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Mitigating the Legal Threats and Risks
in Owner-Assisted Real Estate Financing

With the EHTrust Transfer™

 

(‘The Subject-To’)

The term “Subject-To” refers to one’s informal assumption of the payments and terms of an existing contract, i.e., “accepting the responsibilities of a mortgage arrangement …’subject to its specific terms and conditions (‘and penalties)”…’without there being any amendment, modification or revision of the original document.

Seldom does the term “Subject-To” have anything to do with whether or not the assumption is sanctioned by the contractor (‘e.g. the Lender-of-Record…the “Mortgagee”): ‘although, the agreement between parties implies the assignee’s full acceptance of all provisions of the original documents; however, ‘any default in the contract’s provisions remain fully the sole responsibility of the borrower-of-record (the signatory assignor on the original contract), and the Subject-To Assignee has no obligation to the underlying mortgage holder what-so-ever.  Any action by the assignor against the defaulted assignee would, by necessity, have to be pursued privately by the assignor as a breach of contract between the two of them.

Each of the following examples of Seller-Assisted (“Creative”)  Home Financing is a “Subject-To” arrangement; and each one carries a significant degree of Danger and Risk that can be averted by the Use of the ODWM Equity-Holding Trust Transfer™ (the EHTrust™)

 

THE STRAIGHT LEASE (Long-Term Rental)

A straight lease is, for all practical purposes, a rental agreement designed to last for a guaranteed term and typically carries monthly payments that are a bit less than less than a month-to-month rental, and can run from from one to three years.

It should be noted here that any lease term of more than three (3) years can be seen by any secured lender to be a violation of their “due-on-sale” admonitions, which require that the property’s title (deed) not be transferred without permission, and that no lease of their security (i.e., the real estate by which the lender’s risk is abated…’hopefully)  can run for more than thirty-six months, or contain an Option to Purchase–‘either of which can be deemed to have transferred an “equity interest” in the property, thus making a legitimate foreclosure-forcause a difficult and expensive process.  I.e., the “claim of equity” is a common tactic by defaulting tenants who attempt to force legal foreclosure versus eviction in order to buy time and free rent.

In the straight lease, the Lessee (‘the party in possession) can be evicted by standard eviction processes, but such “standard process” can become quite cumbersome and expensive if the tenant refuses to comply with the eviction process:

1. Notice of Default,

2. Eviction Notice

3. Unlawful Detainer Action,

4.  Court Hearing,

5. Filing of consecutive demurrers,

6. Consecutive fake Bankruptcy filings, etc.

7. Time-wasting petitions for Temporary Restraining Orders

8. Last-stroke claims of physical illness and incapacity

THE LEASE OPTION

The Lease Option: A lease containing the lessee’s (tenant’s) right to obtain a mortgage loan and purchase the property at some future date (usually) for a reduced purchase price.  The arrangement most often requires the posting of an upfront “Option Fee” by the tenant, and/or issuance of monthly “Rent-Credits,” wherein a portion of the tenant’s lease payments is scheduled to be credited to a future purchase price.

Problems (downsides):

1. With the lease option there is no hiding or shielding of one’s title-ownership, or the existence of the Option in the public record…unless the Option is not recorded…’which opens up the potential for a claims of fraud against the Optionor, should irreconcilable disputes later arise between parties.
2. Any lease containing an Option to Purchase is clearly a violation of the lender’s due-on-sale clause as per 12 USC 1701-j-3;
3. A Straight Lease with a separately-drawn Option Agreement may not violate a due-on-sale clause; ‘but in the event of a tenant-default, any consumer advocacy attorney will immediately set about trying to convince the court that his/her client has a bona fide “Lease Option” and should therefore be immune to eviction due to the client’s “holding Equity” in the property by virtue of the partial payments having been made toward the purchase of the property (i.e., the Option Fee and the Rent Credits).  While the attorney extorts the landlord, with a long and drawn-out foreclosure action, the defaulted tenant remains in the property for free while watching the landlord being slowly drawn into financial distress (if not devastation), and compelled to “settle out of court,” in order to stop the pain and drain: thereby lining the attorney’s pockets and providing the defaulted tenant with months of free rent.As well, the Lessor’s or the Lessee’s legal problems (i.e., divorce actions, probate actions, creditor claims, tax liens, etc.) can result in levies on the option and the optioned property, blocking its sale or re-leasing.
4. A Lease Option is an executory contract, ‘i.e., a contract which has not been fully executed, and under which both sides still have remaining unfulfilled obligations.  A contract that has been fully performed by one party, but not by the other party is classified as an executory contract and is not official or enforceable until a future action would take place.  This is the reason that certain jurisdictions (e.g.,  the state of Texas) has outlawed any contingent sale arrangement unless the property’s title can be transferred within  six-months of the agreement’s inception)
5. The Lease Option is considered to be the most common cause of litigation involving real estate brokerages, ‘causing many of them to prohibit their agents from being involved with them (‘even though the various Boards of Realtors® continue offering forms for their use) and boxes to check in their Purchase Offer form when the transaction is to be a Lease Option (further confirming for the courts the fact that the Option entails a purchase of Equity ownership in real property.
   

