Posted by El Guapo on August 11, 2005 at 18:33:15:
Nike:
Thanks for your response. No sophistry whatsover!
“There’s nothing wrong with discouraging lawsuits.” I agree with you.
“You cannot create phoney legal instruments (mortgages) to do it.” Friendly Liens are legal and have been used quite often.
“Lemmings” You condemn someone just because they disagrees with you and agree with someone else?
Nike, I hope you well.
Sincerely,
El Guapo
Section 8 vs. Lease Options…Pro’s Cons - Posted by acw
Posted by acw on December 28, 2009 at 07:29:26:
I have a property now that i’m not sure what to do with. Its a SF home in a nicer lower income neighborhood.
? Option 1. Section 8
Section 8 would pay a good income BUT, i’m not sure about the reliability of tenants and how ROUGH they would be on my property. You can do a lot of damage to a home (flushing items down the toilet, mangling drywall, elect, etc). While i like the idea of that rent check being on time, not sure what to expect for these types of tenants.
? Option 2. L/O
L/O would provide a LOWER income. ON the plus side i could structure the lease to make the tenant responsible to all repairs with the hope of future ownership making the management issue more manageable.
Which is Better and why…?
As always…Thanks for your constructive input!
~Tony
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by Chyna
Posted by Chyna on December 31, 2009 at 16:27:37:
I own in NYC and Indianapolis and have had my share of destructive tenants, surprisingly all in Indy. But they weren’t Section 8.
My two all time favorite tenants are Section 8 and have just rented to a third. They have a lot more to lose by messing up since once they lose their Section 8, they can’t get it back, at least in Indy. Also, the rents are MUCH higher. Just make sure you screen carefully.
The rents are in my checking account like magic on the first of every month. The inspections can be easy or not, depending on the inspector. And now the tenants can’t leave before two years, with a rent increase after the first year.
Don’t know about anyone else, but my experience with Section 8 has been very positive.
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by DJ-nyc
Posted by DJ-nyc on December 29, 2009 at 09:18:33:
I have been using Section 8 since I started Landlording in 2002. I have learned to have a good talk with them about treating the property. I also express my fairness and let them know that I will kick them out if they mess up my place. Since I started doing that; its been better on my properties. For me, its more important that I get my rent with the Tenant-friendly renter laws here in nyc. (evicting non-payers take to long). I am seeing the LL’s that previously were Against Sec8 giving in because of the defaulting of cash tenants due to job losses.
DJ-nyc
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by -Steve-
Posted by -Steve- on December 28, 2009 at 09:20:15:
With either Section 8 or Lease Option the key is to screen the tenant or tenant/buyer well. I have done both with success.
Typically most tenant/landlord laws require the landlord to be responsible for repairs; however, the day-to-day maintenance and repairs, like mowing the lawn, keeping the property clean and any repairs required due to damage caused by the tenant is the tenant’s responsibility.
With a lease option SedonaSam is incorrect. No one is disguising a sale. And if your paper work is set up properly your tenant/buyer is leasing first and only becomes a buyer when they exercise the option.
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 07:39:04:
Making your tenant responsible for maintenance and repairs in a lease
option without his being on title is a sure bet to result in the IRS
declaring it to be a disguised sale.
Here are five things that may violate the law or cause the court to
classify the transaction as a sale.
Collection of more than 1.5 times the monthly rent as an Option
Deposit.
Collection of an Option Deposit or Rent Credit to be credited to a
Purchase or to discount the Purchase, as in a Down Payment.
Pre-Determining an end Purchase Price as in delaying or disguising
a sale.
The Leasee also holding an Option on the same property in which
they are leasing regardless if it is one document or two separate
documents.
The Leasee being responsible for maintaining the property
Be careful out there.
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 09:37:31:
Just to clarify. Those are not my words in reference to disguised sales.
They are the words of an Arizona Senator, Judge Lester Pearce, who is
also the judge who wrote the state’s Landlord/Tenant laws. Here is a
portion of his statement:
Typically, when financing is put into place, a trustee holds a “Trust
Deed” against the property giving the trustee the right to sell the
property after a certain amount of time has passed following a default
of the loan.
When you get a loan, a “note” and “trust deed” is created. The note
outlines the terms of the loan and the trust deed is a lien placed
against the property and is the instrument that is used to force
the defaulting party out the property and to sell it.
When the trustee initiates a foreclosure in case of default, there is a
statutory time period that must pass to give the defaulting party a
chance to bring the contract current. After that time passes, the
trustee holds a trustee sale. Because there is no court action taken, the
time frame is much shorter and legal fees are much lower. The reason
it goes so smoothly is that both parties agreed upfront in legally
recognized terms on how the default would be handled.
