Lease back to Seller? - Posted by T

Real Estate Investing Triple Net Leases
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Posted by LeasePurchase on April 03, 2005 at 16:25:30:

“So you are saying that Greenpoint, Countrywide, et al Lenders have accepted the income from the 3-Net lease as the income stream to service the debt”.

YES!

“So from a qualifying standpoint, what type of personal or business financials do they require you to submit for underwriting of such a Mtg/TD loan…”?

Most of my Loans are Stated NOO 90% to 95% Interest Only type loans. What I have found is that once you go Full Doc with lender you always have to go Full Doc. On Stated Loans it is not an issue. But on the Lenders that I can’t go Stated I have to provide all the normal documentation. Included in that documentation is a letter on each of my properties from the Trustee explaining to the lender the terms of the Triple Net Lease and intructing/asking the Lender for 100% RTI.

I did have a Lender question it once, but I got the Trustee on the phone with the Lender and it was resolved. My Trustee is also a Loan Servicing Organizaiton and understands how to instruct and explain it to other Servicers etc.

You also must understand that I am not doing “Lease Options or Purchases”. I am using and Equity Holding Trust combined with a Net Lease Agreement. My guess is that the banks look more favorably at this because of it’s safty an Equity Holding Trust offers.

I am using the same system that the banks use in seven other states. When you go to get your mortgage, the bank has you setup an Equity Holding Trust first and naming your lender as a co-beneficiary. These are called Mortgage States. Most other States are Trust Deed States but you can do Equity Holding Trusts in all 50 States, however in Louisiana and Tennessee they treat them a little differently.

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Lease back to Seller? - Posted by T

Posted by T on March 24, 2005 at 17:39:47:

I get a lot of calls from people who “hear” there are programs where they can sell their house to an Investor who will lease it to them until they are ready to buy it back…

I’m reluctant to get into this line of business because of all the obvious reasons… legalities, disputes over ownership, resale price, terms, sour grapes, etc.

Is anyone successfully running this sort of program? If so, how is it being executed. I’d be happy to refer these Sellers to someone I felt comfortable could do right by them, but I dont’ want to steer anyone the wrong way.

Thanks,

-T

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Re: Lease back to Seller? - Posted by john

Posted by john on March 24, 2005 at 20:10:27:

I have an investor friend that does about 10-12 of these a year. I am not exactly sure how, but he buys the property usually 80% to 90% LTV. He does use traditional financing with title company to close. After the closing before leaving the table he does a lease option with seller. The payments are 10% higher than PITI and the option price is 15-20K more than purchase price. He claims to have had a seller try to get legal once but his contract held up in court, in the last 6 years.
Personally I think it is a big risk but it works for him.

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Re: Lease back to Seller? - Posted by Chris (WI)

Posted by Chris (WI) on March 24, 2005 at 19:54:49:

Going against all the advice I received, I leased back to the person I bought from (3 days before the sheriff’s auction). It was only a 6 month lease. I sold the house. They move out in 7 days and I make $40,000.

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Re: Lease back to Seller? - Posted by Walt

Posted by Walt on March 24, 2005 at 18:44:26:

If you live in Florida You can be put in jail for doing this type of transaction. Stay away from it.

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Not if you use a Land Trust - Posted by LeasePurchase

Posted by LeasePurchase on March 24, 2005 at 19:36:00:

I do at least 4 to 5 of this type of transaction per month.

Have the Seller place their property into a Properly Formed Land Trust naming you and them as co-beneficiaries. You then then make a contribution to the trust to either bring the loan current or pay it off. Your Equitable Interest is equal to what you contributed plus what ever profit you agree to. The Seller’s Equitable Interest is equal to their equity minus what they have agreed to pay you.

In a few months, typically 12 to 24, the Seller can refinance and pay you off. You may even enjoy some possitive cashflow along the way.

The question I get is, “what if they don’t pay”? Well, as a co-beneficiary they will agree to lease the property from the trust. It is a straight lease which means you can simply evict them -vs.- foreclose. I have done this several times within 30 days with no problems.

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Re: Not if you use a Land Trust - Posted by Walt

Posted by Walt on March 24, 2005 at 21:16:05:

What state do you live in? This is most interesting. Do you have any other commenets concerning this matter. If you are doing two or three a month what kind of marketing do you do to get the leeds

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Re: Not if you use a Land Trust - Posted by LeasePurchase

Posted by LeasePurchase on March 25, 2005 at 19:23:37:

I am in Utah, but more than 90% of my deals are not with in 1000 miles from me. There are alot of good deals here too but there are deals everywhere there are houses.

I get my leads from Realtors and Lenders that I have networked with for years.

Just got one yesterday from North Carolina. The property is worth $140,000. The owners have a 5 year balloon of $70,000 due at the end of the month and they can’t even qualify for a HELOC.

