Bill J. Gatten
Contrary to what you might hear from those who are uninitiated in these areas, buying real estate with nothing out of pocket, nothing per month, no payments, no management, no maintenance, no repairs or upkeep and no credit risk is a pretty good gamble. This is true even in those areas where appreciation "might" be perceived potentially less than in others.
When someone supposes there isn't as much appreciation in the inner cities, then I suppose that would mean one could buy a virtual mansion there for $50,000. Obviously you and I know this isn't true. The values in the so-called inner cities rise and fall proportionately with the rest of the world. This is because houses there are made from the same lumber, concrete, cement, glass and Union labor that Valley and Seaside houses are. And, as well, they are responsive to, and subject to, the same economic influences. Obviously if one is referring the Ghettos or slums, then that doesn't relate to your question about investing in the "city (Watts, Compton, Inglewood, etc.)"
With all that aside, let me answer your questions: We've facilitated well over 1,000 PACTrusts™ since 1993. So far we have a 25% slow pay rate; a 15% default rate; a 5% eviction rate; three favorable Unlawful Detainer Actions to our credit. Further, we have never experienced a single lawsuit, lis pendens or legal action of any type against the company; a participating broker, agent, investor or any other principal).
The PACTrust(tm) works this way:
A. A property is placed in a land trust for myriad reasons (here are just a few of them):
1. For privacy, estate planning, probate avoidance and assets protection
2. To enable one to convey all tax benefits to any party in the transaction that he/she would choose...without title transfer...in order to command 150% higher rents and eliminate all costs of vacancies, management, maintenance, etc.
3. To avoid Due on sale compromise in the underlying financing relative to owner financed subject-to's
4. To shield the property from virtually all legal threats and potentialities: from marital disputes and creditor judgements to BK's and tax liens
5. To make your purchase by payment-assumption simpler and easier, since the seller can be so well protected while staying on the loan, and never have to worry about you or the collection and disbursement of payments. And neither does he ever have to put your name on title… until you're ready to sell or Re-Fi
6. To make your selling (or other disposition) easier, since the buyer can be so well protected while assuming payments on existing financing... without a Down (if you so choose) and without bank financing and stringent credit requirements
7. To make "sandwiching" easier, since the investor in a two-tier PACTrust(tm) needn't ever be concerned about the potential for untoward or illegal actions by, or personal problems of, the person remaining on the loan: or of the person living in the property and making the payments
8. To make eviction faster and easier, since no defaulting party can not claim "equity" to thwart or forestall Foreclosure, eviction or Unlawful Detainer
9. To shield the buyer against illegal or illicit Foreclosure or Unlawful Detainer by the Settlor or Non-Resident Beneficiary without just and appropriate cause
10. To allow for the collection of as high a security deposit as you want without being restricted by legislation to just a "first and last"...a PACTrust(tm) Contingency Fund can hold one payment or twenty payments, if you want
11. To shield the investor from unfair and highly biased and restrictive Landlord/Tenant laws and regulations
B. NEXT, a Beneficiary Interest in the trust is assigned (sold by the owner... the Settlor Beneficiary)to an Investor (the Non-Resident Co-Beneficiary).
C. THEN the Non-Resident Co-Beneficiary Leases the property from the trust on "Triple Net" lease basis (i.e., contracts to pay all costs of ownership and possession).
D. FINALLY the Non-Resident Beneficiary advertises for a Resident Beneficiary who will live in the property, take care of it and make all payments and handle all costs for 100% of all benefits of homeownership (including income tax deductions). Depending upon the amount of payment relative to FMV, the appreciation and principal reduction can be shared between Resident and Non-Resident Beneficiaries.
In this scenario, the Investor can relax and buy more property, while expecting to receive profit by means of: 1) a share in equity build-up 2) by principal reduction, 3) appreciation, 4) a return of all equity held at start, 5) a positive cash flow throughout the term, and 6) the passive tax write-off (Depreciation) throughout the term.
At the end of the Agreement (term is set for 3,4 or 30 years) the contract provides that the Resident Beneficiary will either sell or refinance the property, and pay the investor off out of the proceeds of such disposition at that time. The sale price for the property termination is agreed upon in advance, and is whatever the FMV may be determined to be at the time by a mutually acceptable appraisal...LESS any monies owed by the trust to the acquiring party (from profits, credits and refunds due).
My Market is Different – Woe is Me!
By Bill Gatten
A tough question posed recently by a would-be investor in the East: "Where I live there hasn't been any appreciation in real estate for several years now. If I truly want to pursue being a real estate investor, should I move elsewhere, or wait for the market to turn?
To some this might seem a reasonable question; however, my response was: "Stay put! Empowering such bogus rationale is what keeps the millionaire ranks as low in number as they are."
The key to creative real estate investing is to have a plan that adapts quickly to ANY market…it doesn't matter which direction market dynamics flow, the force is still there: water flows east with the same strength as when it runs west. In a "down" market, there are few willing buyers; but obtainable properties abound, and they're all for sale at the best prices. In an "Up" market there may be fewer "easily" obtainable properties: but there are more buyers, and they'll do just about anything you want in order to get in on the action.
The fact is that market dynamics in creative real estate have always required "thinking outside the box." The true Real Estate Investing Entrepreneur lives with, copes with, and makes his/her living with that fact. Think about it…a fisherman who goes fishing armed only with catfish bait, most probably won't catch trout. All he can expect to bring home is catfish…if they're biting that day. If the catfish aren't hungry the fisherman will be. On the other hand, the serious and well-studied angler, carries a "full" tackle box, so that when the catfish aren't biting, he can hook up for trout, bass, walleye…or a sperm whale, if he wants to…at a moment's notice.
Understand that when real estate appreciation trends are up, a seller's market prevails: sellers set high prices and hang in there till they get them. On the other hand, when appreciation is down or stagnant, that's a buyer's market: fewer properties are available and sales are sparse. It's during these downtimes that most folks are counting pennies and digging in for a long winter, than looking for a new home. In other words, a Seller's market pushes prices and circumstances toward the seller's benefit; whereas a Buyer's Market pulls everything down to suit the buyer's needs. But none of this should be a concern of the well-studied Creative Real Estate Investor. In an up market you sell, in a down market you buy and hold.
During our last major downturn here in California, a common cry was: "Help! Houses are a dime a dozen, but I can't find any buyers." But now that the market has turned, the current entreaty is, "Help! Buyers are everywhere, but I can't find any houses!" And (for the most part) whom do you suppose these two disparate plaintive cries come from? Right! Exactly the same people: those who choose to blame their own shortcomings on market condition, having failed to plan to "bend with the trend (as it were)."
To excel in any market, we need education…and tools that work in all circumstances. In a seller's market, we must be able to attract and serve buyers who would love to climb on the home-buying bandwagon, but who haven't yet saved up the cash or garnered the credit to do so. In a buyer's market, that knowledge and those same tools must attract sellers of no, low, or negative equity properties; fixer-uppers; distress sales; NOD filings; and "hard-to-moves"…while simultaneously wedging us, the investor, into the middle.
This is where the NARS PACTrust™ comes in. The PACTrust™ is a third-party title-holding land trust system, which works virtual wonders in any market. With this remarkable tool, the existing loan stays in place without a due-on-sale compromise; full income tax write-off is transferred to the tenant (in exchange for much higher payments); the property is shielded from creditor judgements, tax liens, law suits, bankruptcy action and marital disputes. Think of it…no down payment, no bank qualifying; no payments; no expenses. This is creative real estate investing!
Imagine telling a seller who is reticent about "carrying," that he needn't transfer the title to you until you can sell or refinance in the future. Or that he needn't worry about liens, suits, judgements or personal problems ever compromising the property's title while he remains on the loan (nor do you need to worry about such occurrences on his behalf).
The PACTrust™ gives your tenant full tax write-off in exchange for paying (your) full mortgage, property tax and insurance. For a share in future appreciation potential, they'll gladly paying 100% of the (your) maintenance, repair and management costs. In other words:
"Mr. Buyer, if you can afford the payments (which include a few hundred positive cash-flow for me) and a few thousand dollars in closing costs (most of which goes into my pocket)… I'll give you the property. The only thing I want out of it all, is to be assured that you'll refinance in a few years--at which time, if there's been any appreciation, I'd like to split it with you."
THE DUE-ON-SALE CLAUSE
-- HOW TO AVOID IT
Bill J. Gatten
The Common Assumption: To get around a lender’s due-on-sale clause, one must just go ahead and violate it, and then try to make sure the lender doesn’t find out.
The Facts: The due-on-sale clause is not violated when a transfer of real estate ownership is by assignment of beneficiary interest in an inter-vivos trust, versus a conveyance by a title transfer.
The Common Assumption (“Denial”): Lenders’ don’t mind if a loan is taken over by another party without their permission. They obviously would never want to foreclose on a perfectly good, properly performing, well secured Account Receivable…especially in “this” market.
The Fact: Lender’s are conglomerations of investors (humans) who do care in a big way, but whom will usually turn away and pretend they don’t see anything wrong during times when mortgage rates are low. However, when rates start to climb and they see an opportunity to replace old, poorly performing loans with significantly higher yields for their stockholders, they suddenly begin spending considerable effort in seeking out those opportunities (like foreclosing on unauthorized transfers and fraudulently applied-for loans).
Interesting, however, one can indeed take over an entirely non-assumable loan without needing to fear, or even be concerned with, a DOS Violation. To do so, one need merely place the property into a co-beneficiary land trust in the mortgagor's (seller's) own name and take a partial Beneficiary Interest in it. The trust would then be set up to run for some specified period of time, with the understanding that, at the end of that period the seller's interest will be forfeited to the "buyer" without further claim. Such forfeiture merely needing to be in consideration of some promise of a future act by the buyer (e.g., prompt payments; strict adherence to contract terms; a share in appreciation or overall profit; etc.).
The problem confronting most of us is that the foreboding due-on-sale clause in Para. 17 of the loan agreement doesn't always say what we (or our attorneys) “think” it does, irrespective of whether a lender's rights under a DOS clause are "real," "false" or indifferent. What the clause actually says is: UNLESS PROHIBITED BY LAW, the lender has a right to foreclose if...". Well, good news! Such right is not available under the law (12 USC 1701(j)). Make no mistakes about it, a lender’s foreclosing due to a borrower’s placing its property into a living trust (assuming the trust is revocable and that the borrow remains a beneficiary), IS in fact against the law. That law is the “Federal Depository Institutions Regulations Act,” known as the FDIRA, having originated with the “Garn-St. Germain Act” of 1982.
