Many people are advised to insert an "attorney's
fee" clause in a real estate contract. The clause generally
states that in the event of a dispute, the winner is entitled
to attorney's fees. In some cases, the clause is written one-sided,
such that only the buyer or seller is entitled to the attorney's
fees and costs. The courts generally rules that such a clause
is reciprocal, meaning that if one party is entitled to such
costs, so is the other.
The danger of such a clause for a real estate
investor is that it can actually work against you. Say, for
example, you are buying a property from a motivated seller
who is almost broke. The contract contains a provision that
upon breach, the winning party gets attorneys fees and costs.
If he renegs, you can sue and maybe even get a judgment that
includes your attorney's fees and costs. But what is such
a judgment worth if the seller is bankrupt?
Look at it the other way - what if the seller
sues you for breach of contract and wins? He gets attorneys
fees and costs. If he finds some contingent-fee lawyer to
work on his side, he has nothing to lose. You have everything
to lose.
In short, think twice about what you have
to potentially lose by inserting an attorney's fee provision
in the contract. There's an old saying that goes like this:
"Never get into a fist fight with an ugly person... they
have nothing to lose."
Mortgage Broker vs. Mortgage
Banker by William
Bronchick
Many
consumers assume that "mortgage companies" are banks that
lend their own money. In fact, a company that you deal with
may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own
money, although it often sells the loan to the secondary market.
Mortgage bankers (also known as "direct lenders") sometimes
retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping
and analysis for the borrower and puts the lender and borrower
together. Many of the lenders through which the broker finds
loans do not deal directly with the public (hence the expression,
"wholesale lender").
Using a mortgage banker can save the fees of a middleman and
can make the loan process easier. A mortgage banker can give
you direct loan approval, whereas a broker gives you information
second-hand. However, many mortgage banks are limited in what
they can offer, which is essentially their own product. In
addition, if you present your loan application in a poor light,
you've already made a bad impression. I am not suggesting
you lie or mislead a lender, but understand that presenting
a loan to a lender is like presenting your taxes to the IRS;
there are many ways to do it, all of which are valid and legal.
Using a mortgage broker allows you to present a loan application
to a different lender in a different light (and you are a
"fresh" face).
A mortgage broker charges a fee for his service, but has access
to a wide variety of loan programs. He also may have knowledge
of how to present your loan application to different lenders
for approval. Some mortgage bankers also broker loans. As
an investor it is wise to have both a mortgage broker and
a mortgage banker on your team.
SIDENOTE:
MORTGAGE BROKERING.
Keep in mind that mortgage brokering is an unlicensed profession
in many states. If there is no licensing agency to complain
to in your state, make sure you have personal references before
you do business with a mortgage broker.
Choosing A Lender
Choosing a lender that you want to work with involves several
factors, not the least of which is an open mind. You need
a lender that can bend the rules a little when you need it
and get the job done on a deadline. You need a lender that
is large enough to have pull, but small enough to give you
personal attention. And, most of all, you need a lender that
can deliver what it promises.
1. Length of Time in Business
Since the mortgage brokering business is not highly regulated
in most states, there are a lot of "fly-by-night" operations.
Bad news travels faster than good news in business, so bad
mortgage brokers don't last too long. Look for a company that
has been in business for a few years. Check out the company's
history with your local Better Business Bureau. If mortgage
brokers are licensed with your state, check to see if any
complaints or investigations were made against them. Also,
ask for referrals from other investors and real estate agents.
2. Company Size
A company that is too big can be problematic because of high
employee turnaround. Also, the proverbial "buck" gets passed
around a lot. If you are dealing with a mortgage broker, it
is often a one-person operation. Dealing with a one-man operation
may be good in terms of communication if he or she is a "go-getter."
On the other hand, the individual may be hard to get a hold
of, since he or she is answering the phone all day.
A small to mid-sized company is a good bet. You will be able
to get the boss on the phone, but he or she will have a good
support staff to handle the minor details. Also, a mid-sized
company may have access to more wholesale lenders than a one-person
company.
3. Experience in Investment
Properties
It is important to deal with a mortgage broker or banker that
has experience with investor loans. Owner-occupant loans are
entirely different than investor loans. And, it is important
that the broker or lender you are dealing with has a number
of different programs. It is often the case that you find
out a particular loan program won't work, in which case you
need to switch lenders (or loan programs) in a heartbeat to
meet a funding deadline.
Excerpt
from William Bronchick's highly acclaimed book, "Financing Secrets of a Millionaire Real Estate Investor"
The Landlord's Guide to
the Eviction Process
by David S. Schonfeld
Please note that the information
contained on this web site is specifically for CALIFORNIA
evictions that are not in rent controlled jurisdictions.
If your property is outside of California or located
in a rent-controlled area, you should seek the advice
of a qualified attorney in your area. The discussion
below is not intended for rent controlled property,
commercial property or property outside of California
and should not be construed as specific legal advice.
The following is simply an overview of the unlawful
detainer process in California and the way our firm
processes eviction cases.
HOW DO I START AN EVICTION?
1. PREPARING AND SERVING THE NOTICE
In order for a Landlord to initiate
the eviction process, California law requires all persons
residing in the premises to be served with a Notice.
The most common types of notices are discussed below.
If preparation or service of the Notice is done incorrectly
or not at all and the tenant raises it as a defense,
the Court will dismiss the Landlord's complaint due
to a technical defect and the tenant will prevail at
Court.
If your property is in Orange,
Southern Los Angeles County, Riverside, or San Bernardino
Counties, we would be happy to prepare the notice for
you and fax it to you at no charge. We also have bonded
and licensed process servers who can serve it for you
for a nominal charge should you not wish to serve the
notice yourself.
A. THE 3 DAY NOTICE TO PAY RENT
OR QUIT This is by far the most common type of notice
used by Landlords to initiate the eviction process
and is utilized when the tenant has failed to pay
the full rent due and owing for the particular rental
period. All tenants named in the rental agreement
must be listed on the notice as well as the names
of all other occupants or sub-tenants, if known. The
complete property address and county must be on the
notice including the apartment number of the unit
if applicable. Finally, the exact amount of rent must
be demanded in the notice without any additional amounts
for late charges, interest or other penalties. If
any charges other than rent are included on the 3-Day
Notice to Pay Rent or Quit, California case law holds
that the notice is fatally defective and the Landlord's
case will be dismissed. Be sure to date and sign the
notice and fill out a proof of service indicating
the date and method of service.
B. THE 30 DAY NOTICE The 30-day notice can only be used to terminate
a month-to-month tenancy. It cannot be used to terminate
a fixed term lease agreement. The critical point to
remember is that the Landlord must not accept any
rent payments to cover any period of time after the
expiration of the notice date. If the tenant tenders
a rent payment to cover a period of time after the
expiration of the 30 days, it must be returned immediately
via certified mail to avoid a waiver of the 30-day
notice. Finally, Landlords are cautioned not to give
any reason at all for the termination other than the
fact that the rental agreement permits either party
to terminate the tenancy with 30 days' notice. Putting
a reason on the notice other than the foregoing only
opens the Landlord up to a retaliatory eviction or
discrimination defense by the tenant.
C. THE 3 DAY NOTICE TO CURE BREACH
OF COVENANT OR QUIT This type of notice is used when the tenant has
breached some material term of the rental agreement
other than non-payment of rent, i.e., No Pets clause,
subletting without Landlord's consent, or not paying
late fees. The Notice essentially gives the tenant
3 full days to correct the violation or move out of
the premises. Tenants will normally contest notices
of this type in court so it is essential that the
Landlord have witnesses, photographs and other evidence
to prove to the court that the breach did in fact
occur. In a situation where there is a pet or constant
late payments, it is advisable to simply serve a 30-Day
Notice to terminate the tenancy (if it is month to
month) so that the tenant has additional time to vacate.
A 30 Day Notice reduces the chances that the case
will be contested at court since most tenants cannot
vacate the premises in 3 days.
D. THE 3 DAY NOTICE TO QUIT FOR
COMMITTING A LEGAL NUISANCE This notice is similar to the previous notice
but is used when the tenant is engaging in criminal
activity or other acts that are harmful to other occupants
of the property, thereby constituting a legal nuisance.