They will place their property into a Trust in their name and name me a beneficiary. I will make a contribution to their trust of $70,000 which they will use to pay off the balloon. Once that is done we will sell the property to me from the trust for $90,000. The original $70,000 plus the $20,000 difference will come to me in cash at closing. We will then form a new trust that they will lease the property from on a net basis for 24 months at which time they will finance the property into their name. The loan payment is only $400 per month and they will pay me $800. The bottomline is that I will make $20,000 upfront and $200 per month for 24 months.

This lead was sent to me by their own Real Estate Attorney whos mother I saved several years ago.

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Re: Not if you use a Land Trust - Posted by JohnBoy

Posted by JohnBoy on March 25, 2005 at 23:51:50:

How do you get a $400 loan payment on $90k???

Since trust will sell the property to you for $90k where you would get your $70k back plus your $20k profit at closing I assume you would be borrowing the $90k.

Are you getting an interest only loan at 5.3%?

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Re: Not if you use a Land Trust - Posted by LeasePurchase

Posted by LeasePurchase on March 26, 2005 at 13:56:13:

The loan will be a what is called an Option ARM. The actual payment, not including Taxes and Insurance will be $373. I can remember exactly what the rate is right now and I don’t have my trusty financial calculator with me.

The owner will simply place their property into their own Land Trust and name me as a beneficiary with an equitable interest of $90,000. My actual cash contribution is only the $70,000. ($20,000 for profit)

The beneficiaries (me and them) will direct the Trustee to sell the property and distribute the proceeds as outlined in the beneficiary agreement. I will be purchasing the property from the Trust on a 100% Interest Only Option ARM. Since I have already paid off the balloon with my contribution to the trust of $70,000, at the closing the the Seller/Trustee will receive a check for $90,000. I will receive my equitable interest in the Trust from the Trustee of $90,000. My payments will be only $373 plus T&I.

I will then form a Trust in my name and name the original owner a beneficiary of my trust with an equitable interest of the their remaining equity of $50,000 plus we will split any equitable growth over the next 24 months over the current market agreed value of $140,000. So if it grows to $150,000 in the next 24 months I will also make another $5000 when the original owner refinances the property back into their own name.

In the mean time they will be leasing the property on a net basis from My trust for $800 plus T&I which is what their payments are now and which gives me approximately $400 per month in positive cash flow.

Also, as a Credit/Financial Counselor and Mortgage Lender I will be working with them over the next several months to improve their credit to obtain the best possible financing for them in 24 months or sooner.

They also have the option to elect to sell the property anytime in that period for anything they wish over the $90,000 underlying note. Doesn’t matter to me how much they want to give up to get out or to move on. I’ve made my money. The cash flow is a bonus.

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2.95% amortized over 30 yr… - Posted by JT-IN

Posted by JT-IN on March 26, 2005 at 14:46:26:

BTW… you seem to being quoting a payment of about 2.95% amortized over 30 years… which is a bit higher than the 1st year rate that I am familiar with… on Investor Option Arm programs. These seem to carry a note rate of about 4.5% to 4.75% locked in for the 1st twelve months, then monthly variable following that period…

The Option Arms that I am familiar with seem to amortize out at 1.95% (investor rate) for the 1st tweleve months… which doesn’t really amount to a lot of difference anyway… I suppose. Maybe $ 45.00 per month less for the 1st 12 months, then they should be about the same folllowing that anyway… Just another one of the nuances of the different lenders offering these programs… For what that is all worth.

JT-IN

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Cost of Mtg…? - Posted by JT-IN

Posted by JT-IN on March 26, 2005 at 14:38:39:

LP:

It sounds like you are paying the cost of the mtg… Pts, orig fee, underwriting fee, kitchen sink fee, and all that other garb that one pays when a mtg originates… out of your 20K profit… Which will reduce the round numbers to square numbers… Unless this is being handled in some other way…

It always seems to be these darned little fees that when added together seem to put a dent in a nice deal… I realize that you didn’t elaborate on who is paying, but it sounds like the other party has no funds, so that leaves you… out of your profits… it seems, walking out of closing with 87K instead of 90K… These fees on these Option Arm deals do seem to be a bit steeper than some of the straight up… pay the freight type deals… They seem to get you for the “whistles and bells” of the lower payment that an Option Arm affords, has been my impression. Yours…?

Just the way that I view things…

JT-IN

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Re: Cost of Mtg…? - Posted by LeasePurchase

Posted by LeasePurchase on March 27, 2005 at 04:42:28:

Just giving round numbers here. My costs are being wrapped into the loan. Even so, $17,000 plus $400 per month is nothing to sneeze at.