Under Garn-St. Germain, a mortgagor’s (borrower’s) rights as established by the federal government, allows any borrower to grant its own mortgaged property to its own living trust, and subsequently name (a second party) as a Co-Beneficiary in that trust. When this is done, if your are that second party, the property has effectively been transferred to you, along with 100% of all the benefits and incidents of real property ownership. And the transfer does not need a new loan or any more cash than the seller might require. As well, the due-on-sale clause has not been tampered with. Title hasn’t been transferred beyond the authorized trust. No control over the property has been relinquished by the borrower of record. The lender’s security interest remains fully intact. There need be no public notice (recording) of the transfer to you; and the property is now shielded from either party’s judgment creditors, tax liens, lawsuits, divorce actions, bankruptcy, probate and estate tax issues.
PRACTICAL USE: When calling on a prospect that you’d want to remain on the loan, if you want to be assured of 'getting the deal,' make it sound so good for the seller that he can't refuse. Suggest to him that for his own safety and peace of mind, you'll pay to put the property into a neutral title-holding trust in his own name. Explain, as well, that he needn't ever transfer the property’s title to you at all…until you've had a chance to prove yourself by selling the property and paying off his loan, or refinancing it in your own name. Explain that you'll consent to being merely named a co-beneficiary in the trust, until such time as you retire his loan in, say, a year or two (or 3, 4 or 5 years…or more).
Note that this arrangement (called a "NARS PAC Trust") affords you the buyer 100% of the mortgage interest and property tax write-off; 100% of the Use, Occupancy, Possession; 100% of the Equity Build-Up (from principal reduction); full rights to all rents; and other profits upon the sale or other disposition of the property. In addition, you own and control every single right ordinarily available under the so-called "Bundle of Rights" in Fee-Simple Real Estate ownership.
In the NARS PAC Trust, the seller never has to take any chances with you; and you don't have to take any chances with the seller. While the property is protected from liens and lawsuits…on both sides, the Due-on-Sale Clause becomes pretty much a non-issue. That’s because the real estate interest in the property has not being sold; the title has not being transferred (beyond the borrower’s own living trust); there is no consideration or option for a purchase…yet); and that which is being transferred (beneficiary interest) is personal property only and not real estate, and therefore not the security for the mortgage loan.
As far as an attorney's suggestion that a Lease Option would be better, with reference to the Due-on-Sale Clause, that's ridiculous (and they do it all the time)! When an attorney makes such a suggestion, he/she knows nothing about Land Trusts or the Garn-St. Germain Law (12USC 1701(j)) per se. they merely are looking to make a profit on doing a deal for you that they understands better: but wholly at the expense of your maximum safety, tax write-off and income potential.
Despite what you may have heard or will hear to the contrary from time-to-time, all Lease Options, Lease Purchases, Wraps, Land Contracts or Equity Shares without the shield provided by the NARS PACTrust can, and do, more than just occasionally, constitute some or all of the following:
1) Lender’s Due-on-Sale violation (all)
2) Public notice of the transfer, or deception and legal risk by avoiding public notice (all)
3) Excessive risk of title involvement with the other party’s marital disputes, BK's, creditor judgments, tax liens, lawsuits, illegal activities and probate issues (all)
4) Loss of tax write-off for the resident party (contracts and options),
5) Possible property Tax reassessment (contracts, wraps and equity shares)
6) Difficulty in procuring title insurance
7) Difficulties with hazard insurance replacement and coverage (contracts and options)
8) Much lower income potential for the investor (contracts and options)
9) Much higher potential for difficulty in eviction and dispossession of an errant or defaulting tenant buyers who would claim “Equity” to force judicial processes versus eviction (all)
10) Need for subterfuge in dealing with lenders, insurance carriers, co-buyers, etc. (all)
11) Confusion and lack of control in timely payment and determining how payments are to be received and disbursed to creditors (all).
AVOIDING THE DUE ON SALE CLAUSE
By Bill J. Gatten
DUE-ON-SALE CLAUSE: The clause (Para. #17) in virtually all mortgage loans, which permits a secured mortgage lender (federal, state or private) to call the entire unpaid loan balance Due and Payable immediately should the property securing the loan be sold, transferred, traded, gifted or otherwise disposed of without the lender’s prior written consent (and without giving them the opportunity to charge more money or say “No” to the transfer).
Despite the due-on-sale clause and its implications in the creative real estate financing business, it is quite possible for one to take over the payments on a non-assumable mortgage loan without needing to fear, or even to be concerned with, a DOS Violation…without violating it.
In order to effect such a take-over without an unauthorized transfer, one simply assures that the property is, in-fact, NOT being sold, traded, hypothecated or transferred in any ‘unauthorized’ manner. In other words, since placement of real estate into the borrower’s revocable living trust for asset protection purposes is fully allowable under the law (12USC 1701-j-3; and since appointment of a co-beneficiary is a prudent thing to do anyway: a would-be seller need only place its property into such a trust, and then deal with the interest in the trust, rather than dealing with the property itself. At this point, the buyer (of beneficiary interest: not real estate) gains virtually 100% of the same incidents and benefits of Fee Simple Real Estate ownership that he or she might have under a traditional transfer of the property’s title.
The only caveat here is that the living trust that is utilized for this purpose must be an Illinois-type, title-holding Land Trust. Such a trust is fully revocable and it is an inter-vivos trust; however, land trusts by nature are directed by their beneficiaries, not the trustee: and all “legal” title, as well as all “equitable” title, is vested with the trustee. Beneficiaries of land trusts own no real estate, only personal property…and even though they retain all the benefits of an owner, the property has not been sold, transferred or hypothecated.
The trust term of the agreement is decided upon by beneficiaries and stipulated in the contract. Such terms generally run for from 1 to 20 years, with the understanding that, at the end of that time, the trust will be terminated and the seller's interest (as little as 10%) will be forfeited to the co-beneficiary (buyer). Such forfeiture merely needs to be in consideration of some future act by the buyer (e.g., prompt payments; strict adherence to contract terms; a share in appreciation or overall profit; etc.). Often times, however, beneficiaries might mutually agree to share profits at termination in proportion to their respective beneficiary interests (50:50, 90:10; 75:25, etc.).
It is most important to understand here that the verbiage of a lender’s Due-on-Sale clause doesn't always convey exactly what we or our attorneys THINK it does, or what the lender expects us to believe it does (a little trickery here)…irrespective of whether a lender's exercising its rights under a DOS clause are "real," "false" or indifferent. What the DOS does infer is: “UNLESS PROHIBITED BY APPLICABLE LAW…” the lender has a right to foreclose, if the title to its security is transferred into a trust, and if a beneficiary interest in that trust is sold or transferred." Well...make no mistakes about it! Such action ‘IS’ indeed prohibited by “applicable law.” The Law (The Federal Depository Institutions Act of 1982) strictly prohibits ANY lender from taking exception to a borrower's placing its property into its own inter-vivos (living) trust (such as a Title-Holding Land Trust) and appointing a 2nd party to function as a co-beneficiary or remainder agent. Further, there is nothing to prevent those same co-beneficiaries from leasing the property out to any one they may choose…say, to the 2nd co-beneficiary, for example.
Overall, the process described here creates what is tantamount to a legally constructed, and very safe and well-shielded ‘Wrap-Around Seller-Carry’ device. Since the original owner of the property has named the second party as a beneficiary in the trust and leased to the property to him or her under a triple-net lease (i.e., net, net, net lease, wherein the tenant pays mortgage interest, property tax and handles all maintenance), the resident beneficiary (or investor co-beneficiary) has obtained all the benefits of a sale… without there actually having been one.
When proposing that a seller remain on the existing loan for you: if you really want to be assured of 'getting the deal,' its important that you make it sound so good for the seller that he can't refuse. To do that, you’d suggest that for his own safety and peace of mind, you'll pay to put the property into a neutral trust (if he prefers), and that he needn't ever transfer the property’s title to you at all…until you've proven yourself, by eventually refinancing or selling the property and paying off his loan. Explain that you'll consent to merely becoming a co-beneficiary in HIS trust until his loan is retired in, say, 6 months (or 3, 4, 5 or 20 years…or more).
Note that this arrangement (i.e., a "NARS PAC Trust™") gives you, as the buyer, 100% of the tax write-off (See IRC § 163(h)4(D)); 100% of the use, occupancy, possession; 100% of the equity build-up (from principal reduction); full rights to all rents; and other profits upon the sale or other disposition of the property. As well, you also have any and all of the other rights ordinarily only available under the so-called "Bundle of Rights" in any form of Fee-Simple Real Estate ownership.
In a NARS PACTrust™, the seller needn’t ever take any chances with you; and you don't have to take any chances with the seller either. By virtue of the structure of the NARS PACTrust™, the trust property is protected from liens, suits judgments, divorce actions or claims, bankruptcies or anything else you can think of…on both sides…including state and/or IRS tax liens. Moreover, the due-on-sale clause becomes pretty much a non-issue in that the property has not been sold; the title has not been transferred (other than to the borrower’s authorized trust); and there is no consideration for a ‘purchase of real estate’ per se. Furthermore, the commodity being transferred (beneficiary interest in a trust) is characterized as Personalty (personal property), and not Realty (real estate), and is therefore not subject to the same creditor rights as would be real estate. And…the transaction has not infringed upon the lender’s foreclosure rights, or compromised its security interest).
In closing, do note that for maximum safety, it recommended that at least 10% of the trust's Beneficiary Interest and 50% of the beneficiary’s Power of Direction should be retained by the seller, with an agreement to forfeit that interest to you upon disposition of the property at the trust's termination. However, also note that the Settlor Beneficiary’s fifty percent Power of Direction can be given to you by means of either an Assignment of Power of Direction, or by a Revocable, Limited, Power of Attorney. The reason for the seller’s retaining a percentage of beneficiary interest is to satisfy the requirement that if the seller places his property into a revocable trust, he must be and remain a beneficiary of that trust. The reason for keeping the 50% Power of Direction intact, is that most county jurisdictions will not re-assess the property for property taxes, or require transfer fees, when transferring the property to a living trust, so long as no more than 50% of the “voting rights” are conveyed.
RIBALD STUFF ATTORNEYS SAY
… FINDING ATTORNEYS
WHO UNDERSTAND LAND TRUSTS
By Bill J. Gatten
A caution to always seek out the advice of a competent attorney before “trying this at home” is always good advice, but I find it difficult to proffer truly good (non-legal) advice on the subject of seeking the right attorney with regard to the PACTrust™ or land trusts in general. In fact, I find myself “…jest a tad ‘twixt a rock and a hard place” here (as it were), mostly because… they jest ain’t hardly none a’tall around these parts (as they say on Jerry Springer).