Such acts include illegal drug activity, prostitution,
and in some cases gang activity. Code of Civil Procedure,
Section 1161 provides the legal basis whereby a landlord
can serve a 3 Day Notice to Quit on a tenant who "...illegally
sells a controlled substance upon the premises or
uses the premises to further that purpose...".
Again, the Landlord is advised to have independent
witnesses (other tenants who observed the illegal
activities), police officer testimony and other evidence
to sustain the Landlord's burden of proof should the
tenant contest the matter at trial.
2. PROPER METHODS OF SERVING THE
3/30 DAY NOTICES
A. Personal Service.
This is the best method of service and simply means
that each occupant of the premises is handed a copy
of the notice by the landlord or landlord's agent.
The original notice should be retained by the Landlord
and a proof of service completed.
B. Substitute Service.
This is accomplished where an individual of suitable
age and discretion (over 18 and competent to understand
what the notice is) is handed a copy of the notice
at the premises with another copy mailed to the premises
on the same day via first class mail. Certified mail
is acceptable as long a copy is also sent via first
class mail.
C. Post & Mail.
In this situation the notice is posted on the front
door of the premises and mailed the same day via first
class mail.
Good News for Landlords: The California
Court of Appeals, Fourth Appellate District has ruled
in the case of Losornio v. Motta that when the landlord
posts and mails, or sub-serves and mails the 3 or 30
day notice that he or she no longer has to wait an additional
5 days before filing the unlawful detainer case. Formerly
the Court were split on whether or not to add five days
to a notice when it was mailed but now the issue has
been clearly decided.
Please note that substitute service
and post and mail service are only acceptable methods
of service where the server has first made a diligent,
good faith attempt at personal service but cannot effectuate
personal service on the tenants despite the attempts.
3. CALCULATING THE EXPIRATION OF
A 3 DAY NOTICE
The following is a simple chart to
help determine when the 3-day notice legally expires.
Some cases are lost at court because the landlord or
attorney filed the case before the 3 full days have
expired.
VERY IMPORTANT: Please note that
if the last day falls on a legal holiday, the tenant
is given an extra day to comply. Example: a 3-day notice
served on January 2nd is improper because January 1st
is a legal holiday so that the rent is not late if paid
on January 2nd.
Day Served
Notice Expires
Midnight of
Monday
Thursday
Tuesday
Friday
Wednesday
Monday
Thursday
Monday
Friday
Monday
Saturday
Tuesday
Sunday
Wednesday
4. THE UNLAWFUL DETAINER COMPLAINT
- (Court Action)
After the Notice period has expired,
the Landlord may commence an unlawful detainer action.
Because an unlawful detainer action is a summary proceeding
to restore possession fairly quickly, it is essential
that the summons and complaint be prepared accurately
by an individual trained in the law. A minor mistake
or defect in the tenant's name, property address, or
other allegation could result in a dismissal of the
entire case causing the Landlord to lose more time and
money.
If you decide to use our services,
once the summons and complaint are prepared and double-checked
for accuracy, our licensed and bonded process servers
will rush the documents to court for filing and immediate
service on the tenants, usually within 24-48 hours.
5. THE EVICTION IN AN UNCONTESTED
CASE - (Tenant Does Not Respond)
In most cases, the tenant will not
respond to the unlawful detainer lawsuit. In that event,
we will quickly prepare default documents, which are
filed with the court within 24-48 hours so that a judgment
for possession is entered. Once the judgment for possession
is entered by the court clerk, the case is sent to the
Marshal's or Sheriff's office for lockout proceedings.
The court clerks send the Writs of Possession to the
Marshal who drives to the property and posts a 5-Day
Notice To Vacate on the front door. If the tenants fail
to vacate within that period of time, the Marshal or
Sheriff will come out a second time and physically lock
out the tenants and possession will be restored to the
Landlord. It is advisable to change the locks so that
the tenant cannot break into the property.
6. THE EVICTION IN A CONTESTED CASE
- (Tenant Files a Response at Court to Delay Case)
There are at least five ways in which
a tenant can use or abuse the court system to delay
the eviction process. Unfortunately, there are many
eviction delay services available to the unscrupulous
tenant and, for a nominal fee, the tenant can file various
frivolous motions with the court to temporarily halt
the eviction proceeding. Many times, the tenant will
not even bother to mail a copy of the Answer or other
motion to the Landlord's attorney in an effort to "sandbag"
them. It is frustrating to be involved with a tenant
who pulls these legal tricks and maneuvers but the California
court system allows tenants to file the following response/motions
regardless of whether there is any merit or truth in
them.
A. LEGAL DELAY TACTICS USED BY
TENANTS
1. ANSWER TO COMPLAINT This is the most common pleading filed by tenants
and means that they want to go to trial against the
landlord. About one-third of all eviction cases filed
will result in a tenant filing an Answer. Once the
Answer is filed, our policy is to immediately file
a request with the Court to give you the earliest
available trial date-usually within 12-20 days. Many
Answers filed by tenants have no merit and contain
false allegations of habitability problems or other
trivial defenses, but since they raise triable issues
of fact, the case must be tried.
Some Answers do contain legitimate
viable defenses, which will have to be analyzed by
the property owner and our office to determine the
most expedient course of action so that there are
no surprises at trial. This is usually the case where
there are severe habitability problems, fair housing
issues, or cases where it is very likely that the
landlord will lose at trial.
Once our office obtains the trial
date, the Landlord or property manager will be notified
and must be present at trial to testify. When the
Landlord meets his or her burden of proof at trial
and the tenant fails to present any evidence to defeat
the Landlord's case in chief, the court will award
the Landlord possession of the premises, forfeiture
of the rental agreement, damages for past due rent,
attorneys fees, and court costs. The lockout proceedings
are instituted in the same manner as for an uncontested
case.
2. MOTION TO QUASH On some occasions, the tenant will file a Motion
to Quash in which the tenant says to the Court that
he or she was not properly served with the summons
and complaint so that the case should be dismissed.
The obvious question is how does the tenant know about
the unlawful detainer complaint if he or she does
not have a copy of it?
These motions frequently contain
the same generic declaration by the tenant in which
the tenant claims that they came home and found the
summons and complaint either stuffed in the front
door or thrown on the ground outside the front door.
Sometimes it is true that the tenant was not properly
served but in most cases it is simply done to drag
the case out. The Landlord's attorney will then have
to file an opposition to the Motion to Quash and appear
at the hearing with the process server who will testify
that the tenant was in fact personally served.
Most judges will deny the tenant's
motion and order the tenant to file an Answer within
five days. However, if the judge believes that the
tenant was not properly served, the process server
or attorney can simply re-serve the summons and complaint
on the tenant at the hearing if the tenant even shows
up. This type of motion delays the case about 10-12
days.
3. DEMURRER/MOTION TO STRIKE This is another motion filed by tenants which
is used to challenge the legal sufficiency of the
Landlord's complaint for unlawful detainer. It essentially
says that the Landlord has no case. If the demurrer
does raise valid issues such as serious defects in
the unlawful detainer complaint, the Landlord can
amend the complaint to correct the alleged defect.
Usually, the demurrer has no merit, but the Landlord's
attorney must file a written opposition and appear
at Court for oral argument. Once again, most judges
will deny the tenant's demurrer and order the tenant
to file an Answer within five days, but the effect
of the demurrer is to delay the case another 2-3 weeks.
4. CLAIM OF RIGHT TO POSSESSION
also called Arrietta Claim Sometimes when the Marshal or Sheriff attempts
to perform the final lockout, a third party will hand
a Claim of Right to Possession form to the Marshal
in which that individual claims to have been an occupant
of the property but was not named in the unlawful
detainer complaint. The Marshal will have to immediately
stop the lockout until the court hears the occupant's
allegations at a hearing. The hearing is held on the
fifth day after the claim is received if no rent is
posted by the occupant, or if the occupant posts 15
days rent, the hearing will take place anywhere from
one to two weeks later. If the judge decides that
the claim is valid, the Landlord must start the whole
eviction process over again as to that tenant by serving
a new notice followed by the summons and complaint
which the occupant can contest by filing any one of
the above responses. If the claim is denied, the court
will order the Marshal to continue with the lockout.
