgage-holder/s can/will be completely wiped-out by the HOA’s superior lien (‘i.e., either by the HOA or by the party having purchased the lien from the HOA).
Interestingly in so much as homeowner associations are non-profit organizations, their primary concern is being paid what they are fairly owed: not acquiring or selling real estate. This situation offers an excellent new opportunity for real estate investors, who buy these receivables at greatly reduced prices in anticipation of the potential foreclosure and resulting retail sale. In the event that such lien is brought current by the mortgagor prior to the sale auction (i.e., ‘as would any such foreclosure, the property must be offered for sale at public auction)…that moneys goes to the investor who can then purchase another receivable with the same motive in mind. When a property would be later (eventually) obtained, the previously established EHTrust™ is ready and waiting the vesting of tile direly into it (i.e., to be re-sold, leased, equity-shared, or carried for an acquiring party with or without a down-payment and AA credit).
The Delayed-Funding EHTrust™: I.e., an empty trust is established into which the trust corpus (i.e., the property) will be placed at a later date, for purposes of a buyer’s wish to keep his name off the title to the property for even a brief period of time (‘i.e., wherein the trustee signs all forms on behalf of the buyer-beneficiary/ies without liability or recourse).
DIRECT-PURCHASE BY TRUSTEE
Direct Property Acquisition by the 3rd Party Trustee: I.e., wherein a property is purchased by the trustee (‘with the personal guaranty of the beneficiaries) and the trustee is directed to sign without recourse on behalf of beneficiary/ies). This is in effect a legitimate “Straw Man” transaction designed to keep the name of the true party in interest out of the public record (i.e., ‘title is vested directly in the trustee versus in the recipient of the funds).
MINIMIZING LEGAL EXPOSURE DURING RENOVATION OR NEW CONSTRUCTION
New Construction Asset Shielding by the ODWM EHTrust Transfer™ is often used to shield the property against in-rem litigation (i.e., legal action ‘against the property), vs. actions in-personam (i.e., actions against the person) during construction. It should be noted here that the ODWM EHTrust Transfer™ effectively shields the property from legal actions, but not necessarily the people: ‘in this regard it may be prudent for one to consider combining the ODWM EHTrust Transfer™ with a Limited Liability Company (LLC) in order to be shield individuals against such actions (i.e., common “Slip and Fall” type lawsuits” are most prevalent during construction).
BY-PASSING LENDERS’ SEASONING RESTRAINTS
Working Around a Lenders’ Seasoning Issues: A new mortgagor (i.e., an investor with a new loan and a new property that can’t be sold for 60 to 90 days after funding) needs to complete the term of his/her new lender’s seasoning requirement, during which a sale cannot take place and a buyer’s lender cannot advance purchase money to a would-be retail buyer, until the seller has owned the property and it’s mortgage with prompt payments for a specific period of time (‘typically at least 60-90 days). In this scenario, the property can be held in the EHTrust™ (‘with full fee-simple benefits going to the new buyer) until the seasoning requirement has been met: at which time the title-holder of record (i.e., the short-term investor owner) can direct the trustee to transfer full title to the new purchaser.
A duplex, triple or apartment building can be vested in an ODWM EHTrust™, whereby when tenants are made a co-beneficiaries in the trust, and can prove that they have the full risks and burdens of ownership (i.e., ‘according to IRC 163(h)4(D) and IRR 92-05), they can each be treated as owners of their own unit and be availed of the same benefits as would be condominium owners: ‘use, occupancy, possession, quiet enjoyment, resale and subletting benefits, income tax deductions for their portion of overall costs. This is to say that the co-beneficiaries can enjoy benefits that any owner of real estate would. In addition, since such dealings are anonymous and not in violation of law, there is no necessity for mandatory installation of separate party-walls, separate utility hook-ups, building permits or zoning variances.
Just as in the foregoing scenario, the owner of, or an investor in, a nicely furnished vacation-suitable home can place the property into an ODWM EHTrust™ Transfer™ and assign, say 15 or 20 or so, fractional beneficiary interests to that number of resident co-beneficiaries in as much as tax deductions are not at issue (i.e., a tax payer would have to own at least a 10% interest and be holding it for income production purposes to be able to claim income tax deductions for mortgage interest).
Individuals who are partnering, or intending to partner, in real estate should seriously first consider shielding their title ownership from public view by snoopy neighbors, competitors and those ever-stalking, ambulance chasing “consumer advocacy attorneys.” In such arrangement (the ODWM EHTrust™ Transfer™) not only shields the partners from the untoward actions of each other; but also that the process provide and effective barrier against in-rem liens, lawsuits and any other real or frivolous creditor claims involving the property.