In the case of a Judicial Foreclosure, there is no trust deed, and
because there were no legally recognized terms spelled out in the
agreement in case of default, a judge has to decide the issue. If the
lease is not recognized by the court as a lease, it doesn’t get the
benefits that go along with a legally recognized lease.
If the judge thinks a sale has taken place instead of a lease, the
rules governing foreclosures would apply. For this reason, possession
of the property must be decided by a judge in a position to hear
matters of title and this process can be extremely expensive; Costs
could be upwards of $10,000 or more, not including paying the back
mortgage payments during the suit.
Me: How often does this happen?
Judge: A lot more than you might think.
Here are five things that may violate the law or cause the court to
classify the transaction as a sale.
Collection of more than 1.5 times the monthly rent as an Option
Deposit.
Collection of an Option Deposit or Rent Credit to be credited to a
Purchase or to discount the Purchase, as in a Down Payment.
Pre-Determining an end Purchase Price as in delaying or disguising
a sale.
The Leasee also holding an Option on the same property in which
they are leasing regardless if it is one document or two separate
documents.
The Leasee being responsible for maintaining the property.
Just advising you. Have an issue? Take it up with the Judge.
Sedona… - Posted by acw
Posted by acw on December 28, 2009 at 07:55:26:
Sedona,…thank you for your response.
Many Landlords use the lease option as a way of encouraging maintaining the property today for “future interest” in a home they may be purchasing down the road.
What can one do to ensure that the property is taken care of?
~T
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by -Steve-
Posted by -Steve- on December 28, 2009 at 12:09:27:
I notice that you write “here are five things that may violate the law or cause the court to classify the transaction as a disguised sale.” And by “court” I assume that you mean an AZ court, since this was written by “an Arizona judge who wrote the state’s Landlord/Tenant laws.” Please correct me if my assumption is wrong.
Well, I may step outside and get hit by a Mack Truck, but that isn’t going to keep me inside all day. I think, even if I lived in AZ, I’d take my chances. Firstly, for an AZ court to even attempt to classify a lease option deal as a “disguised sale,” the contracts would first have to be brought before the court. What are the chances of that happening? Secondly, IF in the unlikely event the contracts were brought before an AZ court and the transaction classified as a “disguised sale,” what is the worst that could happen? That the tenant/buyer be declared to have an equitable interest in the property and you have to foreclose instead of evict? (And I’m assuming that the reason that you are in court is to get the t/b out of the property for non-payment, but I could be wrong. Feel free to correct my assumption if you wish.)
You can choose to operate in fear, looking over your shoulder. Or you can enjoy yourself, do your deals honestly, and run your business. I opt for the latter.
Re: Sedona… - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 09:09:46:
I am now retired and can only tell you what I have actually done in the
past. I used lease options for many years but switched to using the
Equity Holding Trust system for a couple of reasons.
First, the five points I listed were not mine, but those of an Arizona
judge who wrote the Landlord Tenant laws in the state. His guidelines
have been readily accepted by other states.
To get the best tenant, I looked for someone who is preferably a
tradesman, carpenter, plumber, etc., someone capable of making
repairs, preferably with a family. I placed the property in an EHT and
granted the Tenant a beneficiary interest which made him or her a co-
beneficiary in the trust and, in the eyes of the IRS, a co-owner despite
the fact that he/she is not on title.
Then, in exchange for the tax writeoffs due the RB according to the
IRS, I was able to get a high rent and a tenant who was excited about
the prospect of home ownership and obtaining benefits throughout the
lease.
The Trustee is the legal and equitable owner of the property. The
tenant and I owned personal property, i.e., beneficiary interests in a
trust. The Tenant leases the property on a triple net basis from the
Trustee.
To summarize, the Tenant has a triple net lease which requires he
make maintenance and repairs. He gets to writeoff mtg interest and
property taxes. I writeoff expenses and depreciation. In the event of a
default, the trust docs and Lease Agreement provide for the Tenant to
either buy me out, or face eviction. The language is clear and steadfast
and has stood up to scrutiny for over 20 years.
It is my understanding that 86% of lease option tenants do not
complete the purchase. In the case of the EHT, it is just the opposite
with something like 80% who end up owning the property. The last
property I used this technique on was in California five years ago, and
my tenant still resides there and is expecting twins for Christmas.
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 14:19:59:
The chances of a lease option getting to court are very good, actually.
The link is: http://garymialocq.tripod.com/leaseoptionhorrorstory.pdf
The information contained in my post is from the following situation
which was described by a long-time investor, experienced and
knowledgeable:
One day I was sitting in my office and feeling full of myself due to
having just completed my sixtieth (plus) Lease Option deal, when a
phone call changed my life. A few months earlier I had placed a young
married couple in a property on a Lease Option. I had a Lease
Purchase with the owner. A kind of sandwich deal, but I had a contract
of sale with my seller and just an open straight Option with the
tenants. That’s what the Gurus tell you to do is do a Lease Purchase
with the Owner and a Lease Option with the Tenant Buyer.