Although I certainly do not advocate proceeding in any real estate related transaction without the advice of a “good’ and “knowledgeable” real estate attorney (a little like finding a handsome Chapultepek or a smart Italian I’m afraid): the quandary in which I find myself is that—first off, there are very few attorneys who know a lot about the use of trusts in general. Then there is the fact that there are even fewer who know kidney beans from koala bears about what a “land trust” is…much less how it differs from other living trusts, and what it’s capable of doing. Many attorneys have never even heard of such a thing; and there are even fewer yet who are competent to offer sound advice—pro or con—relative to the use or safety of an “Illinois-type, revocable, inter vivos, title-holding beneficiary-directed, third party trustee, land trust transfer (the PACTrust™).”
Ordinarily, when an uninitiated attorney is engaged for the purposes of reviewing a land trust transfer—much less a PACTrust™ with all of its attendant appendices, directions, Escrow documentation, creditor letters, etc.—he or she is faced with a true pointy-horned dilemma. The only two options available are: 1) Get into Nexus-Lexus or out to the law library and spend hours in getting educated on the advent and history of land trusts, or 2) render advice (pro or con) on something they know virtually nothing about (and it will always be ‘con,” I can assure you).
I’d presume no less than 10 or 20 hours would be needed to thoroughly research the pertinent local and federal codes and cites, and the myriad features and uses of the land trust (i.e., a bill of from $1,700 to $ $5,000); Think about it…if you were a busy attorney with your itinerary over-burdened with time constraints, what would you prefer to do?
Would you opt to: 1) Spend your “billable” hours doing hard research for free for a transaction you’ll probably never see the likes of again; 2) Risk your client’s walking away and your receiving nothing for your consulting time, or 3) might you attempt to convert the entire transaction to something else” something you better understand, and are more competent to advocate…and on which you could make some money?
Similarly, if you were the client seeking and hoping to pay only for a simple review and approval of a set of documents, would you be willing to finance your attorney’s continuing legal education at the rate of $175 to $275 (or ?) per-hour? Probably not. My guess is that you’d relent, as many do, and be coerced into accepting the suggestion that the entire transaction should be transformed into something more “manageable (for the attorney).” Perhaps a nice “Contract for Deed” or maybe a little seemingly innocuous “Lease Option.” After all, let’s face it, there just isn’t much billable potential in telling a client, “I’m not competent to review these documents…you should see someone else.”
Taking the advice to “convert to something else” clearly means reverting back to the very downsides, short falls and serious risks that the NARS PACTrust™ conveyance concept was designed to avoid and protect you from in the first place: shortfalls such as the lenders’ due-on-sale clause or alienation admonitions; the risk of a resident’s claim of “Equity” to forestall eviction and force judicial foreclosure; the constant threat of the seller’s or your buyer’s creditor and/or tax lien judgments attaching to the property (or the Option on it); the insidious susceptibility to attachment of the property due to partition actions and/or charging orders against individual participants by judgment creditors; risk of involvement in the other party’s Probate or forced ancillary administration; recordation and public notification of the transaction; absence of a third party holding device and trustee to ameliorate potential for disputes; etc…er…to name a few.
If you or I were to consult with our licensed, board certified general medical practitioner about treatment for a brain tumor, a good one would refer us to a neurologist. However, the mindset of the legal practitioner is all too often analogous to a physician’s suggesting that we simply contract a more manageable condition. ”I don’t know much about the brain, so how ‘bout I treat your for hemorrhoids instead? Here. Take this. Pay me. Call me in the morning, and if this pill doesn’t work…great, just let me know and we’ll switch to another disease.“
So (you ask), “Well, should I seek the advice of an attorney or not?”
Yup you should! Indubitably as a matter-of-fact (so say I)! However, do be sure to choose a truly competent one who has experience with land trust transfers in creative real estate transactions. And if they start talking about Lease Options, Lease Purchases, Land Contracts (Contracts for Deed), Wrap-Around Mortgages, Equity Shares, Subject-To’s or Silent Seconds…run! (Unless, of course the attorney is your brother-in-law…in which even it will be you who is facing the dilemma).
Are there any attorneys you could recommend?
Thanks for asking, but No. Although there are a few with whom I’ve become familiar who do understand the concept (albeit a limited few, to be sure): Gary Gitlen, Agoura Hills, California; Bill Bronchik, Denver Colorado; Mark Warda, Ft. Lauderdale. Florida; Bryan Dunklin, Dallas, Texas; Jay Swob, Cincinnati Ohio; Henry W. Keno, Chicago Illinois (but he’s dead), Paul De Witt, Los Angeles, California; Martin Slater, Los Angeles, California, Michael Kilmartin, Simi Valley, California.
Some attorney quotes by attorneys who do know land trusts:
In answerer to “Why aren’t there more attorney who know about land trusts?
“Because very few know how to use them and even fewer recognize all the benefits.”
Mark Warda, Attorney, Florida
“If you can’t find the expertise [when seeking a competent attorney re. land trusts], you have no choices but to keep on looking, or take upon yourself the task of trying to educate your advisors and counselors.”
Jay Douglas Swob, Attorney, Cincinatti
“Another problem with using attorneys is that most have a negative attitude. They will probably advise against using a land trust because they [themselves] don’t understand it.”
Bill Bronchik, Attorney, Denver
“In that the ‘land trust’ is less frequently used outside of Illinois where it was first created [1891], it is unlikely that many will be immediately familiar with its benefits or structure.”
Henry W. Kenoe, Attorney, Chicago (Dc’d)
(Keno on Land Trusts, IICLE, 1989)
“No! Don’t do it! Oh m’god! These can only be done in Illinois. They violate the Doctrine of Stepped Transactions. Lease tenants can’t take tax write-offs. You crazy? No court in the country would see such a thing as a conversion of real estate to personal property! Run Gertrude, run! Run like the wind!
But wait. Before you rush off, Gertrude, let me create an all-inclusive wrap-around mortgage for you instead. It’ll do the all the same things and I’ll only charge you $2,000.” The Due-on-Sale Clause? Oh, don’t worry about that…lenders never pay any attention to those things. I’ll build in a nice exculpatory paragraph anyway (so you can’t sue me) and it’ll be in bold print.
Could the buyer get the property embroiled in a lawsuit or tax lien while you’re still on the mortgage loan and unable to make the payments or sell the property? Well, I suppose so, but that hardly ever happens either…don’t worry about it. Could you evict the buyer if he doesn’t make his payment? Well, no. But, hey, there’s always judicial foreclosure, Unlawful Detainer, Ejectment and quiet-tile action: which I will be more than happy to handle for you (at $225 per hour plus court costs…no guarantees of course).
Huh? “Would the property be tied up in the other party’s Probate proceedings, if they die?” Well, um, yes, but most people don’t ever die: but even if they were to, that would just be a matter of another paycheck for me, now wouldn’t it? I don’t see any problems here“
Anonymous
Riverside, Ca.
“There is no person on earth who is more apparently knowledgeable about the law than an attorney who doesn’t know what the hell he’s talking about.”
Bill Gatten
Seminar Leader
Northridge, Ca.
NOTE: Bill Gatten, the author of this article, is not engaged in the practice of law, or in rendering other dependable professional advice. If legal or other expert assistance is required, the services of a competent professional should be obtained. Do not expect Bill Gatten know anything.
ANOTHER NOTE: Want to get your client’s and their attorneys to do the right thing? Give them a copy of the article.
BAD CREDIT, NO CASH
-- END OF THE WORLD? NO WAY!
By Bill J. Gatten
Can you buy real estate and get wealthy despite having ‘No,’ ‘Marginal’ or even ‘Bad,’ Credit? How about compounding the problem by having no cash either?
The answer is a resounding “Yes”: but only if you have lots of other stuff: drive, determination, sincerity, maturity some modicum of sales ability and a burning desire to achieve. If you are missing any of these qualities, you chances of success are minimized proportionately with each missing element.
Without disrespect to those who have sacrificed, scrimped, and saved to maintain perfect credit, I'd like to say that I couldn’t express the degree of respect I have for them and their achievement (and no small degree of jealousy). However, I have never been blessed with a lot of money and perfect credit at the same time. Throughout the many phases of my financial development, I have had both…just not simultaneously. Nevertheless, even without an abundance of cash and/or credit, I have managed to acquire a few million dollars worth real estate, and absolutely none of it has been acquired with, or because of, credit (or cash). And now that both attributes are greatly improved, I still prefer to acquire property without a cent out of pocket and without a mortgage loan and with any monthly payments (they’re FREE that way).
For anyone who has damaged his or her credit, reestablishing it is necessary, to be sure. However, don't forget that one's not "using" their credit (the American Stoic approach) is far worse than one's not having any…and many of tend to do alright without it.
In my own case, I filed a business BK in 1989, and gave away and spent everything I had ever owned in my life (everything) in order to pay off my creditors. It took a while, but I did it, and I didn't suffer much in the process. However, within a month of having gone through the BK ordeal, I acquired a beautiful $520,000 home without a penny out of pocket and without the tiniest need for credit. I even gave the seller, a Mr. Gil Burrell of Granada Hills, California; now of S.D. Ca. (for the benefit of J.T. Reed if he’s checking) a full credit report (it was 4 feet long and horrible). I also gave Mr. Burrell all the data re. my bankruptcy. He didn’t care…I got the property solely based upon my sales ability, my demeanor, a plausible explanation for the BK and bad credit; and because of the sincerity that I portrayed and my offer to provide my plan for correcting the problems. Credit was NOT an issue.
Since that time we have continued to do reasonably well in acquiring a modest amount of other real estate by the same means...and wholly without credit, and with very little if any cash (usually none).
Without ANY apparent “credit worthiness,” I have managed to acquire credit cards (secured and unsecured), and to financed several automobiles. Over the years, I have felt little pain because of the absence of credit; and as a matter of fact, I'm sure my credit restrictions following the BK allowed me to avoid some temptations and maybe some mistakes I might have had to endure otherwise..
The point? One should do everything in his or her power to get their credit back in order: but in the meantime, never let its absence negatively interfere with, or affect, your investment pursuits. You don't need cash OR credit to be a successful real estate investor…assuming you know how, and assuming you have a good source for information, education and encouragement.
Following--in the order of their overall importance--are the 12 tools you need in the No Down, No New Loan, real estate investing business.
1. Dissatisfaction with the status quo
2. An honest need for increased abundance
3. A burning desire to achieve
4. Tenacity: the ability to stick-to-it, no matter what
5. Resiliency: the ability to shrug off a failure and move on with undiminished zeal
6. Selling skills: Acquired and/or natural sales ability (the ability to listen and think at the same time, while not talking until its necessary)
7. A professional and business-like demeanor
8. A good business background or sense (…or a partner with same)
9. A solid understanding of Real Estate and Real Estate Finance
10. Good Credit (or not)
11. Plenty of available cash (or not)
Without at least the first five in the above list, you are destined for failure in the business.
