Lease Option & Subject-To - Advanced Strategies for Investors
The focus of this article is advanced strategies for experienced real estate investors who want extra protection for your investments. The use of the strategies I'll cover will depend upon your investment strategy. Also, they may not be solutions you'll commonly use, but you'll have the knowledge you need should you decide to employ them. It's always good to have more weapons in your investment arsenal!
A Basic Protection-the Memorandum of Option One disadvantage of lease options, in particular, is financial difficulties on the part of the seller, resulting in liens, delinquent property taxes and the like. The result can be the time and expense of getting these issues worked out before the property can be sold.
That's why you need the Memorandum of Option. It's an indispensable protection because it's a public document that's a record against the title of the property. Always record a memorandum because it lets everyone know that you have an interest in the property.
The purpose of the memorandum is to prevent an unethical seller from refinancing and selling the property to someone else. It also provides you protection from bad faith sellers who try to squirm out of their obligations. With lease options, always record a memorandum of option!
Advanced Strategy 1-the Deed in Escrow Usually, the term escrow refers to the deposit of funds by one party for delivery to another party upon completion of a specific event or condition.
However, the definition also includes the deposit of deeds and other written financial/legal instruments. I recommend placing the deed in escrow at the time the memorandum of option is filed. In this case, the seller signs the deed along with the other contracts, but the deed is not recorded on the title at this point. Instead, it's held in escrow by a title company or attorney, and they're provided with instructions for its release.
Now, this action doesn't protect against the filing of liens against the property. But, its effect is to reinforce to sellers that they've actually sold the property. This, in turn, creates reluctance on their part to try to back out on a lease option agreement.
This action another benefit for you; it allows you to close on the property without the seller being present! With the deed in escrow, you can then specify how and when the deed is to be released and recorded. The instructions can be simple, such as this example: "When Joanie Jay pays $200,000 in certified funds to Stan Wild, the deed will be released to him. By (date), these funds must be paid."
Advanced Strategy 2: The Performance Mortgage This is a method whereby the seller pledges the property as collateral for the lease option agreement, ensuring good faith performance by that seller. When the mortgage is assigned to you, it prevents the seller from selling the mortgage to other people. (It replaces the filing of the memorandum of option.)
The performance mortgage permits the seller's insurance company to put the buyer's name on the owner's policy as another insured. It shows as well that the buyer is a lien holder and requires that he or she be notified if any type of foreclosure action is taken.
Naturally, some sellers dislike the idea of a performance mortgage and won't agree to this deal! In the event that a performance mortgage is agreed to, an attorney should review the terminology of the mortgage to make sure the appropriate, specific clauses are included.
Advanced Strategy 3: The Land Trust Land trusts are formed by organizations established to hold land and to administer use of that land. You'll find that this technique is very useful with subject-to's because a land trust minimizes your exposure to litigation.
It achieves this by hiding true ownership. The actual owner or beneficiary is not recorded in the public records, only the trust's name. In other words, it's difficult to get sued because litigants find it hard to identify anyone to sue.
Land trust contracts tend to be complicated and long so investors will definitely need an expert lawyer to draw them up.
Advanced Strategy 4: Get Yourself a Seller-Partner There may come a time when you want to consider subject-to high-end properties (in terms of quickly appreciating value). Since there's more risk involved, it's a smart idea to spread that risk. You can do this by taking on the seller as a partner. With this arrangement, you and the seller share the profits.
Here's an example: Assume a property is worth $800,000 and the monthly rental is $3,500. Under normal circumstances, you'd more than likely back away from this deal. However, let's assume you discover that this home might be sold for $200,000+ in profits. This deal makes good financial sense for you and the seller. So, you agree on a 50-50 partnership (or another percentage arrangement), and you're both happy.
My recommendation: If you take this course, require that the seller cover all the risks.
Advanced Strategy 5: Refinancing Refinancing is a great tax-deferment strategy. Here's an example: Assume you have a house worth $300,000, and $230,000 is owed on it. Through a new mortgage, you can take out some or all of the $70,000 in equity, and it's not a taxable event. The result-you can use that money to reinvest in other properties while still holding on to your original property.
Check with lenders and brokers in your area to find out what refinancing programs are available.
Tax Concerns Remember that with any of the methods I've just described they have to meet IRS regulations. So, make sure that you and/or your tax person are on top of them; the regulations do change from time to time and can affect the legality and profitability of deals. One area to really stay on top of is capital gains.
Capital gains are the profit on the sale of a property. Currently, a person can sell his or her primary residence (the one actually lived in, not investment properties) every two years.
If you're single, you can keep the profits up to $250,000; if you're married, you can keep up to $500,000. In both instances, the profits are tax free. If the seller of a property lives in his or her home for two out of five years, then that property qualifies for a tax-free gain. The seller can rent the home out for three years - and not a single day more.
My Advice Study advanced strategies and keep them in mind as you grow your investment portfolio. More than likely, you won't need them for the majority of investments (especially early in a career), but, as is often said, knowledge is power. With that knowledge, you'll be able to apply it quickly and easily when the right situation arises.
Key Point: Make certain you get the lenders permission! Study advanced strategies in depth, so you can make use of them at the appropriate time for maximum protection of your investments.
Article Source: http://www.search-raven.com
About the Author
Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at" the closing table more than 1,500 times. Mr. Sternberg has the depth of experience that lend value to his associations. Contact Mr. Sternberg at www.askjacksternberg.com
This article is licensed under a Creative Commons Attribution - No Derivative Works 3.0 Unported License, which means you may freely reprint it, in its entirety, provided you include the author's resource box along with LIVE links (without "nofollow" tags).
by: JackSternberg
Total views: 31
Word Count: 1139
Rating: Not yet rated