Important: The only way to prevent
an Arrieta claim is to either serve everyone in possession
or to serve a form with the summons and complaint
known as a Pre-judgment Claim of Right to Possession.
This form gives any unnamed occupant the right to
identify himself or herself so that the Landlord can
proceed against them. The drawback of filing this
form is that it delays the case by an additional five
days since the unknown occupant has ten days to respond
instead of only five. If you suspect that your original
tenants have allowed numerous sub-tenants to move
into the rental unit, it is strongly advised that
the Pre-judgment Claim form be filed and served. It
is the policy of our office to serve a Pre-Judgment
Claim in all cases unless we are advised by the Landlord
that they do not want it served.
5. BANKRUPTCY This is probably the worst thing that a tenant
can do to delay the eviction as it is expensive and
extremely frustrating for the Landlord. Fortunately,
it only happens in the worst of cases (maybe 1 in
50).
Here's what happens: When the Marshal
arrives to perform the lockout, the tenant shows a
Chapter 7, 11, or 13 bankruptcy petition to the Marshal
who must immediately stop the eviction. The legal
effect of filing any type of bankruptcy petition is
to create an "Automatic Stay" of all state
court actions against a debtor. Because bankruptcy
law is federal law, it pre-empts California State
law so that the Landlord is powerless to proceed without
obtaining what is known as "Relief from the Automatic
Stay." The Landlord's attorney must file a Motion
for Relief in the Bankruptcy court and a hearing is
held in which the debtor-tenant is allowed to respond
to the Landlord's motion. Normally, these motions
are granted in favor of the Landlord because the tenants
have no equity in the subject property, and it is
not part of their bankruptcy estate. Once the Order
for Relief is signed by the Judge and mailed back
to our office, we immediately forward it to the Marshal
for final lockout.
A bankruptcy filing can delay an
eviction by four to six weeks if the Motion for Relief
is not immediately filed. Once our office learns of
a bankruptcy filing, we file an Ex Parte Application
( Emergency) with the U.S. Bankruptcy court so that
your Motion for Relief can be heard in about two weeks
rather than the standard four-week time frame.
Big Problem - Multiple Bankruptcy
Filings:
Some unscrupulous tenants will file one or more bankruptcies,
i.e., first, husband files and then later wife files,
or they file a Chapter 7 and a Chapter 13. When the
Marshal goes to perform the lockout, the husband will
show his Bankruptcy Petition to the Marshal and the
eviction will stop until the Order for Relief discussed
above is given to the Marshal. The Marshal goes to
the property the second time to lock out the tenants,
but now the wife or even some third party hands another
Bankruptcy Petition to the Marshal, which stops the
lockout again. This means that Landlord's attorney
will have to prepare a second Motion for Relief and
go to bankruptcy court again to have another Order
for Relief granted.
Most people wonder how the Bankruptcy
Court can allow this non-sense. The short answer is
that the Bankruptcy judges and court staff do not
know who is filing a fraudulent bankruptcy and who
is filing a legitimate case and they are very reluctant
to throw Bankruptcy cases out without clear evidence
of fraud.
The problem with multiple bankruptcy
filings is that the majority of Bankruptcy judges
will NOT grant the landlord something called PROSPECTIVE
RELIEF or IN REM RELIEF on the first Bankruptcy filing
by a tenant. When a Motion for Relief asks for Prospective
and In Rem Relief it asks the Court to prevent or
bar any other debtor or tenant living in the rental
premises from filing a Bankruptcy Petition. The majority
of Bankruptcy Judges in the Central District of Southern
California will only grant PROSPECTIVE and IN REM
relief after the second or even third Bankruptcy filing
and the landlord has to prove to the Court that the
debtors or tenants filed these cases for fraudulent
or improper purposes. In other words, the burden of
proof is on the Landlord to show the Court that the
Bankruptcy is fraudulent. This is a serious problem
with our Bankruptcy Court system and until Congress
changes the laws, not much can be done. Please write
to your Congressperson with your concerns.
7. AFTER THE LOCKOUT - (DISPOSING
OF THE TENANT'S PROPERTY AFTER THE LOCKOUT)
If the tenant is evicted by the Marshal,
the law allows the tenant 15 days to claim any personal
property left behind at the premises. If the tenant
vacated without being locked out by the Marshal, a Notice
of Belief of Abandonment must be mailed to the tenant's
last known address and the tenant is given 18 days to
claim the property. During this time period, the Landlord
is obligated to store the property in a safe place,
either in the rental unit or a storage facility. If
the tenant shows up to claim the property, reasonable
storage charges can be demanded, but it is usually not
worth the Landlord's trouble to pursue the matter since
most Landlords simply want to end all dealings with
the tenant. Under no circumstances may the Landlord
hold the tenant's property hostage by demanding that
the tenant pay past due rent or other charges. This
could trigger a lawsuit by the tenant for conversion
(stealing) his or her property. Always take an inventory
of the personal property and take pictures or a videotape
of the items.
If the property appears to have a fair
market value of less than $300, then it can be disposed
of by the Landlord after the 15 or 18 day period. If
the property is worth more than $300, the Landlord must
auction the property through a public sale. The notice
of the time, date and place of the auction must be published
in a newspaper of general circulation once per week
for two consecutive weeks. The auction can then take
place five days or more after the last notice was published.
8. ACCOUNTING FOR THE SECURITY DEPOSIT
California law requires the Landlord
to provide the tenant with a written accounting of the
tenant's security deposit within 21 days of regaining
possession of the property, unless the rental agreement
provides for a shorter time period. The Landlord can
deduct delinquent rent, cleaning fees, repairs above
normal wear and tear and any other damage, which can
be reasonably attributed to the tenancy. If there is
a balance remaining, it must be returned to the tenant.
Landlord's are cautioned to take this
law seriously and to fully comply. The security deposit
law allows tenants to sue the landlord for failure to
comply with the law and many tenants have been successful
in recovering the full amount of the security deposit
plus punitive damages for the landlord's failure to
make an accounting or bad faith retention of the security
deposit when it should have been returned to the tenant.
9. COLLECTING THE MONEY JUDGMENT
After the tenant has been successfully
evicted, the Landlord can decide whether or not a money
judgment is desired. Our office can obtain a money judgment
for you for back rent, court costs and attorney's fees.
A judgment is valid for 10 years. If you know where
the tenant works, our office can attempt collection
of the judgment for you. If the tenant has no job or
you cannot locate their place of employment, our colleagues
at South West Collections will collect the judgment
for you on a contingency basis.
10. CONCLUSION
We hope that this discussion on the
unlawful detainer process in California has been informative
and helpful to you as a landlord. If you have any further
questions or concerns, please feel free to contact us
for more information. If you need a 3 or 30 Day Notice,
we will gladly prepare one for you at no charge. Once
again, thank you for your interest in our firm. We welcome
the opportunity to be of service to you.
A profitable, yet easy-to-learn method
of creating cash flow is to buy and re-sell properties
in back-to-back closings. However, flipping properties
in this manner requires you to KEEP WORKING. When you
stop working, the cash flow stops coming in. Rather
than flip properties for all cash, flip them for some
cash and a promissory note that pays you monthly income
with interest for years and years.
Related Information
The "Wraparound" Transaction
Obviously, you need the cash to buy the property. Most
people buy properties using a mortgage loan, which means
you need enough cash flow from the sale of the property
to pay off the loan you borrowed.
Enter the wraparound formula. A "wrap" is
a transaction that involves leaving the first mortgage
in place and creating a new loan to a buyer which is
secondary to the first mortgage. The payments come in
from the buyer, and you make the payments on the underlying
loan still in place. There is a "spread" between
the two payments which equals cash flow to you. Most
agents equate a ?nothing down? offer with a buyer who
is not serious.
Example: Buy a property worth
$100,000 for a discounted price of $90,000. Put 20%
down ($18,000) and finance the balance of $72,000 at
9% with a conventional loan. Your principal and interest
("P&I") payment is about $580.00 per month.
Resell the property for $110,000, taking a down payment
of $15,000 and a $95,000 note at 12% interest. You collect
about $977 per month. Your cash flow is almost $400
per month ($4800/year), with just $10,000 invested (figuring
$5000 in closing costs.) That's 48% annual interest
on your money!.
This deal is definitely "cookie
cutter" and easy to do, but I said "no money
or credit." Here's the solution: find a partner
to put up their money and credit.