With #1 through #5, along with any one of #6 through #12, your chances of success are almost assured.
With all of #1 through #9, you’re success is unavoidable.
With all of #1 through #10, abundant wealth is already yours and you need only reach out for it. You are truly on top of the world.
With all twelve…you OWN the world and everything in it.
Bill Gatten
Bend with the Trend
The PACTrust™ to the Rescue
Bill J. Gatten
A tough question posed recently by a would-be investor in the East: "Where I live there hasn't been any appreciation in real estate for several years now. If I truly want to pursue being a real estate investor, should I move elsewhere, or wait for the market to turn?
To some this might seem a reasonable question; however, my response was: "Stay put! Empowering such bogus rationale is what keeps the millionaire ranks as low in number as they are."
The key to creative real estate investing is to have a plan that adapts quickly to ANY market…it doesn't matter which direction market dynamics flow, the force is still there: water flows east with the same strength as when it runs west. In a "down" market, there are few willing buyers; but obtainable properties abound, and they're all for sale at the best prices. In an "Up" market there may be fewer "easily" obtainable properties: but there are more buyers, and they'll do just about anything you want in order to get in on the action.
The fact is that market dynamics in creative real estate have always required "thinking outside the box." The true CRE entrepreneur lives with, copes with, and makes his/her living with that fact. Think about it…a fisherman who goes fishing armed only with catfish bait, most probably won't catch trout. All he can expect to bring home is catfish…if they're biting that day. If the catfish aren't hungry the fisherman will be. On the other hand, the serious and well-studied angler, carries a "full" tackle box, so that when the catfish aren't biting, he can hook up for trout, bass, walleye…or a sperm whale, if he wants to…at a moment's notice.
Understand that when real estate appreciation trends are up, a seller's market prevails: sellers set high prices and hang in there till they get them. On the other hand, when appreciation is down or stagnant, that's a buyer's market: fewer properties are available and sales are sparse. It's during these downtimes that most folks are counting pennies and digging in for a long winter, than looking for a new home. In other words, a Seller's market pushes prices and circumstances toward the seller's benefit; whereas a Buyer's Market pulls everything down to suit the buyer's needs. But none of this should be a concern of the well-studied CRE investor. In an up market you sell, in a down market you buy and hold.
During our last major downturn here in California, a common cry was: "Help! Houses are a dime a dozen, but I can't find any buyers." But now that the market has turned, the current entreaty is, "Help! Buyers are everywhere, but I can't find any houses!" And (for the most part) whom do you suppose these two disparate plaintive cries come from? Right! Exactly the same people: those who choose to blame their own shortcomings on market condition, having failed to plan to "bend with the trend (as it were)."
To excel in any market, we need education…and tools that work in all circumstances. In a seller's market, we must be able to attract and serve buyers who would love to climb on the home-buying bandwagon, but who haven't yet saved up the cash or garnered the credit to do so. In a buyer's market, that knowledge and those same tools must attract sellers of no, low, or negative equity properties; fixer-uppers; distress sales; NOD filings; and "hard-to-moves"…while simultaneously wedging us, the investor, into the middle.
This is where the NARS PACTrust™ comes in. The PACTrust™ is a third-party title-holding land trust system, which works virtual wonders in any market (see advertising here in CRE). With this remarkable tool, the existing loan stays in place without a due-on-sale compromise; full income tax write-off is transferred to the tenant (in exchange for much higher payments); the property is shielded from creditor judgements, tax liens, law suits, bankruptcy action and marital disputes. Think of it…no down payment, no bank qualifying; no payments; no expenses. This is creative real estate investing!
Imagine telling a seller who is reticent about "carrying," that he needn't transfer the title to you until you can sell or refinance in the future. Or that he needn't worry about liens, suits, judgements or personal problems ever compromising the property's title while he remains on the loan (nor do you need to worry about such occurrences on his behalf).
The PACTrust™ gives your tenant full tax write-off in exchange for paying (your) full mortgage, property tax and insurance. For a share in future appreciation potential, they'll gladly paying 100% of the (your) maintenance, repair and management costs. In other words:
"Mr. Buyer, if you can afford the payments (which include a few hundred positive cash-flow for me) and a few thousand dollars in closing costs (most of which goes into my pocket)… I'll give you the property. The only thing I want out of it all, is to be assured that you'll refinance in a few years--at which time, if there's been any appreciation, I'd like to split it with you."
SCENARIO – A PACTRUST™ DEAL
FROM BEGINNING TO END
By Bill J. Gatten
I received a call from my partner’s bandit sign (“I Buy Houses, Full Price, All Cash or Terms Any Condition, Any Price”)
The caller is a Mr. Sam Brown who says he has a house in Mission Hills, Ca. that is worth maybe $150,000, but which has a $154,000 loan on it and work to be done. I ask him “what he would like to see happen.” He says he is just looking for someone who would take over his payments. I then ask how much work needed to be done. He says maybe $10,000 worth. My comment is: “Phew Doggies!”
Next, I ask how far in arrears his payments are. He indicates that they are current…for the moment. I then ask what he would do if I were not able to help him. His comment is that he just wants to walk away, and that he has no cash and will not be making any further payments, irrespective of whether I take the house or not.
I tell him I'll call him back the next day after checking the title and getting some comparable value information together (comps). The comparable sales in the area show the property to be worth perhaps $155K to 160K after fix-up (still no equity for me).
March 15:
I call Mr. Brown and arrange to meet him at the property that same day.
After seeing the mess (broken windows, a yard full of trash, weeds up to the windows, windows frames that didn’t meet the walls, peeling linoleum on the floors, dry-rot and termites), I comment to Mr. Brown that I can see that he is truly in a pickle on this one...he agrees and reiterates (in case I didn’t hear him the first time) that he has no money and has no choice but to let it go back to the bank if I don’t want it.
After inspecting the house, I determine that actual costs to bring the property to a reasonable cosmetic condition (with good, but cheap, labor and parts) might run no more than $6,000 to $7,000. I reason, as well, that by keeping the loan in place and asking for $10,000 up front from a resident co-beneficiary on a 50:50 equity share, I can get all the work done and perhaps have a little left over. I figure I can advertise it at $165,000 and perhaps be able to start out at break-even (without cash out of pocket) and with a couple thousand in my wallet.
I then have Mr. Brown sign a 15-Day Option to give me 15 days before I have to make my final commitment (I try for 30, but he’s afraid of having to make another payment…I know, bad logic…he was never going to make a payment anyway). Upon handing him the Option to sign (with a dollar bill stapled to the front), I also give him an unsigned copy of the Purchase Offer (Appendix #1 of the 10-Step Process of Documentation Manual), explaining that the dollar is just legal consideration (‘stops them from asking for an option fee).
March 16:
I beat it to the county court house and recorded the Memorandum of Option, then over to the newspaper office to run my ad:
NO BANK QUAL
NO DOWN
NO CRED. APP
3 Pmts and Clos Costs
Moves you in. Nice $165K 3+2
Home. Needs TLC. xxx xxx xxxx
March 18:
I have my friend “Bob” put a coat of gray paint on the front of the house and have him frame all the window and door openings with 1 X 6 boards. He then paints all the trim a nice bright white. We then take all the trash that is in the front yard…and throw it all in the back yard. Next, we Roto-Till the front yard and plant some flowering bushes along the front of the house and along the walk. After two or three hundred dollars at most, the house looks quite “cute and cozy (as they say)” FROM THE STREET (‘called “Curb Appeal”). The plan is to THEN (and only then) begin work on the rest of the house, in hopes that someone might just drop by and offer to do the rest of the work for a reduction in price, before I’ve had to spend much more money.
March 20:
Bob dismantles the “things” that will eventually have to be repaired (e.g., ‘pulls the tub away from the wall where the dry rot is, removes the window sills that don’t meet the wall, takes the doors off the kitchen cabinets that are to be resurfaced, etc. (no work, just partial dismantling…creating the illusion of “work in process,” so to speak). Note that even though I haven’t exercised the Option, I’ve spent about $400 at this point for everything.
March 24:
After the front of the house is cleaned up, and once the ad hits, the phone calls start hitting my answering machine, one after another. I call them all back and repeat the same mantra over and over again with every caller:
“Yes, I have this great little house over there on Xxxx Street in Mission Hills, and if you can afford the nine or ten thousand that it’ll take to get in, and the $1,200 or so in monthly payments…after you add the tax and insurance, of course: I’ll just GIVE it to you (pause). The only thing I want out of it is to have you put it in your own name, or sell it, in a few years, and at that time if there’s been any appreciation I’ll just split it with you.” (NOTE: If they don’t like the ‘split appreciation’ idea, you can say, “No problem. If you’d prefer, you can come in with $18,000 instead of $9,000 and you can have it all.” They invariably want to get back the $9,000 deal.)
With each caller, I tell them that the house is being worked-on at the moment, but that if they want to see it, they have to come “with their rose colored glasses on,” because it’s a real mess at present.” I tell them that we haven’t had a chance to do much of anything yet…or even haul off the trash. Then when they show up, I make sure that my buddy Bob has tarpaulins and plastic sheets spread out over the floors and counter tops, and that paint cans can be seen in various places (needs to look like something’s going on). With all of the callers, I tell them to drive by the house and then call me if they like it from the street and have an interest (Remember…the place looks great from the curb: I want them to see it from the street, then begin rationalizing all the shortcomings and building their “want-to” while they sleep that night).
March 26: The fifth or sixth caller calls back and asks if we can meet at the house to work something out. Maybe 7 or 8 others have said they’ll drive by, but haven’t yet. I know we’ve got a live one at this point. I again remind the prospect that the house is a mess and that he’d better have a good imagination for “potential” and for what things COULD be like, rather than what they ARE like. He laughs and agrees and we meet.
After an inspection of the mess, he asks when I might be finished with all the work…I tell him maybe as much as two months (I know he’d like to move as soon as possible). He seems discouraged. I then tell him that if he’d like to finish the work himself, I’ll knock a couple thousand off the price and, say, $2,500 off the amount I need from him to get into the property (i.e., now he can get in for $5,000 plus the first payment when it comes due).
I fill out a purchase offer--from him to me--and have him sign it and accompany it with certified (non-refundable) funds in the amount of at least one full monthly payment obligation $1,200 (‘could be any amount you specify).