THE EHTRANSFER™ SOLUTION:

The best way to achieve the benefits, advantages and objectives of a Lease Option is for one to hold the property in the EHTrust™ while providing a co-beneficiary-tenant the right to secure a loan and acquire the property at its full Fair Market Value at a specific date in the future with a compensating amount of money that is owed to the buyer by the trust (i.e., and amount that is equivalent to what would otherwise have been the value of and option fee and rent-credits), which is schedule to be due the trust’s tenant-beneficiary at termination.

In this arrangement, the tenant beneficiary receives 100% of the Fee Simple benefits of real property ownership benefits, including income tax deductions (for mortgage interest and property tax), while remaining throughout the agreement under threat of simple eviction, without the ability to claim “Equity” for the purpose of forestalling eviction efforts and forcing foreclosure to buy time and free rent  (‘as all of the property’s legal title and equitable title (‘Equity’) is vested solely in the trustee not the beneficiaries: with the tenant beneficiary’s ownership being personal property versus holding any interest in real estate).

Any Lessee who is simultaneously a beneficiary in the trust, with full income tax benefits can obviously save a lot of money, even if monthly rent is higher, due to having full income tax-deduction benefits. I.e.:

Consider a tenant in, say, a 33.3% tax bracket who is paying $1,500 per-month as after-tax rental cost (i.e., $1,000
in rent and $500 in income tax when the rent money is earned).       What this mean is that if the hypothetical rent
were increased from $1,000 to, say, $1,400,  the    EHTrust™ tenant-beneficiary   would effectively be saving $100
per-month, in addition to all the other benefits of Fee-Simple real property ownership.

[FOR INSTANCE:  Note than a renter who is in, say, a one-third overall tax bracket needs to earn 150% more than his/her actual rent in order that when the third of his/her earnings is taken out for taxes, there’s enough left-over (in the two-thirds) to cover the rent.  [This is to say that ‘out of the $1,500 1/3rd ($500) goes to the government, leaving $1,000 for the landlord.]

THE LEASE-PURCHASE

The Lease-Purchase is a contingent Contract of Sale, wherein the Lessor agrees to sell to the Lessee at a specific price at a specific point in time, and the Lessee agrees to purchase the property at that price at that time.  In the interim, the tenant is paying higher rents, but getting nothing of particular extra value in exchange. I.e., tax deductions, appreciation, mortgage principal reduction, etc.

Problems:

Pretty much the same as listed under the Lease Option scenario above…

1. No anonymity of ownership
2. Due-on-Sale Violation
3. Extortion by so-called Consumer Advocates
4. Among the most litigious real estate transaction ever
5. Either party’s liens, lawsuits, creditor-judgment and tax liens can (‘and likely will) attach to the property
6. Any claim of a tenant’s holding “Equity” will be upheld by the courts, invariably mandating expensive and time-consuming full judicial (or non-judicial) foreclosure actions
7. There is no ability to alter-tax rental costs by taking income tax deductions for property tax and mortgage interest (as monthly payments are generally based upon a specific interest rate)

THE EHTRUST TRANSFER™

SOLUTION:

The Equity Holding Trust very effectively avoids every one of the these down-sides, fully accommodating ALL benefits, advantages and objectives of the Lease-Purchase arrangement: all the while allowing for greatly increased rents and total elimination of maintenance costs and effort due to the ability to position the tenant for full income tax deduction benefits and full responsibility for all management and maintenance on the property.