Step 1: Locate an open-minded
investor who has good credit and provable income.
Step 3: Locate properties in nice middle class
neighborhoods available for 10% or more below market.
Step 4: Execute a resolution from the LLC that
your investor member will purchase a particular property
in is name, for the benefit of the LLC. Have the investor
purchase the property in his name, using his credit
and down payment.
Step 5: Advertise the property for sale by owner
"no credit required." Find a buyer willing
to pay at least 10% more than the appraised value of
the property with 10% or more as a down payment. The
investor gets the cash to recoup his investment
Step 6: Execute a land contract to the new buyer.
Step 7: Collect monthly cash flow and split it
with the investor.
In the above example, you so
all the legwork and you split the cash flow with the
investor. When the investor is unable to obtain any
more loans, find another investor, rinse and repeat
For
comments or questions, e-mail bronchick@legalwiz.com. Copyright
2000 All Rights Reserved. No part of this publication
may be copied
or reprinted without the express written permission
of the Author.
Is
your real estate bringing you enough monthly cash
flow? Is landlording draining you of energy? Is property
maintenance depleting your bank accounts? Are you
open to new and safe methods of bringing huge annual
returns on your cash? If you answered "Yes" to
any of these questions, please read on . . .
The Dirty Little "Secret" of How
Bankers Make Money
Actually, it's not really a secret
at all. In fact, bankers have been doing this for
over a hundred years. Bankers make money by borrowing
at low interest rates, then lending at higher interest
rates. You deposit money in a saving account and
they pay you 3% interest. They lend the same money
back to you for home loans at 7% or more. The "spread" between
the interest rate they pay and the interest rate
they collect amounts to incredible profit!
Consider this simple example: You
are shopping for rates to refinance your home loan.
A lender quotes you 7% interest. On a $100,000 loan,
the monthly payment (amortized over 30 years) is
about $665 per month. However, at the last minute
someone at the bank decides that the color of you
underwear isn't right, so your interest rate changes
to 7.25%. Your monthly payment will now be $682.
You aren't terribly upset, since, after all, what's
$17 per month? What you don't realize is that the
extra ¼ percent amounts to over $6,000 in additional
interest! An Incredible Opportunity in Today's Market
We are in a unique time in history in that real estate
prices are rising, yet interest rates are dropping.
This means that those who can borrow at low interest
rates and loan at higher interest rates are making
a bundle! Combine the interest rate "spread" and
the "buy low, sell high" principle and
your profit grows exponentially.
Enter Wraparound Mortgages
Consider this example: Susie Seller
buys a $90,000 house for a 10% discount ($81,000).
She borrows $81,000 from First Federal Financial
on a favorable 8% thirty-year loan. Her principal
and interest payments are roughly $594 per month.
She sells the property to Barney Buyer on an installment
land contract for $100,000 (about 10% above market),
taking $10,000 down and carrying the balance of $90,000
at 11% for thirty years. She does not pay off the
underlying loan, but rather collects payments ($952/month)
from Barney on a monthly basis and continues to make
payments on the underlying loan. She collects $358/month
cash flow on the "spread" for 30 years!
This is a basic example of a "wraparound".
The existing loan remains in place, and a new loan
is created which wraps around the existing loan.
Susie makes a profit on both an interest rate spread
and a markup on the purchase price. People with poor
credit rarely question the price of the property
(especially since they do not have to qualify for
the loan). When the new buyer pays off the remaining
balance, Susie pays off the underlying loan. In the
meantime, she makes monthly cash flow on the spread
between the interest she pays and the interest she
collects. This cash flow is not offset by property
management, maintenance and the aggravation of tenants.
There are no vacancies, calls from tenants, city
code violations or other headaches to deal with.
You can collect your monthly checks for thirty years,
or you can sell your "wrap" note for cash!
You Don't Need Good Credit or Huge Sums of Cash
If you don't have the ability to
qualify for low interest rate loans, not to worry!
You can use partners who have good credit and income.
You can take over existing loans with low interest
rates, then re-sell the properties on a "wrap." There
are multiple ways to make a profit on "wraps," and
you don't need credit, provable income or bundles
of cash! If you are looking for an alternative to
landlording or a new way to create more cash flow,
this is the ticket!
For
comments or questions, e-mail bronchick@legalwiz.com. Copyright
1998 All Rights Reserved. No part of this publication
may be copied
or reprinted without the express written permission of the Author.
Trusts
have been used for hundreds of years for tax savings
and estate planning, but few people realize the enormous
potential for using trusts for privacy. In this information
age where records of your assets can be accessed via
computer, fax and even telephone, you have to take active
steps to protect your privacy.
What
is a Trust?
A
trust is a private contractual arrangement between
several parties for
holding, managing and investing assets. The parties
to the trust are the grantor (the person creating
the trust, also known the "settlor"or "trustor"),
the trustee (the person or entity holding title to
the assets) and the beneficiaries (for whose benefit
the trust is established). A trust created for one's
benefit is called a "self-settled" trust,
i.e., one in which the creator and beneficiary are
the same person.
A trust created during the life of the grantor is
called an "intervivos" or "living"
trust. An intervivos trust can be either revocable
(taken back or modified by the grantor) or irrevocable
(once created cannot be revoked). A "living trust," while
technically any trust created during the life of
the grantor is a buzzword in the estate planning
industry used to describe a revocable, intervivos
trust.
Benefits
of a "Living Trust"
The
typical living trust is created by an individual
for his own benefit. He
also names himself as trustee, i.e., "The John
Doe Family Living Trust." Upon his death, a successor
trustee is named to hold and manage the trust property
(typically his spouse, sibling or a bank trust department).
Although he is the beneficiary during his life, the
trust will name his family as alternate beneficiary
upon his death (known as a "testamentary disposition").
One of the main reasons why living trusts are used
is to avoid probate. Upon your demise, the assets
remaining in your estate are distributed according
to the instructions of a Will, or, if there is no
Will, according to the rules set forth by state law.
The Probate court is involved throughout the process,
adding time, cost and aggravation. The Will is now
public record, for all the world to see. If you own
assets in multiple states, an "ancillary" proceeding
must be commenced in each state.
If most of your assets are owned in trust, these assets
are not subject to probate, nor are they on display
for the world to see. The trustee, according to the
instructions of the trust agreement, either distributes
the assets outright to your heirs (the alternate beneficiaries),
or holds them in trust until they reach a certain
age. Your trust can hold assets (such as real estate)
in multiple states without the need for ancillary
probate.
The
Land Trust
You
wouldn't walk around with a financial statement taped
to your forehead would
you? So why would you
have your most valuable assets exposed to public
scrutiny? Owning real estate in your own name is
like walking
around with a giant "kick me" sign taped
to your back. In every county in the United States,
copies of deeds to real estate are recorded in the
public records. Anyone can go down to the courthouse
or recorder's office and look up the owner of any
property in the county.
A land
trust, a
modified form of living trust, will hide your name
from the public
records. The land
trust
(also known as an "Illinois Land Trust,"
"Title Holding Trust" and "Nominee
Trust") differs slightly from a regular living
trust in that the trustee is a mere nominee. The
beneficiaries
have the right to direct the trustee as to the acquisition,
management and disposition of trust property.
The main purpose for using land trusts is privacy
of ownership. No one will know who owns the property
but you, your attorney and the trustee. If the trustee
resides in a different state than the property is
located, it will be difficult, if not impossible,
for anyone to discover the proverbial "man behind
the curtain." If a judgment is entered against
you, the lien will not automatically attach to the
property, since the title is not in your name.
The
Personal Property Trust
A personal property trust, like a land trust, is a
simple, revocable trust used to hold title to assets.
Cars, boats, bank accounts, leases, mortgages, mobile
homes, corporate stock - you name it - it can all
be held in the name of a nominee. Anything that can
be found on public record is a dead giveaway to potential
creditors, contingency-fee attorneys and deadbeat
litigants looking to steal your hard-earned fortune.
Using a nominee trust to hold title to assets will
help keep your financial matters private and discreet
in the information age.
A trust, unlike a corporation, is not registered with
the state. There are no public records of officers,
directors and shareholders. There are no minutes of
directors' and shareholders' meetings. The trustee
keeps control of the trust records and the identity
of the beneficiaries in his file cabinet. A trustee
will not reveal this information without a court order.