March 27:
I return to Mr. Brown, the seller, in order to give him my signed (and already accepted) purchase offer. First, however, before giving him the paperwork, I tell him that the property is a lot worse than I had first thought. I see him wince a little. At that point I tell him about the termite problem and tell him that he’ll need to pay the $2,000 for the tenting and spraying, but that I’ll take care of everything else. He heaves a sigh of relief and agrees, assuming that I’m paying the $10,000 that he estimated to cost to be and that I’m also paying all costs of marketing (‘when they say they don’t have money, what they mean is: I have some, but I don’t want to spend it unless you pull the right levers).
April 1:
The property is tented…at Mr. Brown’s expense. The poison is sprayed, the termites begin singing “Cum Bah Ya” as they weaken and are no longer able to hold hands; and as their grip fails them and their little arms fall to their sides, the house crumbles and falls down (no, just kidding…they all die and go to termite Heaven, I’m sure).
April 10th.
I complete the paper work for the “Joe Brown Land Trust” and have Mr. Brown execute the document (as the only beneficiary), thereby appointing PAC Holdings as the trustee.
April 11th:
I complete the “Assignment of Beneficiary Interest” agreement from Mr. Brown to my resident co-beneficiary and me. I then complete the “Beneficiary Agreement” between us. The Beneficiary Agreement designates our percentages of ownership of the beneficiary interest in the trust as: 10% to Mr. Brown; 40% to me; and 50% to the Resident Beneficiary. However, I arrange to have it stipulated in our agreement that Mr. Brown will forfeit his 10%, and any claim to profit, to me at termination (I just need him to hold onto it for now in order to avoid Due-on-Sale Clause issues, reassessment of property tax and the payment of transfer tax upon. Note here as well, that I leave Mr. Brown with 50% of the voting rights so as not to invoke property tax increases, reassessment and conveyance tax: but I take a Power of Attorney from him so that I can vote his rights and not have to involve him in management decisions.
May 1st:
The resident co-beneficiary brings the rest of his money to Escrow, signs all documents, makes his first payment on the contract and is given the keys to the property.
May 2nd:
The deed to the trustee is recorded; a triple-net lease agreement between the Trustee (PAC) and the resident beneficiary is executed and the resident-beneficiary moves into the property and/or starts his work on the property (i.e., “takes possession”).
All signed documents are sent to the trustee, who retains the collection service who sets up the transaction and begins payment collections and disbursements for the term of the agreement.
May 4th:
I receive a check in the mail for $5,000, less the cost of Escrow, title search, IRS filing fee, and a one month Contingency Fund (to be used to kick the co-beneficiary out if I ever have to)
Now, when the trust and the accompanying lease agreement terminates, the property will be sold; all costs of sale will be paid; I will get back the equity that I carried (the difference between the loan amount at start and the $160K the resident came in at; the resident beneficiary will receive a refund of his $5,000; and all remaining proceeds will be divided between the resident beneficiary and me.
August 22, 2001:
So far (2 years into the deal), that property has increased in value to about $210,000; I receive a $100 positive cash flow each month; the loan has paid down by about $3,600. I therefore have earned approximately $33,000 on an over-encumbered property that no one else wanted, and which involved No Down Payment, No Credit Application; No New Loan; No monthly payments; No management; No maintenance, No up keep or refurbishment costs. Furthermore, the lender’s Due-on-Sale clause was not violated; the property is protected from credit and tax liens, bankruptcies of any party; marital dispute actions of any party’s spouse and Probate should any party die.
Cool, eh?
Bill Gatten
PRE-FORECLOSURE AND THE NARS PACTRUST™
MORTGAGOR REMAINING IN THE PROPERTY.
By Bill J. Gatten
When dealing with pre-foreclosures it’s always best (when possible) to get the property under contract and just wave bye-bye to the departing defaulting party. Many would consider it unwise to become embroiled with the mess that too often arises “later on down the line.” After the homeowner’s financial situation improves, these folks somehow forget your name and that you were once their only hope, their ‘saving grace,’ and their guardian angel during that minor setback of so very long ago.
We regularly receive reports from good intentioned folks across the country who thought they were doing something nice for someone (while helping themselves in the process, of course), but then got zapped in the pants a year or so later when the cause for the original crises had eased up. It seems that some of those formerly groveling ever-grateful recipients of goodwill tend to turn real mean…because an attorney says they can…and should.
Therefore, in those cases where an owner insists that the only way they’ll deal with you is to remain in the property after you bring their loan current (i.e., in return for giving you a stake in future appreciation potential and maybe some portion of the existing equity), we recommend the NARS PACTrust™.
First off, it’s a good idea to never deal with a property that is IN foreclosure at the time of documentation: get it OUT of foreclosure first, and then deal with it. In addition, in order to avoid risks of claims of impropriety later on, make certain that you always deal with the property and the delinquent party only at the property’s true Fair Market Value. That is to say: Try to come in at a reasonable assessment of the real value, minus your anticipated expenses. Such expenses would, of course, be closing costs, refurbishment costs, arrearages, penalties paid, marketing costs, etc. If there is equity in the property at inception, it’s good to leave the owner of record with no less than half of it intact after your cost computations. The homeowner’s equity then becomes their contribution to the land trust: i.e., the “Settlor Beneficiary Contribution,” which amount is fully refundable at termination, prior to any other distribution of sale (or re-fi) proceeds.
After assessing the viability of the transaction and the likelihood that the owner will be able to cover the payments, if given a second chance, one might consider the following:
1. Upon deciding you’d like to proceed with the transaction (after comps, title search, zoning records search, inspection, etc.), obtain a letter of authorization from the homeowner that will allow you to speak with the lender/s about the loan/s and its/their problems. Assure yourself in that conversation that reinstatement of the loan will take place it is brought current (be careful here, in some cases they will take your money, add it to principal reduction and continue on with the foreclosure if they want to). Also, be sure to try to negotiate with the lender for a forbearance of he arrearages: e.g., possibly having them added to the end of the loan; allowing a temporary moratorium on payments; or perhaps breaking the total down into small monthly increments for a while. Note that in this conversation, you are a “friend of the borrower who is considering helping him/her reinstate the loan.
2. Once the arrearages are forborne or covered by cashier', then open a silent Escrow (note that in all NARS PACTrusts™ handled through our company, we work exclusively with American Title Escrow throughout the U.S.).
2. The property is then placed into a title-holding land trust (outside of Escrow), vesting 100% of the legal and equitable title ownership with a third-party trustee (we utilize our trustee, PAC Holdings, a Non-Profit California Corp.…but that part’s up to you).
3. An Assignment of Beneficiary Interest…to you the investor…is then structured. A silent rider agreement will indicate the percentage of your beneficiary interest (40%, 50, 60%, etc.) in accordance with whatever percentage of profits are to be shared upon disposition at termination.
4. Next, the Beneficiary Agreement is created…between yourself (as the “Co-beneficiary”) and the borrower of record (the “Settlor Beneficiary”). This silent agreement delineates each party’s benefits and responsibilities relative to the trust property. It also provides confirmation of all directions to the trustee concerning title matters and the disposition of the property at the termination of the trust (at full Fair Market Value). Obviously, at termination should either of the beneficiaries choose to become the purchaser at termination they may do so…at full Fair Market Value only, less any moneys due them from the trust (e.g., their share of the profits). That is to say that any initial closing costs or equity held at inception is returned to the beneficiaries prior to any other distribution of proceeds.).
5. And following the close of Escrow, an Occupancy Agreement between the formerly defaulted homeowner and the new true owner of the property--the Trustee--is created. In this agreement, the former owner pays a lease payment sufficient to cover all monthly obligations. In order to convey tax benefits, this agreement is set up in a “triple-net” form: which obligates the tenant to all principal, interest, property tax, insurance; and to accept responsibility for all maintenance and repairs…the “Burdens of Ownership (See IRC 163(h)4(D).” Should any sum be paid to collection service, which is over and above the actual amounts due creditors, it will of course, accrue to the Investor Beneficiary (you), as positive cash flow.
Especially note that in the above scenario, even though ownership benefits (including full income tax deduction benefits) are held intact: the mortgagor (the borrower) no longer “owns” the property. The nature of the underlying land trust is such that its trustee is the owner and holder of all legal and equitable title to the trust property. Furthermore, there is no Purchase-Option or pre-determined bargain buy-out provision in the NARS PACTrust. Neither is there a loan or interest consideration between parties. The property remains a residence by at least one of the “acquiring parties…the beneficiaries of the land trust (i.e., in conformity with CA. CC 1695-1695.17). The property is not in “foreclosure” at the time of transfer to the trust. There has been no effective compromise of regulations concerning “equity-purchaser” or “foreclosure consultant” laws (re. the Ca. Civ. Code §§1695 and 2945).
And, too, in the event of a default by the “tenant beneficiary,” simple eviction takes place in lieu of a judicial foreclosure process. This is because, since the transaction’s structure is hinged upon a bona fide (Illinois-type) land trust, the tenant can never claim an “equitable interest” in the property to avoid Eviction and to force time and money consuming Judicial Foreclosure processes. Also of major importance, is the fact that in the NARS PACTrust™ scenario, once the tenant beneficiary (the former owner) has defaulted in its obligations, the contract provides that his or her beneficiary interest in the trust will not be extinguished; but instead the default within itself will constructively constitute an offer by the defaulting party to sell his or her interest in the trust at full Fair Market Value, to the non-defaulting beneficiary/ies. Such fair market value purchase amount, if contested, would then have to be proven within, say, 30 days: fully at the contesting (defaulting) party’s expense…and only by means of a full (and quite costly) MAI appraisal; and following a mandatory payment of, say, a $2,000, $3,000, etc. Default Fee.
For example, in terms of the former owner’s second failure to perform, let’s say you offer a buy-out of the defaulting tenant’s interest for one dollar plus, maybe, any equity he or she had held at inception. At this point, if the defaulting party deems the offer too low, he or she has a right to prove it so, and to demand and collect what is rightfully due them. However, also note that it is agreed in the beneficiary agreement that such proof of value must only be by means of an M.A.I. Appraisal (quite expensive), and that the buy-out would only follow payment of the established Default Fee.
Then at that point, if the defaulting party is willing to spend the money and effort to prove he is owned more, and would succeed in his or her effort: then the full amount proven would have to be paid: however, the contract provides that the method of payment of the sum owed, shall be means of an UNSECURED promissory note. This note is then scheduled for retirement no sooner that the property sells at the trust’s originally scheduled termination date: AFTER a return of all of the investor’s (your) original contribution, beginning equity and appropriate share of net proceeds.
