Seller-Carry Type

Shortfalls, Pitfalls, Draw-Backs and Risks

Straight Lease

A rental for a specific period of time. No benefits other than use and occupancy. Always at the landlords whims and mercy. Far more costly than owning due to absence of income tax deductions and equity build-up

Lease Option (L/O)

A unilateral agreement to buy at some future time, under pre-arranged terms if the tenant has the money and credit wherewithal to do so at the exercise date.

So what's wrong with an L/O? They've been done for years. The L/O violates a lender's due-on-sale clause (See. 12USC1701-j-3). An unscrupulous optionor can change the terms on a whim relative to the option price and rent credits, requiring extensive legal action to rectify. If the Option is recorded, the lender's due-on-sale clause are brought to bear and the house and the option could be lost; if not recorded there is no guaranty the property wouldn't/couldn't be sold or leased to someone else without the optionee's knowledge. Optionors can, and often do, refuse to honor their commitments in the face of increasing values (again, forcing expensive and tenuous litigation). Very few Lease options are ever consummated, thereby most often wasting one's Option Fee and Rent Credit payments.

Contract for Deed (CFD)

The CFD is essentially a "Lay Away Plan." The property's legal title is given to the buyer only after all debt has been retired: i.e., there is no legal ownership until the property is fully paid for.

And the problems are...? The CFD violates a lender's due-on-sale clause; any (either) parties' creditor liens, lawsuits, judgments, marital dispute litigation and tax liens will attach to the property. And...the death of either party throws the property into the decedent's probate (re. posthumous creditor claims).

The “Wrap” All Inclusive Mortgage

In a "Wrap" a seller creates a mortgage loan that is equal to or greater than the existing loan/s on the property. Then from the buyer's monthly payment to the seller the mortgage payment/s is/are made...thereby leaving the seller a positive cash flow.

So, what's wrong with that? Violation of the Due-on-Sale Clause; the seller's liens, suits, judgments, marital litigation, probate and tax liens attach to the property; and the death of the seller puts the entire property into probate. There IS, however, a better way to accomplish the same objectives without the risks (The Trust Selling System!)

The Equity Share (ES)

A shared-ownership of real estate, wherein two or more parties hold title as tenants-in-common. Typically, one party makes the down payment while the other lives in the property and makes the monthly payments for an equal share in profits upon sale.

So? And the problem is...? Another due-on-sale violation. The other party's liens, lawsuits, judgments, marital dissolution litigation, tax liens and affairs of probate attach to the property...thereby negatively affecting the surviving party's ownership interests. Once again, the objectives of equity sharing can be safely accomplished without the risks and downsides by use of the Trust Selling System.

The “Subject-To”

The Subject-To is an informal assumption of mortgage payments subject to a loan's existing terms, with or without the lender's knowledge and/or permission.

And the problem...? "Subject-To" is basically a generic term that can be applied to any of the above schemes. And like all the above, an unauthorized Subject-To violates the lender's due-on-sale clause. The Subject-To clouds the property's clarity of title; it invites disastrous dissention and frequent litigation between parties. And...any party's business, personal and legal actions attach to the property: thereby seriously negatively affecting the interests of the other party/ies. The solution follows with an explanation of the Trust Selling System

The Trust Selling System (TSS)

Protection with virtually none of the downsides, but all of the benefits and advantages of Seller-Assisted-Financing. With the TSS, a seller's property is vested with a 3rd party trustee in a land trust. Income tax benefits can then be conveyed to a co-beneficiary/buyer. In that the trustee is the property owner, no party can act independently of the other. No party can jeopardize title. The property is shielded from public view, and is well insulated from lawsuit, creditor judgments, tax liens; bankruptcy, marital dispute and probate on behalf of either (any) party to the arrangement. And... the lenders' "due-on-sale" clause is not violated.

Problems? As is common with ANY financing method, a seller (trust grantor) could "stir up trouble (although with effect)." The property could lose value over the term of the agreement, necessitating a future sale at a loss, or requiring mutual agreement for an extension of the agreement; without proper caution one's real estate could fall into disrepair. No negative exists, however, that would not be in common with any form of home mortgage financing.