Tax
Consequences
Revocable, living trusts are "tax neutral,"
that is, there is no tax consequence of transferring
property into trust. According to sections 671- 678
of the Internal Revenue Code, the property is treated
as still being owned by the grantor (the logic is
that since the grantor can still revoke the trust,
it still belongs to him for tax purposes). For example,
if you owned you rental property in your name and
reported on schedule "E" of your federal
income tax return, a transfer into a revocable, living
trust of which you are the beneficiary would not
change
your reporting. Compare this to transferring property
into a corporation, which is a separate taxpayer,
even if your own all of the stock of the corporation.
As you can see, trusts are simple, yet effective devices
for holding title to assets and preserving your privacy.
For
complete do-it-yourself information for accomplishing
the task,
order William Bronchick's home study course,
"Your
Step by Step Guide to Land Trusts."
For
comments or questions, e-mail bronchick@legalwiz.com. Copyright
1998 All Rights Reserved. No part of this publication
may be copied
or reprinted without the express written permission
of the Author.
The "due-on-sale" clause
is probably the most talked about, feared and misunderstood
topic in real
estate. This article will dispel any misunderstandings
you may have about the due-on-sale and suggest
a simple,
yet effective strategy to get around it
What
is the Due-on-Sale Clause?
Before we discuss how
to get around the due-on-sale, we must understand
what it is and where it came from.
The due-on-sale (a.k.a "acceleration clause")
is a provision in a mortgage document which gives
the lender the right to demand payment of the remaining
balance of the loan when the property is sold. It
is a contractual right, not a law. This means that
if title to the property is transferred, the bank
may (or may not), at its option, decide to "call
the loan due."
An "assumable" loan is one which is secured
by a mortgage which contains no due-on-sale provision.
FHA-insured mortgages originated before 12/89 and
VA-guaranteed loans originated before 2/88 contain
no due-on-sale provisions. Nearly all loans
originated today contain a "standard" due-on-sale
clause which usually reads something like:
"If
all or any part of the property herein is transferred
without the lender's prior written consent, the
lender may require all sums secured hereby immediately
due and payable."
Where
Did the Due-on-Sale Dilemma Come From?
Banks began inserting due-on-sale
clauses in their mortgages in the 1970s when interest
rates rose dramatically.
Home buyers were assuming existing loans rather than
borrowing new money from banks because the interest
rates on existing loans were lower. The banks used
the due-on-sale as a way to kill their own worst
competition.
They argued that the reason for the restriction was
to be able to police who was living in the property,
the collateral for their loan. This argument
holds little water, since most banks haven't been
enforcing due-on-sale violations since the early
80's
when interest rates were high. In fact, Black's
Law Dictionary defines the due-on-sale clause
as a device for "preventing subsequent purchasers
from assuming loans with lower than market interest
rates." This idea was also confirmed by the
Court in Community Title Co v. Roosevelt Savings & Loan
670 S.W.2d 895 (Mo.App. 1984):"The
due-on-sale clause was a way of eliminating these
low yielding loans as soon as the property was sold,
so that it could re-loan the money at current higher
rates or negotiate a higher rate in the event the
purchaser assumed the existing loan."
The
homeowners fought the banks in court claiming that
the enforcement of the due-on-sale was "unfair
trade practice" and an "unreasonable
restraint on the alienation of property." In
state courts, many homeowners were winning the argument. See, e.g., Wellenkamp v. Bank of
America, 21 Cal 3d 943 (1978). The banks ultimately
won in a United States Supreme Court case, Fidelity
Federal Savings and Loan Association v. de la Cuesta,
102 S.Ct. 3014, (1982). Congress thereafter
passed the "Garn-St. Germain Federal Depositary
Institutions Act" (12 U.S.C. 1701-j)
which codified the enforceability of the due-on-sale
clause, despite state statute or case law to the contrary.
There is No "Due-on-Sale Jail"
Many people are under the mistaken
impression that transferring title to a property
secured by a "due-on-sale"
mortgage is illegal. This is because most
lay people confuse civil liability with criminal liability.
To be "illegal," you must be in violation
of a criminal law, code or statute. There is
no federal or state law which makes it a crime to
violate a due-on-sale clause. If the lender
discovers the transfer, it may at its option, call
the loan due and payable. If it cannot be paid,
the lender has the option of commencing foreclosure
proceedings.
So the real question is: are you willing to take
a property subject to a mortgage containing a due-on-sale
clause with the risk of getting caught?
The "Trust-Assignment Trick"
The
game for us is how to transfer ownership to the property
without getting caught by the lender. You could
simply
get the owner to sign you a deed and not record it,
but this method is problematic (for example, what
if the seller gets a judgment against him?). Enter
the "trust assignment trick . . .
The
Garn St. Germain Act carves several exceptions in
which the lender may not enforce the due-on-sale:
Exemption
of Specified Transfers or Dispositions
With
respect to a real property loan secured by
a lien on residential real property containing
less than five dwelling units, including a
lien on the stock allocated to a dwelling
unit in a cooperative housing corporation,
or on a residential manufactured home, a lender
may not exercise its option pursuant to a
due-on-sale clause upon -
(1) the creation of a lien or other encumbrance
subordinate to the lender's security instrument
which does not relate to a transfer of rights
of occupancy in the property;
(2) the creation of a purchase money security
interest for household appliances;
(3) a transfer by devise, descent, or operation
of law on the death of a joint tenant or tenant
by the entirety;
(4) the granting of a leasehold interest of
three years or less not containing an option
to purchase;
(5) a transfer to a relative resulting from
the death of a borrower;
(6) a transfer where the spouse or children
of the borrower become an owner of the property;
(7) a transfer resulting from a decree of
a dissolution of marriage, legal separation
agreement, or from an incidental property
settlement agreement, by which the spouse
of the borrower becomes an owner of the property;
(8) a transfer into an inter-vivos trust in
which the borrower is and remains a beneficiary
and which does not relate to a transfer of
rights of occupancy in the property; or
(9) any other transfer or disposition described
in regulations prescribed by the Federal Home
Loan Bank Board.
(The
Federal Home Loan Bank Board, which was disbanded
in 1989 and replaced by the Office of Thrift
Supervision,
takes the absurd position that the Act only applies
to owner-occupied homes. See
12 C.F.R. 591. However, the clear
language of Garn Act specifically states that it
applies to residential one-to-four family homes.
There is no mention that it must be "owner-occupied."
Although never enforced or challenged, such a direct
conflict with the Congressional statute would probably
be struck down in court as being "ultra vires").
The
Land Trust.
A
land
trust is form of a revocable, living trust
which is exempted under the Garn Act. A
land trust, like a living trust, is create by two
legal
documents:
1)
A trust agreement between the creator (called "grantor" in
legal terms) of the trust and the trustee which
defines the trust arrangement;
and
2) A deed from the creator of the trust to the
trustee.
The
trustee holds title for the benefit of the grantor
(in this case, the grantor is also the "beneficiary").
If you place title to your property into a land
trust, you have not violated the due-on-sale
(so
long as there is no change in occupancy).
Let's say that you come across a seller who is
willing to give you title to his property. The
only "glitch" is that the loan is not
assumable because the mortgage has a due-on-sale
clause. Here's the process for
getting around it:
STEP
1: Sammy Seller signs a trust agreement with
you as trustee of his trust. Sammy is named
as the "beneficiary" of the trust.
STEP 2: Sammy Seller transfers title to the trustee
(no violation of the due-on-sale clause)
STEP 3: Sammy Seller quietly assigns his interest
under the trust to you (similar to a transfer
of stock in a corporation). This assignment is
not recorded in any public record. Sammy moves
out and you move in.
STEP 4: You are now the beneficiary of the trust.
Your trustee makes payments to the lender.
Keep
in mind that the assignment of Sammy Seller's interest
under the trust to you does trigger the
due-on-sale, but who is going to tell the lender? In
reality, the lender will discover the transfer
of an interest
in real estate in one of three ways:
1)
Change of name on the deed. Not likely, since
lenders don't readily have "spies" at
the clerk's and recorder's office;
2) Different name on the check received for payment.