ELIMINATING TENANTS’ DELAY TACTICS (I.E., CLAIMS OF “EQUITY” OR MALTREATMENT) FOR PURPOSES OF COMPLICATING AND PROLONGING EVICTION [i.e., ERRANT “TENANT-BUYERS” NEEDN’T BE FORECLOSED-UPON WHEN SIMPLE EVICTION WILL DO]
Re. eliminating the need for judicial or non-judicial foreclosure when in dealing with defaulting Tenant-Buyers who historically try to (‘and usually succeed in doing so) prolong any eviction process by claiming they have an equitable interest in the property by virtue of being owners in a Wrap, Contract, for Deed, Equity Share, Lease Option, Lease Purchase or a “Rent-to-Own” arrangement. The ODWM EHTrust Transfer™ very effect prevents these underhanded tactics because of the fact that even though 100% of the BENEFITS of fee simple ownership can be enjoyed by tenant, no equity ever passes to the tenant-beneficiary until and unless the property is refinanced and owned by them. (The refundable Contingency Fund paid in by the Resident Beneficiary at the inception provides the funds necessary to handle the eviction and continue with mortgage payments until the parties are removed by simple eviction, while their replacement is sought.
AVOIDING EXECUTORY CONTRACT PROHIBITIONS (Re. Texas)
In certain jurisdictions today, Lease Options, Lease-Purchase arrangements, Rent-to-Own agreements and Land Sale Contracts (i.e., “Contracts for Deed” or CFD’s) are prohibited anytime a property’s title cannot be, or is not scheduled to be, passed in-total from Seller to Buyer within six-months. However, through the use of the ODWM EHTrust Transfer™ these regulations are moot, in as much as the EHTrust™ process does not transfer, or purport to transfer, title at any future time, (‘this, despite the fact that the BENEFITS of ownership (including tax deductions) are fully conveyed to a party holding a beneficiary interest in the trust). Neither does the ODWM EHTrust Transfer™ offer the property for sale to anyone, now or in the future, i.e., for any amount less than actual Fair-Market-Value (‘although, the Beneficiary Agreement stipulates that upon the trust’s termination the property can be purchased by the mortgage-qualified Co-Beneficiary: but only for its full Fair Market Value…’LESS any moneys owed to the buyer by the trust at that time (‘upon the trust’s scheduled termination). The sum owed to the purchaser by the trust is determined by that party’s percentage of beneficiary interest having been held in the trust since its inception.
AVOIDANCE OF A LENDER’S DUE-ON-SALE ADMONITIONS
According to the verbiage within Title 12 of the U.S. Code, any mortgagor can place its mortgaged real estate into an inter vivos asset-protection trust without triggering a foreclose at the will of the mortgagee…so long as:
1) The trust must be inter vivos in nature (i.e., ‘created and operational during one’s lifetime, vs. testamentary)
2) The trust must remain revocable by the buyer (‘although, after recordation, a trustee can be directed to
honor only mutually-agreed-upon direction by “all” benefices…’including direction-to-terminate or extend)
3) The trust cannot, within itself, transfer rights of occupancy (‘although occupancy rights can be granted to a co-beneficiary
by means of a separate agreement (Lease Agreement).
4) The borrower must, throughout it term, retain “A” beneficiary interest in the trust (‘no specific percentage stipulated)
5) The borrower must be a “natural person” (i.e., ‘that is, not a business entity)
AVOIDING COMPROMISE OF THE DODD-FRANK CONSUMER PROTECTION ACT (Pub.L. 111–203, H.R. 4173)
Regarding prohibitions and limitation relative to owner-financing of real estate (re. the sale of one’s own home or investment property), it is important to know that the design and function of the EHTrust Transfer™ is not for the purpose of financing the sale of real estate: ‘its function is to allow a resident co-beneficiary lessee in the property the opportunity of enjoying the BENEFITS Fee-Simple ownership without the necessity of being on the property’s title and with any requirement to be a guarantor a loan of money. As stated earlier, the EHTrust Transfer™ does not involve ownership of the real estate, only a personal property ownership of beneficiary interest in am inter vivos trust, whose trustee is the legal and equitable owner of the fully vested property. ‘Neither is there any stated obligation or option to buy the corpus of the trust for any amount less than full Fair Market Value at any time. It is the provision under IRS 163(h)4(D) and Revenue Ruling 92-105 that affords tenant-beneficiaries of title-holding trusts all of the standard tax benefits.
