Need help with details of holding title in escrow
I have always been worried about using a lease option in order to purchase, fix-up and then resell or lease-option again, because of the possibility of the owner not making the payments, having the house foreclosed on, etc.
I read in a William Bronchick article that putting title in escrow would be a good way to lessen the risk of the original owner defaulting on payments, refusing to execute the option, etc. I would just like to hear from someone who is experienced in lease options, how you go about this.
Who do you use to hold the title? What does it cost to pay a third party like that? How receptive are owners to holding the title in escrow? Thanks for any help and input.
ClemsonInvestor,
Glad to meet you.
When you do not have the Deed then you really do not have control of the property whether the Deed is held in escrow or not.
Bill B. is a very smart investor, however I would disagree with him on this one.
Having the Deed held in escrow does not give you control of the property, it does not guarantee the payments will be made by the owner, or the owner may file Bankruptcy, which the Deed in escrow or not, you have a problem.
You may think if the owner of the property defaults in any way you could sue him. Well turnips do not bleed and neither does an owner with problems.
It is just as easy to get the deed, then you are the owner, no need to worry about what happens then, because you control the property.
John $Cash$ Locke
John,
Thanks for the reply, and it's good to meet you as well.
If getting the deed is what I need to do in order to trully control the property, I assume I need to either get a new 1st mortgage or buy the property subject to his existing mortgage.
My problem is that I'm a young, enthusiatic investor who unfortunately does not have a long enough income history to qualify for traditional financing (as far as I know) and get a new 1st, and I am worried about or just not experienced yet in convincing people to let me take title to their house while they keep the mortgage in their name.
What kind of approach would you recommend John?? I am basically birddogging now for my father, who is also an investor, and I've gotten pretty good at finding and analyzing REO's, fixer-uppers, and landlord properties - but I've basically marketed to these people that we can close fast and with cash (from my father of course).
For my own investing, I'm trying to figure out this creative financing angle - because I don't have the cash yet. Where should I start with trying to buy my own property??
Thanks for the input.
[ Edited by ClemsonInvestor on Date 04/03/2003 ]
You can get the deed just as easy as you can lease option. You just have to know your material and know what you are doing. It is basically the same sales presentation.
You don't need to get financing in your own name to do this.
What I would say is you need to make sure this is the type of investing you can handle and also handle the risks associated with it.
Make sure when you do a sub2 or l/o deal you can make those payments without fail!
Good luck investing. Keep reading all you can. Then read it again. If you have any money, spend some of it and invest in yourself by buying a course or two to know your subject matter thoroughly.
The way our system works is we hold deed and bill of sale. I make payments direct to the lender. I would not suggest hoping someone else makes the payments. You want to have as much controll as you can. Things can and will go astray. You want to have as much controll as possible.
Sire[ Edited by sire on Date 04/05/2003 ]
Quote:
On 2003-04-05 13:52, sire wrote:
The way our system works is we hold deed and bill of sale. I make payments direct to the lender. I would not suggest hoping someone else makes the payments. You want to have as much controll as you can. Things can and will go astray. You want to have as much controll as possible.
Sire <font size=-1>[ Edited by sire on Date 04/05/2003 ]</font>
Sire:
You are still taking the same risk whether or not you hold the deed because even if you hold the deed, the owner can always deed the property to someone else (i.e., in nearly all of the states, the owner does not surrend the old deed to the county recorder when deeding the property to someone else).
Clemson:
Here is what I do on my lease options that substantially reduce the risk you and John Locke are talking about.
First, I have the owner sign and notarize a "memorandum of option." This I record at the county recorder so that my option is a superior lien on title and will remain such (thereby preventing the owner from refinancing the property without my consent, or ensuring that a judgment that is filed against the property is junior to me so that when I exercise the option, the junior lien is "bumped off" title.
If you are concerned about bankruptcy or other control issues, you should have the owner deed the property into a land trust whereby you and he (or your or his attorney, whichever you feel comfortable with) and execute the lease option with the land trust. You should also still record the memorandum of option (but the landtrust will be the owner and therefore the trustees will have to sign and notarize the memorandum of option).
Using the landtrust in this manner will help alleviate problems if the owner files bankruptcy or dies; the former case the property will still go through bankruptcy, but since you are a secured creditor, it is much easier to get it released from the bankruptcy proceedings. In the latter case, you will not have to get the probate court's approval to transfer the property. Holding a signed deed will not avoid probate because if you record the deed after the owner's death, the personal representative of the owner's estate can still get the probate court to set aside the transfer since it was a testamentary transfer.
Hope those ideals help. They have saved alot of hassles for me. In fact, I have had a couple of owners that did not want to transfer the deed to me years later when I finally exercised my option on some long term lease-options (they saw the property substantially increased in value and they wanted some of the profit). While I could have sued them for breach of contract, it was just easier for me to say to them that I have a lien on their property (from the recording of the memorandum) and therefore no other buyer could get clear title from them nor could they refinance the property without my approval. That scared them enough to go ahead and transfer the deed.
Note: If you use the landtrust, you don't need to transfer the deed. All you need to do is transfer the beneficial interests in the trust.
You could also use an LLC the same way you use the landtrust, but the LLC will provide more creditor protection and get you away from the fiduciary duty obligation under state law that you must follow when using the trust. I now prefer using the LLC to do the same thing I use to use the landtrust for. Like the landtrust though, you will have to get the owner to deed the property into the LLC.
Note: Transferring the LLC interests (rather than the property) may also save you on some property taxes because some states do not revalue the property taxes when LLC membership interests are transferred.
Hope that helps,
Taxjunkie
We do get a memorandum of contract, but does that "bump off" any seconds if you exercise your option? We have always done this to keep anyone for pulling a second or refi. Doing this will cause anything created after this to be void. Is this correct?
Sire
taxjunkie,
Wouldn't a performance mortgage work better then a memo of option? This would allow you to assign your contract to the t/b. When he refinances your performance mortgage happens to be the difference between his option and your option. Wouldn't this also alleviate a double close.
[addsig]
Hi Clemson,
I read that you evaluate foreclosures. I am a new investor getting into the foreclosure in the next 5 months. I am getting my strategy together and learning as much as I can. What should I look for when scoping out an REO or forclosed home? What are the keys to a winner? What clues tell me to walk away?
Quote:
On , wrote:
TaxJunkie:
Excellent article. Appreciate it....
[addsig]
Hmm.
What are the steps & paper work that I take & fill out to deed a property from a LO to my LLC?
Thanks,
OnTheWater :-D
Ok, I just figured out how to transfer the Deed to the LLC. A warranty deed or a quit claim deed provided there's been a title search to support the latter.
Thanks,
OnTheWater :-D