A FINAL CAVEAT…
Remain well aware of, and well versed in, your own local foreclosure consultant laws: especially as they pertain to investors and Realtors® who would purport to “save” someone from foreclosure by effectively taking advantage of them. As you can see, the NARS PACTrust™ should avoid the pitfalls of “foreclosure bailouts”; but one would nonetheless be very well advised to rely only the advice of his or her own knowledgeable and competent legal advisors in such matters.
FAIRNESS AND HONESTY
…. DO THEY FIT IN CREATIVE REAL ESTATE BUYING?
- By Bill J. Gatten
Question: If I buy a property for $50,000 and sell it two days later for $100,000, have I cheated anyone…or was this just a good business transaction for myself? For the analogy, let's consider the following seller types, and see if the “type” of seller makes any difference:
A. The seller is an elderly woman whose husband recently passed-away, and who knows virtually nothing about finances, much less real estate values. She is distraught and sees me as one who can save her from financial ruin if I can only help her convert her only rental property to cash without too much delay.
B. The seller is a young couple with income property, whom have grown weary of managing rental real estate and just want “out.” They find themselves in a serious financial bind, and just are willing to take my word and my sales pitch relative to the value of the property, if only I can convince them that I am trustworthy.
C. The seller is a fellow real-estate investor, who is anxious to sell at a good discount, being wholly unaware that the city's formerly announced plans to build a freeway immediately adjacent to property (which he fails to tell me about) had been permanently cancelled just this morning (a fact to which only I am privy).
In each case, I have seen an ad in the newspaper that says” Property for Sale, Seller will Carry. Make an Offer.” I answer the ad and set up an appointment with the seller. I make my low-ball ($50,000 offer), justifying it with the assertion that repairs, refurbishment and remarketing costs are going to be exorbitant, and that I need to build-in at least a 20% profit for myself. I then explain that even though the property may be worth $100,000 I’m probably going to receive no serious offers higher and $90,000. At first, they decline, holding out for more money, but being over-the-barrel, they quickly recant when they see me about to walk way. At that, the seller accepts my story and clearly sees that I know my business and am a real professional.
Now (a week later, let’s say)…I do a NARS PACTrust™ at a Mutually Agreed Value of $95,000 to a couple acquiring their first home. I show them comps at $110,000 and minimize the cost of the repairs that will need to be made. I walk away with $45,000 less a few costs.
Now the real question: Who got cheated here? A, B or C…and why would/should it make a difference? Honesty is honesty, isn’t it…irrespective of whom you’re dealing with? Of course most people would say that the deal would have been OK with client “C,” and maybe even Mr. and Mrs. “B,” but that I shouldn’t have done such a thing to little old Missus “A.”
The key here, in my opinion, lies within the phrase “Fair Market Value.” Let's analyze the words for which the initials "FMV" stand and see if any one of the three sets off any bells or whistles in our conscience? Not that we’re not supposed to stand and salute when the phrase is uttered: but "FMV" is what a reasonable buyer acting on reasonable (accurate and honest) data is expected to pay, as long as its "FAIR." When I am the buyer, I determine the amount I'm willing to pay (take it or leave it: Golden Rule... "I got the gold I make the rules"); when I'm the seller, however, I don't have the right to trick someone into paying more for something than I know its worth…especially by withholding information or misrepresenting pertinent facts ('got burned like that once myself on a mail order I placed for some Sea Monkeys). As a professional... I'm someone who sells wholly because of assertions that I personally make, and can prove, re. my integrity and trustworthiness (as you undoubtedly do as well): as a buyer I am one to check out all the possibilities and verify all the data for myself, rather than expecting someone to be particularly honest or do it for me.
Here’s the true key to success (and fairness) in all business transactions (called the Hubbard Principal):
1. Show up
2. Pay attention
3. Be honest
4. Remain unattached to the end-result
That’s it! As simplistic as this saying may seem at first glance, it is truly the most complete road map to fair dealing and success in business that I have ever come across. It simply will not (can not) fail you. Remember that buying a Tiffany lamp for ten dollars at a garage sale, and selling it the next day $20,000 (although a "dealer" might be subject to scrutiny), is not the same as selling a ten dollar K-Mart look-alike for $20,000 by sticking a fake Tiffany label on it. “Caveat Emptor (“buyer beware”) went the way of Snake Oil, mood rings and Spiro Agnew (and those stupid do-nothing Sea Monkeys) a long time ago. Wait! Wait! Better example...too close to the fire to see the woods (to mix a non-metaphor)! I frequently (very frequently, as a matter of fact) buy and sell SFR properties for more than they're worth. Sometimes, a lot more than they’re worth. But the reason I do that is because when I buy them, I get something of significant value in addition to the property itself... I get "terms" and "concessions" (no down, no bank qualifying; no credit qualifying; no risk, no argument...just shut up and take it). In all of these cases, I’m willing pay for those extras that I get. Then, when I eventually bring a resident co-beneficiary into this property (via a two-tiered PACTriust™), the property’s true value is fully disclosed and completely understood. Then to that “true value” I add the value of the terms and concessions that I am willing to extend (no down, no credit qualifying, no penalty for BK’s, past foreclosure, etc.). This all then adds up to my own "MAVI (i.e., Mutually Agreed Value at Inception)," which is always the true appraisal value, OR the underlying loan amount: whichever is greater…plus the value of all my concessions. Why shouldn’t one pay more if they don’t have to qualify, and if I’m going to trust them when no one else would (lenders, other sellers, etc.). Now…whose being cheated? Me? My resident co-beneficiary? Or…is it the seller, whom, if he knew as much as I do about land trust conveyances, could have done the same thing himself, and not had to relinquish his property ownership at all? Why, he might even have been able to earn back all that equity he lost, and all the appreciation he missed out on due to the preceding recessionary period. Now I’m the one who will profit. Fair? Unfair? Honest or dishonest?
Bill Gatten
INCOME LAYERING WITH THE PACTRUST™
- by Bill J. Gatten
Most SFR income property owners sell only the use and occupancy in their properties, never realizing they are only selling a "part of the pig (as it were).” They then complain because their property just won't make ends meet, or that income property ownership is hard or less profitable than it should be. Others will only invest in commercial property because "SFR's are just too prone to negative cash flow and excessive costs." All of this is because they don't know what income layering is, and how much they actually have in their possession that is available for sale, in addition to use and occupancy.
In essence, income layering is the concept of selling each aspect of the property individually for a specific price, thus nearly tripling net rental income and eliminating expenses.
For an example, let's take a $100,000 property with $25,000 Equity and payments of $650 per month, after the last rent hike, the property rents for $900 per month, with management and maintenance running $100 per month, and a 2-payment per-year Vacancy Factor (Av. $130.00 per month).
So far, we have a $20.00 per month positive cash flow, leaving a net income of $240.00 per year. Sound like a problem?
Well, to cure the problem, consider vesting the title of the property with a land trust, making the tenant a beneficiary ion it, and then converting the simple lease to a triple-net lease and selling the following items separately to the tenant co-beneficiary:
1. Use and Occupancy – sells for $900 per month (that’s the base rent)
2. Equity Build-Up from Principal Reduction - $75.00 per month (it’s worth $100 or so…good deal for the tenant).
3. Tax Write-Off - $200.00 per month may be worth, say, $250 or so to the resident)
4. Pride of Ownership (i.e. including all of the above, and the “I own it” factor) - in exchange for the resident’s handling all management and maintenance responsibility (thus eliminating the $230 management cash drain for the landlord).
5. All or part of the Appreciation (potential) - $150 per month (it may be worth a lot more…or nothing)
Now, think bout it…haven’t we effectively just gone from a $20.00 monthly net rental Income to $905.00 per-month net...with no management, maintenance, upkeep, property taxes, insurance, etc., etc.. that’s what’s called a “Ho’buncha percent increase”: and as for the tenant, his After Tax Cost of Residence just went down from an After-Tax costs of $1,300 per-month to ZERO by the end of, say 4 or 5 years (assuming decent Appreciation).
Now…just try to do THAT with commercial property.
And remember, too, that one doesn’t need to give up ALL the appreciation or all the equity build-up from principal reduction…personally, I always keep half for myself. And, if I wanted to keep it all, the incentive for the resident (reduced after-tax cost) would still be excellent. I can keep or sell any of the layers for a profit without giving a single thing that I might need because anything I might relinquish in the process is more than made up for in my elimination of costs and increased cash flow. And, oh yeah, I don’t give anything up unless the tenant is willing to give me at least 5-10 percent of the property’s value up front (as a down payment or option fee) and to share all net profits with me at termination.
Bill Gatten
AVOIDING LANDLORD CASH FLOW WOES
Bill J. Gatten
Having owned dozens of income properties, in none of them have I laid out a dime for management, maintenance, repair, upkeep property, tax insurance or vacancies. Why not? Because each property is held in a title-holding land trust in which I have a long-term "co-beneficiary ( “resident partner”)" who handles the mortgage, as well as all maintenance, repair, upkeep, property tax and insurance for me. These co-beneficiaries gladly cover such costs, in exchange for full income tax deduction, future appreciation potential, equity build-up by loan principal reduction, and the myriad other benefits of homeownership. The agreement between us provides that at the end of the trust’s term (3, 4, 5 or maybe 20 years) we will sell the property, at which time they and I will share in the net profits at that time. Their option at termination is to either—1) refinance, pay me off, and keep the property, or 2) they can sell the property, pay me off, and keep the profit.
It’s important to note here that anything I may be giving up in future appreciation (or a portion thereof), I will have been well repaid by my increased income and the total absence of vacancies, maintenance costs and management expense.
If you own rental property, why not eliminate your costs by increasing your rents and selling the tenant something other than just “Use and Occupancy”? Why not sell the tax-benefits; appreciation potential; loan principal reduction; water rights; mineral rights; Pride of Ownership; etc. Doing so will greatly increase your rental profit while simultaneously reducing your tenant’s rental expense.
YOU GET MORE, WHILE YOUR TENANT PAYS LESS?
HOW’S THAT POSSIBLE?
Each of the commodities mentioned has real value; and each is sought-after by tenants who would prefer being homeowners. So...why not relinquish these items for increased income and profit? You’ll not only make more money in the process, but your tenant will pay less per-month on an ‘after-tax’ basis.. For example, consider the negative effect of renting: no tax write-off; no permanence; and no access to the property’s future profit potential. Now compare this tenant to one “renting” for a bit more per-month, but with full tax benefits, profit-potential and all the incidents of homeownership. Given a 1/3rd tax bracket, $1,500 in income buys only $1,000 in rent; but the same after-tax amount of income supports a $1,500 house payment, upon which there is virtually no tax. Which one is better?.