Not likely, since the bank officers are far removed
from the clerical workers who process payments;
or
3) Change of hazard insurance beneficiary. This
is the most common way a lender discovers a transfer
of interest in the borrower's property.
If
you notify your insurance carrier of a change in
insurance beneficiary, the lender, who is also
a
named beneficiary, receives a copy of the change.
However, if you transferred title into a land
trust,
the new beneficiary under the insurance policy
will be the trustee of the land trust. The lender
will probably not object, since it will assume the
seller has implemented an estate planning device.
If the beneficiary of the trust is assigned,
the lender will not be notified since the insurance
beneficiary (the trustee) has not changed.
This strategy is not much different than simply
transferring title directly from seller to buyer
(called taking a deed "subject to").
However, the chances of the lender discovering the
change of ownership are greatly reduced. This
is especially true where the lender has contracted
to use a "servicing" company to deal with
most facets of the loan. If you have had
any experience with servicing companies, you may
know
that most are so poorly managed that they don't
know which way is up (I would wager that a survey
of 100 servicing company employees would reveal
that 98 of them wouldn't know the meaning of a
due-on-sale
clause).
But, but . . . isn't It is Unethical or Fraud?
From a legal standpoint, a real estate agent who
does not disclose the transfer to the lender has
committed no breach of ethics. In fact, some
of the standard contracts approved by the California
Association of Realtors contain provisions contemplating
a "subject to" transfer (see, e.g.,
form LRO-14, Residential Lease with Purchase Option). The
Offical Utah Division of Real Estate forms also
contain provisions for transfers in the face of
a due-on-sale provision (see
Seller Financing Addendum to REPC). According
to the New York Department of Real Estate, it is
not improper for an agent to suggest a lease/option
or contract-for-deed, both of which trigger the
due-on-sale.
The state bars have no problem with lawyers helping
clients conceal a transfer either. In Matter
of Sabato, 560 N.E.2d 62 (Ind. 1990),
the court found no ethical problem with an attorney
helping a client circumvent a due-on-sale provision
using a land trust as described above. In Alaska
Bar Association Ethics Opinion #88-2, the
Committee declared "circumventing a contract
term under these circumstances is not fraud or fraudulent
conduct. The attorney's participation would
amount to concealing a breach of contract."
The Illinois Bar also concluded that "the
breach of the contract of sale in contravention
of the
due on sale clause is not a crime" See Advisory
Opinion No. 728. The Virginia Bar reached a
similar conclusion in Opinion 471 (1983).
Thus, if it is not illegal or fraud for an attorney
or broker to conceal a transfer of ownership, it
is certainly not for a lay person. It is
not a bad idea, however, for any party, real estate
agent or attorney to disclose the existence of
a
due-on-sale clause to all parties involved in the
transaction so that they are aware of the risk.
"Federal" Fraud?
Some title company representatives and attorneys
have refused to close "subject to" transactions,
quoting 18 United States Code Section 1001,
which generally states that:
"whoever,
in any matter within the jurisdiction of the
executive, legislative, or judicial branch
of the Government
of the United States, knowingly and willfully
-
(1) falsifies, conceals, or covers up by any trick,
scheme, or
device a material fact;
(2) makes any materially false, fictitious, or
fraudulent
statement or representation; or
(3) makes or uses any false writing or document
knowing the
same to contain any materially false, fictitious,
or fraudulent
statement or entry; shall be fined under this
title or imprisoned not more than 5 years, or
both.
It
is a bit of stretch to apply this law to concealing
a transfer that triggers a due-on-sale clause.
Taken to its illogical extreme, this statute
could land you in jail for saying "I'm
next"
while on line at the post office when you really
aren't. In fact, criminal statutes are always narrowly construed to protect the rights
of citizens.
18 U.S.C. Sec. 1010 makes it a crime to
make any false statement in regard to a loan insured
by HUD. This law has been used to prosecute
borrowers and their brokers who lie on their loan
applications or "fudge" down payments
for FHA loans. It has never been used
to prosecute due-on-sale violators. In fact, the
HUD-1 Settlement Statement (lines 203 and 503)
that
is used for virtually every loan closing has a
blank which states, "loans taken subject to."
How could a HUD promulgated closing form contain
such a blank if it were a crime to take property
subject to an existing loan?
Remember that the due-on-sale is triggered by "transfers"
other than a deed. A lease of three years
or more, a lease/option of any term, a contract
for deed (except on VA-guaranteed loans), moving
out of the property within the first year and other
transactions also give the lender the option to
call the loan due. Thus, hundreds of thousands
of borrowers across the country could be subject
to prosecution. Furthermore, their real estate
agents, attorneys, insurance agents, title companies
and others could be indicted for conspiracy - LOL
(laughing out loud).
There have been no reported cases of criminal prosecution
for violation of the due-on-sale. In fact,
the Federal Tax Court recently reviewed
a case in which the taxpayer had taken title
to 10 properties "subject-to" existing
mortgages. If ever there were a case for federal
prosecution, it would have been in a federal forum!
Civil
Liability?
In theory, a lender could sue the borrower for
fraud for deliberately making a misstatement regarding
his loan. Of course, this makes no sense,
because a lender would do better simply calling
the loan due and foreclosing the property. Furthermore,
a case for fraud requires someone to lie in the
first place; keeping your mouth shut
is the easiest way to avoid the issue.
In theory, a lender could sue you, the buyer, for
inducing the seller/borrower to breach his mortgage
agreement (called "tortious interference with
contract"). This case would be pretty
hard to make, since the standard mortgage agreement
does not state that the borrower has to notify
the
lender if he transfers title or any other interest
in the property. Odly enough, I did find one reported
case in which the lender tried to make such an
argument: Community Title Co v. Roosevelt Savings & Loan
670 S.W.2d 895 (Mo.App. 1984). In
that case, a lender (Roosevelt Savings) sued a
title company that advocated, educated and performed
closings
using a contract-for-deed. Some of the properties
that were closed had Roosevelt's mortgages, which
contained due-on-sale provisions. The court
correctly reasoned that the title company was not
liable, since the borrowers could have found some
other means of violating the due-on-sale (in legal
terms, there was no "but for" causation).
Likewise, it would be just as easy for you to prove
that the borrower was inclined to walk away from
the property and default on the loan . . .
why else would he hand you a deed subject to his
mortgage?
Of course, all of this discussion of "fraud"
requires a material misstatement of fact in the
first place. If anyone made a misstatement,
it was the borrower (ok, so it was your idea - so
what?). If the borrower and you simply
transferred title without making any statements
to the lender (as I described above), then there
can be no fraud. The United States Supreme
Court recently declared that is not fraud to violate
a due-on-sale if the borrower simply transfers
title
without saying anything to the lender. See Field
v. Mans, 1995.S.Ct.207 (1995). Furthermore,
the court in Medovoi v. American Savings & Loan,
89 Cal.App.3d 875 (1979) declared a lender
could not sue the buyer for fraud for deliberately
concealing a transfer, since he has no legal obligation
to tell the lender of the transfer.
Don't
Just Take My Opinion
Thus,
beyond the legalities, "ethics" becomes
a matter of opinion. In other words, is it
dishonest? About opinions, the legendary
Dirty Harry eloquently stated "an opinion
is like an a**hole . . .everyone's got one." Joking
aside, the following are some prominent professionals'
opinions the subject.
Attorney Robert Bruss, a well-respected nationally
syndicated real estate columnist, advocates the
practice transferring properties "subject-to"
existing loans without notifying the lender. In
his 1998 article, "Nothing Down Home
Purchases," Bruss says, "I buy subject
to the existing mortgage and do not notify the lender
of my purchase . . . In today's market . . . a lender
would be crazy to push the issue and put the loan
into default." In his article, "The
Six Pillars of Assumption," he also
advocates the use of a trust to "dupe" the
lender.
Attorney Jeffrey Liss, J.D., LLM, a Harvard Law
School Graduate and well-respected member of the
Illinois Bar, wrote an excellent article called
"Drafting Around the Mortgage 'Due on Sale'
Clause in the Installment Sale of Real Estate" which
was published in the Chicago Bar Record in
1981. In this article he points out that "the mortgage does not prohibit the [transfer],
but merely gives the mortgagee an option to accelerate.