A Lease Purchase is, of course, a contract that allows me an ?equitable?
claim to the property. A Lease Option is a lease with a separate
unilateral option- to purchase by the Optionee. In this arrangement,
the assumption is that Tenant Optionee has no equitable
interest in the property, allowing a simple eviction of a defaulting
tenants; but requiring full foreclosure should I be the one in default
(my equity interest would force a foreclosure process rather versus
eviction).
I was about three months after my tenant lessees moved into the
property the fateful call came. The wife informed me that her husband
had left her for another honey, and that she (now thoroughly pregnant)
had no means of support and no way of paying the rent. And neither
had she resources to find other accommodations. Me, being the sweet
fellow I am, gave her a month then started the eviction process, which
of course prompted her to seek out an attorney in order to recover her
option fee.
Those were the innocent circumstances that led him face to face with
Judge Pearce. Read the rest, it’s a horror story.
Steve… - Posted by acw
Posted by acw on December 28, 2009 at 13:29:57:
Thanks very much Steve,
I think it depends on which instrument you feel most comfortable with…and Sam obviously likes trust agreements.
While i’m not familiar with them…i will check the rules for my state (florida) and let you know which i opt. for…
Thanks Again for your input!
~Tony
Re: Sedona… - Posted by BAK
Posted by BAK on December 28, 2009 at 15:22:57:
How does this compare to a Land Contract?
Re: Sedona… - Posted by Joe
Posted by Joe on December 28, 2009 at 15:15:16:
Great explination of a Equity Holding Trust. Sam is there any guru, course or book that you would recommend to get more details to study up on?
…ok… - Posted by acw
Posted by acw on December 28, 2009 at 13:27:18:
Awesome Sam…
Thanks for the Tip…!
~Tony
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by Jack-E
Posted by Jack-E on January 04, 2010 at 16:24:44:
U might try a Lease with Option to purchase if all comittments are met. Mark Warda, Fl attorney, recommends this as a way to keep the two separate and no commitment to the Leasee as the Option is only offered and signed upon satisfactory completion of the Lease.
Re: Section 8 vs. Lease Options…Pro’s Cons - Posted by -Steve-
Posted by -Steve- on December 28, 2009 at 15:00:02:
After reading your reply the set up of sandwhich lease option was incorrect to start with, so it is no wonder there were problems.
If there is an issue, being the experienced inverstor would know to, simply return the consideration and move on.
Re: Steve… - Posted by -Steve-
Posted by -Steve- on December 28, 2009 at 15:09:34:
There is more than one way to skin a cat.
Re: Sedona… - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 15:46:52:
They are completely different animals. A LAND CONTRACT or
CONTRACT FOR DEED, is a contract in which the seller provides
financing to buy the property for an agreed-upon purchase price and
the buyer repays the loan in installments. Under a land contract, the
seller retains the legal title to the property, while permitting the buyer
to take possession of it for most purposes other than legal ownership.
Once paid in full, the seller must grant full title.
Overall, the EQUITY HOLDING TRUST? encompasses a combination of
documentation including, but not limited to:
Using this technique in varying ways, it effectively accomplishes the
purpose and all the objectives of Lease Options, Lease Purchases,
Contracts for Deed, Land Contracts, Wrap-Around Mortgage schemes,
Equity Sharing, and even wholesale “flipping” and assignments.
Re: Sedona… - Posted by SedonaSam
Posted by SedonaSam on December 28, 2009 at 15:33:29:
Bill Bronchick and Bill Gatten are the two most respected gurus with
decades of longevity and I am comfortable recommending either.
Bronchick is an attorney who uses a system involving the land trust
and I believe you can access his materials through this website.
Gatten uses his trademarked Equity Holding Trust (a hybrid of a land
trust, equity sharing, and triple net lease). I used Gatten’s system for
about a decade because it included accounting and legal supervision of
all documents. My home is in an EHT.
There’s an ebook that is free that provides a basic education on this
topic that you might want to read:
http://landtrust.net/NoDownNoNewLoanPDF.html
Good luck. Land Trusts aren’t for everyone, but there’s a reason that
they’ve been used by the wealthy since the late 1800’s, and why they
were perfected by Chicago Title Company in the 1920’s to protect the
anonymity of their best client – Al Capone. A tool of the wealthy for
over a century, is it any wonder why the land trust is exempt from the
Due on Sale Clause? Laws are passed to benefit those in power. So, I
figured I might as well use a trust myself. I’ve never had a problem.
The topic itself you’ll probably find both interesting and a bit
entertaining. Have fun and good luck.