Note also that an EHTrust Transfer™ transaction can be structured for any length of time, by merely stipulating that after the expiration of the lease term, the Tenant Beneficiary’s leasehold reverts to a day-to-day hold-over until the scheduled termination date of the trust.  [‘I.e., due to the shared Power-of-Direction within the structure of the trust, the tenant-beneficiary can only be evicted if he/she would him/herself, would instruct the collection-service to institute eviction proceedings (or ‘should there be an uncured contractual default on that party’s behalf).

And once again, a Resident Beneficiary with full tax benefits can pay a lot more “rent” and still save money (‘i.e., ‘considering a 33.3% tax bracket, $1,500 after-tax rental costs become $1,000 after-tax…’when the EHTrust™ is employed).  What this mean is that if the hypothetical rent were increased from $1,500 to, say, $2,000, the EHTrust™ Tenant-Beneficiary would effectively be saving $250 per-month, while enjoying all other benefits of Fee-Simple real estate ownership.  In order to claim the tax write-off the Resident Beneficiary must be able to show the IRS that he/she is contractually bound to cover all payments as well as maintenance and repair costs Re. the property (See IRC 163(h)4(D).

THE RENT-TO-OWN

A rent-to-own arrangement is essentially a Lease Option, with the only difference being that in a Rent-to-Own, the tenant has (usually) no particular responsibilities for maintenance, management or payment of property taxes or insurance (‘as well, the tenant is most often not obligated to pay the cost of  utilities, ‘although doing so can be written into the Rental Agreement).

Problems:

The same as above…

1. Due-on-Sale Violation if any real estate equity is being bought or earned in the transaction prior to an outright purchase
2. A possible violations of Dodd-Frank, RESPA, HOEPA, TILA and FCRA (i.e., re. the Wall Street Consumer Protection Act; the RE Settlement Procedures Act; the Home Owners Equity Protection Act; the Truth in Lending Act and the Fair Credit Reporting Act)
3. Consumer advocacy extortion (‘by opportunistic bottom-feeding lawyers who capitalize in extorting honest folks)
4. Among the most litigious real estate transactions ever
5. Any party’s liens, lawsuits, creditor judgment and tax liens can (‘and likely will) attach to the property (if equity has been transferred in any manner)
6. Any claim of holding “Equity” by  a defaulting party will be upheld by the courts, forcing expensive and time-consuming judicial or non-judicial foreclosure actions
7. Provides the tenant with no ability to capitalize on income tax deductions for interest and property taxes, that would justify significantly elevated rental income and freedom from management and maintenance expenses

THE WRAP-AROUND MORTGAGE

The Wrap Mortgage, All-Inclusive Mortgage or All-Inclusive Trust Deed [AITD], as it’s referred-to in states using trust deeds to secure mortgage loans, versus mortgages only) is an old owner-financing device wherein a seller (“owner-of-record”) creates a new mortgage for a buyer who wishes to acquire the already financed property on a “subject-to” basis (‘i.e., accepting related responsibilities subject-to existing contract terms), and who may be short of a standard down-payment or ideal credit.

In the Wrap, the new loan created by the seller is larger than the existing underlying loan/s secured by the property.  The owner-financier then establishes a monthly payment on the new larger loan, which is excess of the monthly installments currently being paid on the current financing.  When the buyer’s payment arrives in the hands of the seller, the seller uses it to cover payments on the existing financing, then puts the remainder of it in his pocket.

This has always been considered a quit clever way to “carry paper” and receive a Return on Investment greater than might be possible were a junior loan (2nd or third) were to be placed on the property.  However, as clever and profitable as the Wrap might be, there is a far better way to accomplish the same thing without its dangerous shortcomings and downsides.