There is no duty upon the seller/mortgagor to report
such a sale. The attorney, therefore,
is not counseling any breach of contract or breach
of a business relationship."
If you think that concealing a due-on-sale transfer
from a lender is dishonest, consider the following
lender practices . . .
Yield
spread premium "kick-backs" (recently
declared RESPA violations by at least three federal
courts - see, e.g., Culpepper v. Inland Mortgage,
132 F.3d 692 (1998))
$100 "processing" fees
for loan payoff (declared unenforceable by
a Florida Federal District Court
in Sandlin v. Shapiro 95-213-Civ FtM-17D (M.D.
Fla 1996)).
"Stalling" for
loan payoff statements to obtain additional
interest (a common practice by several lenders
in my personal experience in closing scores
of
loan transactions)
The
old "bait and switch" with loan rates
- promising one rate then changing it the day
before closing because of alleged "underwriting
requirements"
Charging
$85 for a credit report that costs the lender
about $5
Offering
a loan with no points, then charging $500
for "Administrative Review"
My
point here is not to convince you that banks are
evil. Like the Godfather says, "it's
just business." Taking title to a property
subject to an existing loan . . . it's also "just
business." It makes more financial sense
in many cases than plunking down a 20% down payment,
paying loan costs and signing personally on a note.
It is a calculated risk that, in many cases, is
worth taking. It also makes more financial
sense for a lender to ignore a due-on-sale violation
than to incur costs in foreclosing a property. This
is especially true if the loan is already in default
and there is little equity in the property,
such as in a foreclosure situation.
The
Reality of the Marketplace
In
many cases, lenders today are not concerned with
violations of due-on-sale clauses on performing
loans. There is no financial incentive for
a lender to enforce a due-on-sale provision on a
performing loan if market interest rates aren't
any higher. A lender does not want non-performing
loans in its portfolio - it simply looks bad. This
trend will probably continue so long as interest
rates remain within a few percentage points of
existing
loans.
Want
more info? Register for one of
William Bronchick's Upcoming
Workshops
For
comments or questions, e-mail bronchick@legalwiz.com. Copyright
1998 All Rights Reserved. No part of this publication
may be copied
or reprinted without the express written permission
of the Author.
Real estate trends dont change direction
without giving you "WARNING SIGNS" in advance. Identifying
a trend change early is what allows you to sell when the
market is peaking . . . and buy when the market is hitting bottom.
The five "Vital Sign"
indicators in the San Diego Real Estate Report read
the market's warning signs . . . and give you "advance
notice" when the current trend in San Diego real estate
is going to change direction.
How accurate are these "Vital Sign"
indicators? Very accurate . . . as you'll see in a moment.
When the "Vital Sign" indicators are positive, rising
prices are almost guaranteed for San Diego real estate. When
they turn negative, a death sentence for price appreciation
is near certain.
The
Five Key "Vital Sign" Indicators
Vital Sign Indicator #1: Interest
rates.
Interest rates act on property values the
same way gravity acts on physical objects. The higher the
rate, the greater the downward pull. In other words, rising
interest rates have a depressing effect on real estate prices
. . . while falling rates tend to raise prices.
Vital Sign Indicator #2: Home
sales.
Home buyers are a dominant force that drive
real estate prices higher . . . and lower. It's simple supply
and demand. When the number of buyers are increasing, more
homes sell . . . and prices go up. When buyers are more scarce,
less homes sell . . . and prices tend to go lower.
Vital Sign Indicator #3: New
home building permits.
New home builders respond to the market
place according to demand. When demand is strong, they "pull"
more building permits so they can build ~ and sell ~ more
homes. When demand is weak, they pull fewer building permits
so they won't be stuck with a lot of unsold homes in a softening
real estate market.
Vital Sign Indicator #4: Loan
Defaults
Homeowners who default on their mortgage
loans are generally having money troubles. This is a sign
of a weakening economy . . . which soon translates into a
weakening real estate market.
Vital Sign Indicator #5: Foreclosure
Sales
Property owners who default on their
mortgage loans - allowing their homes to be sold at a foreclosure
sale - are generally having severe money troubles.
Like loan defaults, therefore, the number of foreclosure sales
is a clear measure of the health of the economy. This determines
whether real estate prices are likely to rise ~ or fall.
Table
of "Vital Sign" Indicators
The
"Buy Low, Sell High" Index
Individually, each of the five "Vital
Sign" indicators sends out it's own "warning signs."
The "Buy Low, Sell High" Index is a composite
of these five indicators . . . making it a very powerful tool
that is easy to follow. This index gives you about 3-6 months
of "advance warning" before major trend changes
occur in the San Diego real estate market.
This "advance warning" is what
enables you to sell at market peaks . . . and buy at market
bottoms. Looking at the chart below, when the "Buy Low,
Sell High" reading is above "0", the San Diego
real estate trend is positive, and real estate owners can
expect capital appreciation. When the reading is below the
"0" line, capital depreciation is likely.
Most importantly, be clear about
this: Trend changes in the San Diego real estate market are
signaled only when the "0" line is crossed
in the "Buy Low, Sell High" index.
The
"Early Warning Alert" Indicator
The "Early Warning Alert" Indicator
is also a composite of the five "Vital Sign" indicators.
It is designed to identify short-term trends . . .
as opposed to the 3-5 year, long-term trends of the "Buy
Low, Sell High" Index.
The "Early Warning Alert"
indicator only puts you on "alert." The "Buy
Low, Sell High" Index is what triggers your buying and
selling decisions.
Track
Record of "Buy Low, Sell High" Index
Looking back, and testing the "Buy
Low, Sell High" Index against actual San Diego real estate
cycles, you have to be impressed. By examining the chart below,
it accurately signaled every major San Diego real estate
trend from 1982 to 1999.
Signal #1. The "Buy Low, Sell
High" Index told you to "buy" San Diego real
estate in April 1982 . . . after mortgage rates started plunging
from the previous high of 17% . . . and prices were cheap.
Home prices increased between 100% and 200% during the next
eight years. (Remember, even when the graph line was falling,
home prices continued to rise until the "0" line
was crossed.)
Signal #2: In February 1990, when
prices were sky-high and ready to fall . . . the "Buy
Low, Sell High" Index flashed a "sell" signal.
Home prices fell by 20-40% during the next four years. (See
"What I Learned from the 1990 San Diego Real Estate
Crash")
Signal #3 & Signal #4: After
keeping you safely out of the worst real estate crash since
the Great Depression, the "Buy Low, Sell High" Index
gave a "buy" signal in January 1994 . . . and a
"sell" signal in September 1995. These signals were
good although not spectacular. Home prices went up a little
and then down a little.
Signal #5: In February 1997, the
"Buy Low, Sell High" index told you to "buy"
. . . and within a few months, San Diego real estate prices
started rocketing higher. By the start of the year 2000, home
prices had increased by 25-40% . . . and were still climbing.
The "Buy
Low, Sell High"
IndexSan
Diego County: 1982 - 1999
Final
Words
While no market indicator is ever 100%
accurate, the "Buy Low, Sell High" indicator comes
close.
This unique indicator helps you buy
at market bottoms . . . and sell at market peaks. Because
"timing" and "market trends" are more
important than "location, location, location"
for making maximum profits in San Diego real estate, serious
real estate owners would be wise to pay close attention to
these "Vital Sign" indicators.
Investor makes amazing 1000%
return in 3 days. Did he make this fantastic return from the
stock market? No. He made, and continues to make these returns,
from real estate and by helping landlords solve their problems.
One of the problems associated
with owning rental real estate is collecting past due rent
and damages after a tenant eviction. This is a topic that
many landlords do not like to discuss. Unfortunately, there
are millions of residents across the United States that overspend
and will not be able to pay their monthly rent. Many landlords
are forced to evict the resident. Sadly, this is not the end
of the story. After an eviction, the majority of the residents
do not pay the money they owe and the landlord is left with
obtaining a judgment against the former tenant. Does this
sound familiar? What I am going to share with you in this
article will forever change you view of tenants and judgments.
I would like to share with
you a unique money-making strategy that I use to generate
thousands of dollars in extra income from tenants and judgments.
Even more exciting is the ability for landlord entrepreneurs,
or anyone who wants the perfect home-based business, to make
several thousand dollars in additional income each month simply
by helping other landlords solve their tenant problems.