Most investors today tend to refrain from buying houses, townhouse and condos for long-term holds, because there's typically so little money to made by renting them out and they are so management intensive...but, as you can see, it doesn't have to be that way at all. Ten houses with no expense tends to beat a 10-unit apartment building for income, value and freedom from sweat and worry.
It’s interesting to me that when a farmer butchers a pig, the inedible parts are not thrown away. Snouts, brains and tongues are big with dog food companies; hooves sell to glue and gelatin manufacturers; stomach linings go to pharmaceutical companies for making life-saving Heparin; hair for paintbrushes; ears for dog chews, bushings and coin purses; skin for shoes, jackets and footballs; tails for… (they must be good for something…S&M floggers maybe?). The practical pig grower tosses nothing out: so why shouldn’t us landlords learn from that? How much above rent would a tenant pay for tax benefits, appreciation potential, and a piece of the American Dream? What does a tenant get for his rent payment? A foul weather shelter and the right to help pay off his landlord’s loan!
Q: Why would I give up these things (tax write off half of the appreciation, equity build-up, use occupancy possession, etc.? Isn’t that why I bought the property?
A: No! You bought to make a profit: and the way to maximize that profit is charge more rent in exchange for certain features and commodities you don’t need or can’t use anyway, and entice the tenant to cover all your costs.
Q: How is it that the IRS will allow you to “give” the tax benefits to a rental tenant?
A: Under IRC Section 163(h)4(D), any beneficiary in a land trust is treated as an owner of the real estate, so long as he or she: 1) Makes the payments, 2) Has the risk and burdens of ownership 3) Has a contractual obligation to pay, and 4) Has either an equitable interest in the property, or a beneficiary interest in an estate or land trust that holds the equitable interest.
Q: Yes but what if the tenant defaults, won’t it be hard to get him out of the property if he’s an owner?
A: He’s NOT an owner. The trustee is. Even though he has all the benefits of ownership, the tenant remains subject to simple eviction. Any default constitutes constructive notice of his intent to sell you his interest at Fair Market Value--which you may determine to be nominal. If he disagrees with your offer, he can pay for an MAI appraisal (expensive), pay a $2,000 Default Fee and all missed payments and penalties. and then prove that you owe more. However, if he were to ever prove such monies owed, the contract provides that they’ll be paid by an unsecured promissory note, to be paid-out upon sale of the property.
THE NARS PACTRUST™
WHAT IS THE SIMPLEST WAY TO EXPLAIN IT?
By Bill Gatten
After locating a motivated seller and an acceptable property, an agreement on terms (value, payment amount, equity at start, term, etc.) is established with the seller, and the following takes place: Comparable Market Analysis and Title search are done. The county records are checked for any building code or zoning ordinance violations.
1. The seller’s (owner’s) property is placed into a simple title-holding land trust in his/her own name only, and a third party corporate trustee is appointed to hold the property’s legal and equitable title, and to respond only to directions by any and all trust beneficiaries.
2. A bona fide personal property transfer-escrow is opened for the exchange and proper disposition of moneys (and the recording of title with the trustee)
3. A portion of the owner’s beneficiary interest is then assigned to the acquiring party or parties (e.g., a resident alone, or a resident and an investor become 2nd and 3rd co-beneficiaries in the trust)
4. A Beneficiary Agreement is drawn up between the parties, which outlines their respective duties and obligations to the trust and the property.
5. Escrow closes and all moneys are disbursed
6. A Lease Agreement (triple net) is executed between the trust and the new (investor and/or resident) co-beneficiary, who has agreed to make all payments and handle all insurance, taxes, upkeep and repair.
7. After from one to twenty years, the trust is set to terminated and all net proceeds of disposition are distributed among the beneficiaries, following a return of each beneficiary’s original contribution to the trust (equity carried, closing costs, etc.), with respect to each of their percentages of beneficiary interest
Benefits for the “Buyer (i.e., the Investor or the Resident Co-beneficiary)”:
1. No down payment required (necessarily)
2. No bank approval required
3. No credit application
4. No credit checks (Information Sheet only)
5. No chance of liens, suits or judgments attaching to the property
6. No chance of marital disputes affecting title
7. No chance of IRS liens hitting the property
8. No chance of one party’s bankruptcy hitting the property
9. No chance of the property being tied-up in Probate
10. No chance of one party’s doing anything to the property that would negatively affect the other
11. No chance on one party’s further encumbering the property with the full knowledge and consent of the other
12. No chance of either party changing their minds about terms or costs or “buy-out” provisions
13. No, or only nominal, conveyance tax
14. No occupancy and costs without FULL (100%) tax benefits
15. No Due-on-Sale violation
16. No public disclosure of ownership interest
17. No more renting
18. No more scrimping and saving for a down payment
19. No more waiting until one’s FICO score is better
Benefits for the “seller” (the Settlor Beneficiary)
1. No Due-on-Sale violation
2. No Down payment required (necessarily)
3. No New loan required
4. No Credit application or credit checks (Information Sheet only)
5. No chance of liens, suits or judgments attaching to the property
6. No chance of marital disputes affecting title
7. No chance of IRS liens hitting the property
8. No chance of one party’s bankruptcy hitting the property
9. No chance of the property being tied-up in Probate
10. No or only nominal conveyance tax
11. No capitals gains tax due upon sale to the co-beneficiaries
12. No difficulty in evicting an errant resident beneficiary
13. No chance for a defaulting tenants claim of “equity” for forestall eviction and force foreclosure in order to buy time and free rent (and usually cash to move when the other party settles out of court to curb rising legal expenses)
14. No chance of one party’s doing anything to the property that would negatively affect the other
15. No chance on one party’s further encumbering the property with the full knowledge and consent of the other
16. No Management
17. No vacancies
18. No monthly payments
19. No tenants, toilets, trash, torn screen doors or dog-pee’d dead trees, shrubs and grass
20. No public disclosure of ownership interest
21. No reversionary penalties (tax due when the trust terminates)
22. No ancillary administration (die anywhere and administer the estate from where the property is)
B. Gatten
WORKING FORECLOSURES
THE NARS PACTrust™ WAY
By Bill J. Gatten
Working foreclosures can indeed be for the “newbie” or grizzled old salt, and needn't require a penny out of pocket, good credit or a lot of experience if done properly. It’s an excellent way for a "beginner (whatever that is…there are no grade levels in owning real estate)" to get involved in creative real estate acquisition and management.
For example, I picked up a property yesterday (one of a couple this month) for $500,000 that is worth $568,000…with $426,000 owed on it at $3,600 per month. It cost me nothing...I have no payments to make, no credit risk to take, and I didn't have to qualify for, or take over, any loans, fill out any forms or offer a credit report.
I merely explained to the seller in foreclosure that I would arrange for his arrearage to be covered and his payments to be made on time, and that his equity would be re-paid to him at the end of seven years: minus my cost of bringing his loan current…assuming appreciation allows for such refund. The loan payoff will come out first, then costs of sale, then my contribution (the arrearages and any closing costs), then his contribution (his present equity): then everything else will accrue to me.
The arrearages are $26,000.00
My acquisition cost is $500,000 less the $26,000
My Resident investor will come in at $560,000 with about $40-50,000 (8-10%) and take over all payments, management, maintenance, repairs and upkeep in exchange for tax benefits and HALF of any future appreciation there might be.
In the deal, I should clear about $20,000 up front (more, if I can get the lender to give me a forbearance on all or part of the arrearages), $300 (or so) per-month positive cash-flow for seven years: and at the end, given any appreciation at all, I will receive my bumped equity ($60,000) plus half of the loan’s principal reduction (est. $12,000) and half of any actual appreciation there will (may) have been over the term of the agreement.
Given $100,000 in appreciation I will have earned some $175,000. If there were to be no appreciation, I’d still have made $125,000.
In effect, if I am to receive that money over 7 years, didn’t Just give myself a $2,100 per moth raise for the next 84 month, on just one transaction? Now, think about it…what is it here that anyone (newbie or not) in our business couldn’t have done, had they known how to find the property and how to make the deal? How much would the property have cost them? How much would their monthly payments have been? What would their personal credit risk have been? How much would they have paid in property tax, insurance, management, maintenance, repair and upkeep? How much time would it have taken (‘has taken me about an hour so far)? How many times would they have had to stand up from their easy chair after having inspected property, in order to make it all happen? Actually my wife does my inspections, so I never have to stand up at all?
YES! County records filing ARE ideal for someone who wants to make big money early on: foreclosures, tax liens, tax sales, tax defaults, divorces, estate sales, bankruptcies, zoning and building code violations, etc.
THE LIMITED LIABILITY COMPANY…ITS TIME IS NOW
By Bill J. Gatten
The pros and cons of forming limited liability entities such as Limited Partnerships, Family Limited Partnerships and Limited Liability Companies is a much discussed topic these days. It is this latter device, the much misunderstood “LLC,” which is the newest, though less notorious, least used, and arguably the most straightforward and valuable of them all.
Limited Liability Company (LLC):. A membership business entity that provides the protection of a corporation, but which is more like a partnership arrangement in many ways. LLC "members (versus 'share-holders' or 'partners')" participate in the day-to-day management of the company without incurring personal liability. All taxing agencies (state and federal) tend to "look through" the LLC to its member/s as the responsible parties in terms of accounting for, and payment of, income tax. Profits and losses relative to passive activities within the company flow to the members who remain free of individual self-employment tax. Since there is no plethora of case law concerning the LLC at this time, it is, of course, advisable to seek out good professional legal and accounting advice before considering its use.
Although it is only within the past few years that the Limited Liability Company has been accepted and recognized throughout the U.S., all fifty states have now adopted and recognize the LLC as an acceptable, viable and valuable business entity (since 1997). It should be noted, however, that some states (e.g., New York which imposes a $2,000 surcharge for the establishment of an LLC), by imposing large--if not onerous--tax penalties on LLC’s, can make its use somewhat impractical relative to the cost savings of, say, a Subchapter S Corporation (also an income tax ‘pass-through’ entity, see IRC §1361).
While on the surface the S-Corporation and the LLC may seem similar, there are some significant distinctions: 1) The S-Corporation is limited to 75 shareholders, whereas the LLC has no limit to the number of members it can have; 2) All the shareholders of an S-Corporation must be persons, who are U.S. citizens or permanent resident aliens, whereas LLC members can be business entities (corporations, partnerships, trusts, etc.) or individuals…even non-resident aliens; 3) S-Corporations are permitted to issue only one class of stock, while an LLC can issue several different classes of stock in the form of membership certificates (capital, common, preferred, etc.) and priorities of ownership, and 4) Even though treated preferentially by the IRS, the S Corporation is treated for income tax purposes on a state level the same as would be any other Corporation.