The Negatives:

1. There is no anonymity of ownership
2. There is a clear Due-on-Sale Violation
3. There potential violations of Dodd-Frank, RESPA, HOEPA, TILA and FCRA (i.e., re. the Consumer Protection Act, the Real Estate Settlement Procedures Act, the Home Owner Equity Protection Act, the Truth in Lending Act and the Fair Credit Reporting Act)
4. There is a likelihood Consumer Advocacy involvement (‘by those same opportunists who specialize in extorting landlords)
5. The Wrap has always been regarded as potentially litigious
6. Any party’s liens, lawsuits, creditor judgments and tax-liens can (‘and likely will) attach to the property
7. Any claim of holding “Equity” by  a defaulting party will be upheld by the courts, forcing expensive and time-consuming judicial or non-judicial foreclosure actions
8. Internecine battle between parties cannot be avoided by virtue of there being an unbiased, unrelated third-party legal and equitable title-holder that cannot, under any circumstance,  respond to any party’s demands or directions, unless such directions would be unanimous (mutually agreed-to), in writing and constructively delivered (similar to such protections provided in an escrow process)

THE EHTRUST TRANSFER™

SOLUTION:

The Equity Holding Trust™ offers all the same advantaged, benefits and features…’every single one of them: while avoiding and protecting against  such risks and down-sides.  All while allowing for greatly increased rental income due to the ability to position the tenant for tax benefits as a provision owner of real estate (‘although never beyond the remedy of simple eviction, and without the possibility of an “Equity claim” in trying to thwart eviction and unlawful detainer in favor of a long and draw-out and expensive foreclosure process).

THE CONTRACT FOR DEED (Land/Sale Contract)

Not unlike the previously mentioned creative financing tricks and methods, the Contract for Deed (Land Sale Contract or “CFD”) is another old owner-financing device, wherein a seller (an Owner-of-Record) agrees to transfer it’s property’s title to a willing prospective buyer (‘referred-to as ‘the Vendee) only after all underlying financing has been fully retired, at which time the seller (the “Vendor”) relinquishes all title ownership in the property to the Vendee.  In other words, the buyer receives ownership only after the property is fully paid-for (‘analogous to a “Lay Away Plan,” but wherein the prospective buyer uses the asset while it’s being paid-for).

This quite legal home-financing tactic has been used by the Veteran’s Administration for many years (Re. the “Cal-Vet,” “Tex-Vet,” “Alaska-Vet,” “Michigan-Vet” Land Contract programs…’to name a few.  Those “home-buying” program allow qualified veterans, what is considered by some to be a “great way to buy a home”…’even though they won’t own it for 25 years (‘sometimes more).

The Negatives:

1. No Anonymity of ownership
2. Unless the contract is structured as a “Contract OF Sale” versus a “Contract FOR Sale,” the buyer cannot take an income-tax write off;
3. One’s creating a Contract OF Sale in order to owner-carry a mortgaged property openly violates any lender’s alienation provision.
4. A likely violation of Dodd-Frank, RESPA, HOEPA, TILA and FCRA (i.e., re. Consumer Protection Act, RE Settlement Procedures Act, Home Owner Equity Protection Act, Truth in Lending Act and Fair Credit Reporting Act)
5. Opens the door for Consumer Advocacy extortion
6. Any party’s liens, lawsuits, creditor judgement and tax liens can attach to the property
7. Any claim of holding “Equity” by  a defaulting party will be upheld by the courts, forcing expensive and time-consuming judicial or non-judicial foreclosure actions
8. Provides the buyer with no ability to capitalize on income tax deductions for interest and property taxes, justifying significantly elevated rental income and freedom from management and maintenance…unless there is a specific purchase-date and purchase-price agreed-to at inception
9. Internecine battles between parties cannot be thwarted by the presence of an unbiased third-party legal and equitable title-holder who cannot, under any circumstance, respond to any party’s demands unless such demands would be unanimous, in writing, constructively delivered and within the law

THE EHTRUST TRANSFER™

SOLUTION:

Viola! Again, the Equity Holding Trust Transfer™ dispenses with those hindrances and provides all the same advantages, benefits and features…’every single one of them pointed out above…and more: ‘all the while avoiding and protecting against all such risks and down-sides, and creating almost perfect asset-protection at the same time.  And it does all of this while allowing for greatly increased rental income and freedom from management and maintenance costs due to one’s ability to position the resident for income tax benefits (‘although their never being beyond the remedy of simple eviction…without the possibility of an “Equity Claim” (i.e., one’s insisting that he/she has ownership in the property) in an commonly seen attempt to thwart eviction and unlawful detainer and force a full-on battle for free rent during foreclosure).