Did you know that almost every
landlord in America has a least one judgment against a former
tenant that has not been collected. These landlords almost
always assume that their judgment is worthless since, in most
cases, the former tenant has "skipped" town and
the landlord has not received any money from the former tenant
to pay off the judgment. Here is your opportunity to make
fantastic profits: buy judgments from other landlords.
This strategy involves buying
the judgment from the landlord at a discount. You purchase
the judgment at a discount because you need to be compensated
for the risk of buying a judgment that has already shown (to
the original landlord) is unlikely to be paid off in the future.
Additionally, you need to be compensated for the work you
will do in the future to get the debtor (former tenant) to
pay off the judgment.
You should negotiate to purchase
the judgment for around five to 15 cents on the dollar. So
for the judgment that made me 1000%, I was looking at a judgment
with a face value of $2,000. I paid $200 or 10% of the face
value. I was able to collect the judgment and made a profit
of $1,800 on a $200 investment. Keep in mind, the key negotiating
argument is that the judgment has already proven to be worthless
to the creditor (original landlord). I do caution, however,
that under no circumstances should you pay more than 40% of
the face value of a judgment. To be ultra safe, you might
consider only buying judgments that are attached to real estate.
In this case the real estate acts as collateral.
This great opportunity gets
even better. Almost every single courthouse in America has
over 300,000 judgments currently on record that are available
for purchase and/or collection. What's more, I did extensive
research to determine that an average of 50,000 new judgments
are entered in almost every courthouse each year. To top it
all off, landlord entrepreneurs can go to their local courthouse
and find other landlords who are willing (excited is a better
word) to sell their judgment (un-recovered money from former
tenants) to you at a sizable discount. You then use your knowledge
to collect the judgment and make huge profits. If you don't
have any money you can also collect these judgments for others
under what is known as the contingency method. I will cover
the contingency method in detail in my next article.
Michael Warren teaches
extensively on this subject in his home sturdy course. For
more information,click
here.
I go into neighborhoods that most people
avoid. It's not that I like them so much, it's just that this
is where the bet deals are. Banks holding properties in these
areas are especially anxious to get rid of them. Vacant properties
are likely to have their electric and plumbing disappear.
The liability to the banks is enormous.These properties soon
become crack houses or just plain public nuisance.
When dealing in these areas, you must take
special precautions. Needless to say, you don't visit the
property at night. Take your tools home with you. Make sure
the house is totally secure. Install spot lights with motion
sensors. Remember your potential buyers will be security conscious.
Install security doors and bars on the windows. Make sure
the property is fenced. A security system is a nice idea if
you can do it cheaply.
Find the people most likely to do harm to
your property and hire them as "security patrol". Offer them
money to watch the house. Pay them partially up front and
the rest at the end if they do the job. Try to use them in
odd jobs on your rehab. The more they have vested in the property,
the less likely they will vandalize it. Offer them a reward
if they find you more ugly houses to buy. After all, who better
knows where all the crack houses are.
I have used this method for years and am
using it now. So far, so good. I'm still keeping my fingers
crossed.
AUTO RENT DRAFTS
Are you still collecting rents the old fashioned way? The
future is now...
Eliminate late payments!!! Thousands of you have heard
me at seminars challenge you to stop collecting rents the
old fashioned way-residents mailing you the payment or even
worse, you collecting the rent in person. Instead, start
telling all new residents (and old) that they never have to
worry about late fees again. Because, you now offer the option
of paying rent
automatically each month worry free!!!
Simply find out from residents, when they
apply for your property, which checking account they will
be using during the term of the rental, and request their
permission to draft that account on an agreed upon date(s)
of each month. Let residents know that this procedure
is one of your "standard" methods of rent collection.
Other collection methods available are automatic payroll deduction
or automatic charge card debit. Most residents will
select the automatic check draft option.
It's important that you present the check draft selection
as a "normal" or "standard" collection
method with advantages to the resident. The more you
treat this a standard collection method, the more your residents
will embrace and actually like the convenience of the idea.
Residents will not have to waste time each month writing out
checks and rushing to get them delivered in
time to avoid a late fee. In fact, the resident will
not have to worry about late fees at all. In addition,
the resident may qualify for a special year-end bonus or rebate
for timely payments throughout the year (This is a nice way
of selling the idea).
Some rental owners actually require residents, whose payments
are made by third parties, to utilize the auto-draft program.
Parents of college-age students actually like the convenience
of this type of arrangement because they don't have to physically
put money in a student's bank account each month. Stories
have been told that students getting "housing" money
from mom
and dad party all weekend and then don't have money for rent.
This can now be avoided, plus parents don't have to write
out a check each month to be mailed in. If you
have residents who attend private colleges or universities,
you should immediately switch from old-fashion forms of collection
to auto-pay plans.
There are various other segments of the rental population
who will quickly embrace the idea of automatic payment plans,
which we discuss in the MR. LANDLORD newsletter. You can offer
the automatic payment plan to current residents. In
fact, I would recommend that you implement a New NSF policy.
Under the old-fashioned rent collection system, if a resident
writes a check
with insufficient funds, then he must then pay by money order
or sign up under the Automatic Payment Plan if he prefers
to continue using a checking account.
Likewise, when a resident pays late under
the old plan and has to pay the additional late fee, inform
the resident that he can avoid such fees in the future by
taking the option of the automatic payment plan. This
encourages many residents to convert from the old-fashioned
rent collection method.
There are many ways to promote the idea of automatic payments
to both new andcurrent residents. For now; however,
is important that you see the advantages as a rental owner
in promoting automatic pay plan as a standard form of collection.
Here are the advantages to you as an owner:
* You have cash in hand on day payment is due on time every
time.
* You will be able to identify payment problems immediately,
quickly filter out problem payers.
* You will save collecting or chasing down rents. No longer
do you have to play the "wonder and wait" game of
whether rent is coming in the mail. You'll be reasonably
assured of how much rent will be available to you on the
first of the month, instead of never knowing when payments
may arrive.
Banks and companies that assist with automatic payment plans
usually utilize one or two methods. Those methods are
either electronic fund transfers (EFT) or paper drafts.
For rental owners, I would recommend, if possible, using paper
drafts. Here's how that works. First, you get
written permission from a resident, to use pre-authorized
checks for rent. There is no computer access into your
resident's checking account (nothing for a resident to be
fearful about). Your resident's check is simply recreated
each month by a company that provides such a service.
The check is delivered to you each month so that you can deposit
the check on the agreed upon date. Because you will
be in control of the checks, there is no chance for the bank
to make a mistake on your resident's account.
With this system, you can even hold a check for a "good"
resident when that "once a year" emergency occurs.
You have no extra costs for software or hardware that is often
required for electronic fund transfers with a bank.
The main point is that automatic payment plans is the way
of the future for rent collection. Other industries,
such as health clubs and insurance, have used this method
of payment collection successfully since the 1970s.
You are now encouraged to make your life easier while you
get your rents on time, every time.
After doing a seminar and sharing the above cash flow idea,
I get calls from excited subscribers who run into a stumbling
block implementing the idea. They call and say, "Jeff,
my bank says they can't set me up for automatic drafts.
I'm not a company, and I don't have a storefront. I'm
not a merchant, blah, blah, blah ......... And, they
want to charge me hundreds of dollars."
Or landlords discover they may need a computer and training.
Well, listen up, especially those of you who have called my
office seeking help in getting setup to receive automatic
payments. I've made special arrangements with a nationwide
company that specializes in working with rental owners across
the country by helping them receive automatic payment plans
and automatic paper drafts. They normally work with
larger apartment owners. But, because of the number
of subscribers to MR.LANDLORD, they have agreed to work with
you. In addition, they've agreed to cut their one-time
setup fee in HALF, for MR.LANDLORD subscribers. The company,
C&A Solutions, understands that many ofyou will be trying
this for the first time, and they will help you through the
process step by step. They will provide you with everything
you need to get setup and implement the program whether you
have 1, 5 or 50 tenants who want to take advantage of automatic
payments. They will give you all the phone support you
need to make your rent collection easier. For more information,
call 512-255-6961, and ask for Claudia. Tell her you
want to start getting your rents on time, every time!
Plus, be sure to tell her that.