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Additonal Hidden Costs - Posted by JT-IN

Posted by JT-IN on March 27, 2005 at 07:38:01:

LP:

Yes, what you say is true… 17K plus 400 mo isn’t too bad for a little brain work…

The other issue… not criticizing but just pointing this out, is that you are qualifying for and obligating yourself for a mtg, personally. There is a cost in doing so… not in dollars and cents, but in the fact that each time we obtain a mtg. it absorbs part of us… and may be a limiting issue at some other point in the future against something else that we may want to pursue… There are limits as to how many of these mtgs that you can have at any one time, and each lender has different perameters on this… But my point is that when I consider doing such a deal, and have done quite a number of the exact thing that you mention here, possibly with a different spin or two, that I am wary of the intangible chunck that it takes out of you, that I refer to as opportunity cost… It is simply worth mentioning, possibly not for you, but for others who mught consider this type of transaction… so that the whole picture is understood… in terms of “cost” overall… at least in my view…

Nice deal, and hope you get to do lots more of them…

JT-IN

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Re: Additonal Hidden Costs - Posted by LeasePurchase

Posted by LeasePurchase on March 27, 2005 at 07:58:26:

That’s a really great point. However, what I failed to mention is that when using a Land Trust and Triple Net Lease together, it does not restrict you in any way from obtaining multiple mortgages. Instead of a 60% to 75% Rent-to-Income Ratio, lenders give you a 100% RTI, virtually making it possible to have an unlimited mumber of mortgages in your name.

When I first started in Creative Real Estate I found your observation true. I purchased several properties and either rented or lease optioned them out. When I got to about 12, lenders started cutting me off. When I converted all my properties to Land Trusts with a Net Lease my lenders gave me a 100% RTI on all of them. Before long I had a dozen or so more financed in my name. Today I only have a few because I usually don’t finance anymore properties unless they are something like the example here. Most of my deals are Sandwich Deals using a Land Trust and Net Lease much like I used to do with straight Lease Purchases. The only difference today is that I have the owners place their property into a Land Trust first and then I place a Resident/Tenant Buyer in the property as a beneficiary on a Net Lease for a few years. I then help them get qualified and sell them the property from the trust of which I am also a beneficiary.

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I understand your premise - Posted by JT-IN

Posted by JT-IN on March 27, 2005 at 09:57:07:

But how do you borrow in a Land Trust…? Who is the borrower, and guarantor…?

The Trustee may sign for the purpose of borrowing funds but isn’t going to be held accountable personally for such debt… Are you saying that you are not having to sign as a Guarantor of these mtgs personally…?

Curious on the exact mechanics here… Thanks.

JT-IN

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Re: I understand your premise - Posted by LeasePurchase

Posted by LeasePurchase on March 27, 2005 at 11:17:48:

The property is only placed in Trust to protect my contribution. The Beneficiaries will direct the Trustee to sell the property and distribute the proceeds. I am buying the property in my name from the trust and then placing it back into trust and leasing it to the original owner.

The trust does not buy anything, it only holds title for the benefit of it’s members.

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Re: I understand your premise - Posted by David Alexander

Posted by David Alexander on March 28, 2005 at 18:13:39:

So, all in all…

Your still borrowing in your name which still uses your credit… Which still strains your borrowing power…

The trust thing is just a Bill Gatten type thing…

Jt… is trying to tell you that doing deals that you don’t turn over will eventually tie up all of your borrowing power…

Plus, my opinion… if your pulling cash out… you should be creating a sinking fund for when the deals goes bad… and you need to find another resident beneficiary…

David Alexander

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You’re not getting it - Posted by LeasePurchase

Posted by LeasePurchase on March 29, 2005 at 24:05:44:

I have over 200 properties and there is no limit on what I can buy. Here is what you’re not getting.

When combining a Properly Formed Land Trust and combining it with a Commercial Type Triple Net Lease, lenders will, 99.9% of the time, give you a 100% Rent-To-Income credit. Since I always charge what is equal to Fair Market Rent plus Taxes and Insurance, I get a much higher credit, dollar wise. Never had a problem with a lender yet and do several deals per month.

Even when I take properties Subject To, and have the Seller place their property into their own Land Trust, the Trustee writes a letter to the Sellers new Lender that instructs them how to give a 100% RTI and why and they?ve never been turned down yet.

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Re: You’re not getting it - Posted by David Alexander

Posted by David Alexander on March 29, 2005 at 03:16:00:

So, which is it… your buying them subject to in a land trust… which has nothing to do with going out and getting new loans…

Or you are getting new loans which you said earlier… As what you are saying is you are getting them new loans…

I’m not the one who’s not getting it… I’m not a brand new at this by any means…

So, you are not getting loans in your name as you said…

If so, good… which was our point exactly…

David Alexander