In that there is no new financing needed, any credit requirements or adherence to mortgage lender-related legislation does not apply. In essence, even though virtually all the benefits of ownership are enjoyed by the resident beneficiary, that resident is never more than a triple-net lessee, fully subject to simple eviction without an opportunity to claim “Equity” to stall, prolong or avoid the eviction process, and, as well, there has been no sale or purchase of the property or specific need to comport with Truth-in-Lending, Home Owner Equity Protection, RESPA or FCRA requirements.
TAX EXEMPTION AND DEFERMENT BENEFITS RE. THE EHTRUST TRANSFER™
Note that beneficiary interest in a one, two or three-party (‘or more) properly-constructed title-holding trust (‘i.e., which is the underpinning of the EHTrust Transfer™) qualifies under IRC §1031 Exchange guidelines, as well as meeting the requirements of the IRS’ conditional tax exemption (Re. IRC §121) relative to ordinary income derived from the sale of one’s personal residence (i.e., ‘In which the seller must have resided for at least three out of the preceding five-years [‘whether those years were consecutively or not].
OVER-ENCUMBERED PROPERTY (A POTENTIAL GOLD MINE)
Via the use of the EHTrust Transfer™ an investor can acquire interest in a negative-equity property and essentially ignore its over-encumbrance without a contractual obligation to retire the mortgage until such time as economic appreciation and loan principal-reduction would reduce the debt obligation sufficiently for the loan balance to be less than value.
After all, if a property owner pays the investor to take over the property, while a credit-challenged, would-be buyer, pays a reasonable mount to get into the property, ‘why would that not be a beneficial opportunity for all parties?
In such a case, the Settlor-Beneficiary eliminates a burden; Resident Beneficiary achieves ownership benefits in a home that he/she likely could never own otherwise, the Investor Beneficiary receives cash up front and along the way. Even the lender is (‘should be) pleased in knowing they no longer need worry about foreclosure on a non-performing asset that is un-marketable without a major financial loss.
In this arrangement, the Mortgagor (i.e., the owner-of-record) places the property in an EHTrust™ and names the investor his/her Remainder Beneficiary (”Investor Co-Beneficiary”). Then at this point, the Investor Beneficiary finds and installs, a tenant beneficiary (“Resident Co-Beneficiary”) in the property who, in exchange for all benefits of home ownership, assumes all (or a major portion) of the monthly costs of ownership (i.e., payments, taxes, insurance, upkeep, HOA, etc.).
Example: A $200,000 home with a $235,000 loan remaining to be paid at, say, $1,400 per-month (PIT&I).
This property as a rental would rent for maybe $1,300 per-month, thereby leaving the owner with a large negative cash-flow considering the cost of maintenance, management, repairs, utilities, etc…i.e., of, say, $500 per-month or so, considering a normal vacancy rate and management expense.
Furthermore, ‘any attempt by the owner to sell at this point would likely bring a negotiated offer of no more than $190,000, leaving the seller with a $45,000 mortgage deficit: ‘plus thousands more in closing costs (‘pre-sale refurbishment, commissions, escrow, title, inspections etc.).
With all this in mind, assume that a fictitious conventional buyer with AA credit, who could arrange for 100% financing at, say 5% interest (over 30 years), would pay $1,250 per-month. ‘So, we’ll assume then that a Resident Beneficiary in an EHTrust™™ should pay roughly the same amount per-month.
NOW…’consider what happens when the property owner enters an EHTrust Transfer™, wherein the in-coming beneficiaries agree to pay the over-encumbrance (‘someday), and pay the same monthly sum as would that fictitious buyer (above) with 100% financing (i.e., $1,250 p/mo):
Suddenly (Viola!) ‘The seller no longer has the $45,000 mortgage-debt on his/her shoulders re. the cash-draining, unwanted property
- The Resident Beneficiary is covering all payments, costs of maintenance and repair
- In that the Resident beneficiary has access to full tax deductions for mortgage interest and property taxes, he/she cans pay more per-month than the after-tax cost of renting (‘thereby allowing for a positive cash-flow for the Investor Beneficiary)
- The trustee’s collections representative is handling the accounting for all payments and disbursements of insurance premiums, taxes and mortgage payments (‘and HOA fees, if applicable)
- And,…’perhaps even more importantly, the property is now well-shielded from any beneficiary’s legal errors or actions, such as IRS claims; creditor claims on the property; claims in domestic dissolution, probate actions, and bankruptcy
As well…’the $150 per-month short-fall in payments can be paid by the Settlor (seller) which amount is better by far than the Previous $5-600 per-month negative, coupled with the $45,000+ mortgage-debt.
Security for performance by the Settlor Beneficiary (“seller”) can be a collateral assignment of, say, another property or an item of personal property (car, boat, motor home, motorcycle, etc.) of equivalent value.