Seller-Carry Type

Shortfalls, Pitfalls, Draw-Backs and Risks

Straight Lease

A rental for a specific period of time. Generally incurs a negative cash-flow along with unrecoverable costs of management, maintenance and vacancies. No chance for elevated income.

Lease Option (L/O)

A unilateral agreement to sell with bargain terms at a future date.

So what's wrong with an L/O? They've been done for years. The L/0 violates a lender's due-on-sale admonitions. A L/0 can (if an option fee is taken or rent credits given) lead to an inability to evict a defaulting tenant. Such a tenant in default can claim having "Equity" in the property, and in so doing, force a judicial foreclosure process versus an eviction. This can afford him/her months of free rent while the litigation rages on. As well, terms can be changed on a whim relative to buy-out provisions, repairs, equity credits (rent credits), etc.: all requiring extensive, expensive, legal action to rectify.

Contract for Deed (CFD)

The CFD is essentially a "Lay Away Plan." The property's legal title is relinquished to the vendee (buyer) only after all debt has been paid off: i.e., there is no legal ownership of the property until it's completely paid for.

And the problems are...? The CFD is a direct violation of a lender's due­on-sale clause; there is no means for eviction; the vendee (resident/buyer) holds a "equitable" interest in the property, allowing only for foreclosure, ejectment and quite title in the event of a breach of contract in lieu of eviction. Further, any parties' creditor liens, lawsuits, judgments, marital dispute litigation and tax liens attach to the property...and the death of any party throws the property into probate.

The “Wrap” All Inclusive Mortgage

In a "Wrap-Around Loan" a seller creates a mortgage loan that is equal to or greater than the current loans on the property. Then from the buyer's single monthly payment to the seller the underlying junior loan payments are made (usually leaving a positive cash flow for the seller).

So, what's wrong with that? Well, a Wrap violates the lenders' due-on‑sale clause; there is no means for eviction in the event of default; the resident/buyer holds an "equitable" interest, necessitating foreclosure, ejectment and quiet title actions in lieu of eviction; any parties' creditor liens, lawsuits, judgments and tax liens attach to the property; and the death of any party throws the entire property into probate.

The Equity Share (ES)

A shared-ownership of real estate, wherein two or more parties hold title as tenants-in-common. Typically, one of the parties makes the down payment while the other lives in the property and makes the monthly payments.

So? And the problem is...? An ES clearly violates the mortgage lender's due-on-sale clause; there is no means for eviction of an errant tenant/ buyer in the face of default; the resident/buyer clearly holds "Equity," thereby forcing judicial foreclosure, ejectment and quiet title action in the event of a breach of contract (versus eviction). Any party's liens, lawsuits, judgments, marital dissolution litigation and tax liens attach to the property....and the death of any party puts property into probate... quite possibly negatively affecting the surviving party.

The “Subject-To”

This is an assumption of mortgage payments subject to a loan's existing terms

And the problem...? "Subject-To" is basically a generic term that can be applied to any of the above: and like the above, a Subject-To violates the lender's due-on-sale clause; obstructs (stops) one's right of eviction of an errant tenant/buyer; it conveys Equity; it jeopardizes title; it invites disastrous disagreement and litigation between parties. And...any party's business, personal and legal actions attach to the property: thereby seriously negatively affecting the interests of the other party/ies.

The Trust Selling System (TSS)

Virtually none of the downsides, but all of the benefits and protections of Seller-Assisted-Financing. A seller's property is vested with a 3rd party trustee. Income tax benefits can then be conveyed to a tenant. No party can act independently of the other. No party can jeopardize title (accidentally or on purpose). The property is shielded from public view, and is well insulated from lawsuit, creditor judgments, tax liens; bankruptcy, marital dispute and probate on behalf of either (any) party to the arrangement. Simple eviction rights are preserved...and the lenders' "due-on-sale" clause is not violated or compromised.

Problems? As is common with ANY financing method, a tenant/ buyer could default in its payment or management obligations under the agreement, thereby requiring disposition by simple eviction action, or imposition of penalties and/or sanctions. The property could lose value over the term of the agreement, necessitating a future sale at a loss or an extension of the agreement.