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Seller Financing on Steroids
Arcadia Weekly Jul 02, 2009
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Does seller financing give you the willies? There are usually a couple of reasons the average seller (or even real estate professional) is uncomfortable when it comes to seller financing.
In fact, many react as if the concept is not only marginal, but borderline illegal. I’m always a bit confused by this, as seller financing has been around for many decades, long before MBSs, CDOs and TARPs, and in some areas of the United States, it’s an important backbone for the real estate market.
But in fairness, let’s address the biggest fear circling around in a seller’s head: “What happens if the buyer defaults and I have to foreclose? I just can’t tolerate even the remote possibility that I would have to foreclose on someone.”
A large down payment and good underwriting will massively reduce the statistical likelihood of default, but won’t entirely erase it. But seller financing, especially in this market, and especially in the jumbo arena (houses worth $700,000 and above), can be such a powerful strategy for selling quickly and easily for top dollar, that it’s a shame we can’t do something about this little foreclosure nuisance.
I mean, wouldn’t it be great if we could get all the benefits of seller financing without some of the risks? This is where I pull out my syringe (I still have my RN license, so don’t worry that there’s a junkie hitting the press) and fill it chuck full of steroids . . . not so I’ll get large muscles, but so I can pump the seller financing model: the Title Holding Trust.
The Title-Holding (Land) Trust is accepted throughout the United States, and may arguably be the best possible means of real property asset protection and/or transferring real estate.
That’s why I like to call it Seller Financing on Steroids.
It could also be called Lease Option on Steroids because of the added protections and benefits it provides for both parties to the typical lease option agreement.
Also called Land Trusts, Blind Trusts and Business Trusts, the trust model dates back to the 1500’s under King Henry VIII, and the Illinois Land Trust was introduced in the U.S. in the late 1800’s.
California’s version, the Title Holding Trust, was introduced in the early 1900’s, and is similar to, but not exactly like the Living Trusts that many of us use for estate planning purposes.
Increasingly, investors and ‘regular’ property owners like you and me are taking title to every piece of property they own in the name of a title holding trust. Why? Privacy.
Most people would rather that their assets are hidden from the snooping eyes of clients, lawyers and governments. And speaking for myself, it’s also a preferred way for transferring real estate when I am interested in deferring capital gains and/or leaving my existing financing in place for the next buyer (without worrying about the due-on-sale clause).
And here’s the clincher. When I offer seller financing through the title holding (land) transfer system, I never have to worry about potential foreclosure.
If they stop making their payments, I simply evict them according to tenant law. I won’t have to foreclose to regain possession of the property, and when I do, I won’t have a higher tax basis to worry about.
My original tax basis in the property is preserved until the trust is terminated, up to 20 years from inception, though most average 5-10 years in length.
So, if you’re ready to line up for your own shot of steroids, take a quick peek at the introductory information I have on Title Holding Trusts on my website, and you may want to sign up for my newsletter while you’re there.
Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.
Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes. www.NoteQueen.com; 626.641.3931; dawn@notequeen.com