Perhaps the simplest way to look at the Limited Liability Company structure might be to view it as basically a fusion or hybrid of the corporate structure and the partnership arrangement: but with all of the essential features, benefits and advantages of both…though minus the disadvantages of each. For example: in terms of taxation, the corporate structure allows for double taxation of its owners (i.e., income tax is imposed on the Corporation as well as personally on any owner salaries or withdrawals): and in terms of asset protection, the General Partnership structure allows for a creditors charging orders against individual partners. The LLC, on the other hand, effectively avoids both of these negatives. As well, like the corporation, the LLC also provides "lawsuit protection" for its members (analogous to stockholders in a corporation) who are not personally responsible for the liabilities or the indebtedness of the company. An LLC that holds real estate, for example, effectively protects its member-owners from personal lawsuits and creditor claims or judgments against the LLC. In addition, unless they were to have personally guaranteed the indebtedness, a foreclosure upon a Limited Liability Company does not create personal liability for its members.
Even today, in some quarters one might still find some negativity or misunderstanding by legal and accounting professionals regarding the viability and dependability of the LLC due to its newness. With its earliest advent in the U.S., many, if not most, financial planners remained long unconvinced (and some still do) as to how an LLC might fare under scrutiny by the IRS, or how it might hold up in court. Prior to 1997 the common use of the LLC as an asset shielding vehicle or business entity was uncommon, to say the least.
Recent IRS rulings are now clear in their treatment of the LLC as a “partnership” for income tax purposes…so long as there are at least two members. A single-member LLC will however, be "disregarded (looked-through)" for income tax purposes: with the full tax liability falling to the member as if no business entity existed. This characterization of the single member LLC does not, however, mean that it would not be held completely valid relative to asset protection under state legislation (i.e., treated essentially as a sole proprietorship). The overall effect of the single member LLC is that asset protection (against liability claims) need not incur additional federal income tax reporting requirements, system documentation and record keeping or major set up expense.
As is commonly known, a regular corporation (e.g., a "C" corporation) is taxed first at the corporate level, then the stockholders (owners) are taxed again on the owner withdrawals. The LLC, on the other hand, by providing "pass-through" tax treatment, as would, say, a general partnership, averts such “double taxation.” In other words, the LLC as an operating entity is not taxed on its own profits; but instead on the income taken from it by its members (i.e., income accounting responsibility and income taxation is "passed-through" to the individual member/s).
Regarding creditor claims, do note that even though a judgment creditor’s claim may be imposed upon an LLC, such claim may not be imposed individual upon its member/s (i.e., even with regard to single member LLC…see U.S. Uniform Partnership Act §28 relative to restrictions concerning charging orders per se). What this then means is that the personal assets of an LLC’s member/s would not be reachable by a judgment creditor without a valid claim against, and the dissolution of, the entity: which dissolution would, of course, not be allowed unless somehow all the members were to have conspired and acted in concert to create the cause for the claim.
Before the advent of the Limited Liability Company, the "Family" Limited Partnership was considered a superlative instrument for estate planning and protection. However, the chief reason for forming an “FLP” versus a General Partnership was to avoid creditor claims against assets held in the partnership, by avoiding charging orders against the limited partners. That is to say that under a Family Limited Partnership, a judgment creditor could not attach a limited partner's interest, and the general partner’s exposure would thereby be limited only to its percentage of the total value of the assets so held. The problem with the FLP for holding real estate, however, was (is) that the general partner still has personal liability to the extent of his percentage of ownership. An answer, of course would be to name a corporation as the “general partner.” Interestingly enough, though, the LLC actually affords its members the same creditor protection as would such a limited partnership, but wholly without personal liability of any of its members: and without the added legal work, time and expense of creating, administering and maintaining the corporation and all of its reporting requirements.
Note that even though the IRS does not consider the single member LLC to exist…the structure none-the-less continues to afford maximum protection against creditor claims and lawsuits: even though the owner member continues to report its income and expenses as an individual (e.g., a Form 1040, with a Schedule C for the business and Schedule "E" for rental income).
While on the surface the LLC seems to be a fairly uncomplicated and innocuous device for doing business and for holding assets, it still has many other relatively unexplored facets. One of which is that of holding real estate assets and protecting them from judgment creditors, bankruptcy actions and actions in marital dispute. For example, all of one’s real estate holdings can be placed into an individual LLC; or each separate property or parcel can be held by a separate LLC, with a different investor or beneficiary “partner” in each one. In using the LLC for holding real estate in this manner, separate tax returns for each entity need not be filed…and of even greater interest, a tenant’s injury on the premises will not create a personal liability for the member/members. Only the LLC can be sued. Therefore, by holding properties in this manner, other properties remain apart from involvement in the claims of creditors arising out of a lawsuit against a particular LLC.
The LLC also provides a truly serviceable vehicle for shielding or passing wealth to family members without having to re-title the real estate. Once real estate is transferred into an LLC, the members' interest is converted to, and its ownership characterized thereafter as, Personalty (i.e., personal property) Vs. Realty (real estate), which "shares of ownership" can then be transferred, all or in part, as tax-free gifts (in blocks up to $10,000 per-year to each recipient). Again, note that the procedure for transferring LLC shares is far less complicated (quite simple in-fact) as compared, say, to altering, preparing and filing new transfer documentation (e.g., Grant Deed, Warranty Deed, Bargain and Sale Deed, etc.) and the requisite Preliminary Change of Ownership documentation. Moreover, when the gift is to a child, the LLC allows the parent to easily retain full control of the asset throughout its lifetime by continuing to act as "Managing Member" for the LLC.
In short…the benefits afforded by the Limited Liability Company are long overdue, but apparently here to stay, with confidence within the financial community growing stronger everyday. And a major welcome benefit of the LLC is that one can be set up for as little as $199.00 (go to www.mycorporation.com).
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Bill J. Gatten (AA, BA, MA, Mbr ASLA), a graduate of California State University, is a licensed real estate sales consultant, respected lecturer, and the author of the popular: No Down! No New Loan!, an easy to follow plain English text dealing with the safe transfer, holding and protection of residential and investment Real Estate via the Title-Holding (Illinois-type) Land Trust (go to: www.landtrust.net).
NO DOWN, NO BANK QUALIFYING
REAL ESTATE FINANCING
VIA THE NARS PACTRUST™
… A GROSS MISCONCEPTION
By Bill J. Gatten
Too often, when someone mentions the term PACTrust™, those few people who have a general idea what it’s all about will pull up an image of an esoteric creative financing scheme that is an alternative to something else: lease options, lease purchases, wraps, land contracts or equity shares. However, if that isn’t the perception, then one’s take on the NARS PACTrust™ might be that it is only viable for use by over-the-barrel buyers or sellers (“OTB’s”) forced to deal with troublesome, upside-down or no-equity properties.
Well, the fact of the matter is that neither of these concepts is wholly accurate. Certainly the PACTrust™ helps in all of these areas: but within itself, the PACTrust™ is merely a logical legal shield, and “the way to do” ALL of these other things. It is not an alternative to something else: it is instead a means for accomplishing the objectives of virtually any creative financing method, without the inherent risks and burdens they may present.
A list of the negatives that can be associated with other types of creative real estate financing might include: 1) The need for subterfuge; 2) Open and dangerous title transfer; 3) Lender’s due-on-sale violations; 4) Exposure of the property’s title to participants’ personal and legal difficulties; 5) Insurability problems; 6) Negative cash-flow and Vacancies; 7) lack of transferability of income tax benefits; 8) lack of control; and 9) overly burdensome and costly management and maintenance responsibilities.
The fact is, that In a NARS PACTrust™, neither the buyer, the seller, the investor or the property itself need ever be in a compromising position . The PACTrust™ process provides a means of real estate benefits transfer that is highly preferable to virtually all other devices. Full down payments can be charged in a PACTrust™ conveyance, or a seller can opto to carry 100% of the down payment; buyers can have great credit or no credit at all; the property can be in perfect condition and hold plenty of equity, o in run-down condition with no equity…and still be best served by a PACTrust™ transfer.
Let’s discuss some of what a PACTrust™ can do for ANY investor, seller or buyer—irrespective of anyone’s poor or marginal credit, limited cash or other extenuating circumstances (or absence thereof).
FLIPS AND ASSIGNMENTS: “Flipping” generally refers to one’s acquiring a property one day (…week/month) and selling it the next, before any money has to be paid out by the initial purchaser. In other words, one agrees to open an escrow to buy the property at, say, 60-70% of value, and then opens a second or simultaneous escrow to sell the same property to an investor at 75% or 80% of value. After repairs and improvements, this second buyer will then most likely sell it to the end user for for 100% of its value. The idea here being that when the second escrow closes, it should provide the “flipper” all the money needed to close the first escrow, plus (hopefully) a few thousand left over as profit. An “Assignment” is similar, but is the process one’s merely assigning its right to acquire a property to another person, without the need for a double escrow. In other words, the “Investor” acquires an option to purchase the property, and then assigns that option to someone else who may now exercise the option and own the property. In either case, the investor starts out with “nothing” and ends up with “something”: this is true no-Down, No Qualifying real estate dealing.
POTENTIAL PROBLEMS WITH FLIPS AND ASSIGNMENTS: Escrow companies often shy away from double escrows; flip and assignment buyers often don’t want the seller to know the flip amount; a flip or an assignment prohibits long-term holding for the “real” security and profit to be had in real estate investing. As well, the government is becoming increasingly involved in (and opposed to) the overall process of flipping (though, for the moment, their complaints have primarily to with situations wherein prices are artificially inflated for the naïve and unwary buyer, resulting in large opportunistic profits for unscrupulous and deceitful investors). This negative press obviously negatively affects anyone engaged in the practice of flipping. As well, many, if not most, lenders today are requiring at least a one-year holding-period by the owner-seller before approving a new loan (in order to eliminate or discourage the practice of flipping).
TA DA…ENTER THE PACTRUST™: The original seller places the property in a simple land trust in his name (no escrow required) and appoints the first buyer (e.g., the flipper) as a co-beneficiary with a written agreement compelling the seller to forfeit its own interest to the co-beneficiary when asked to do so (note that there is no due-on-sale violation). The first buyer then merely assigns his interest in the trust to the investor for a fee (no loan approval or title transfer required). After fix-up and/or refurbishment, the property is then sold to the end-user via an ordinary mortgage and a purchase of the property from the trustee of the trust…or by a further assignment of beneficiary interest to the end-user. The entire transaction is a personal property transfer and not a real estate transaction…thus avoiding due-on-sale issues, capital gains issues, seasoning issues, credit issues, eviction difficulties, insurability problems, etc..
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WRAPS. “Wraps,” “Wrap-Around Mortgages” or “All-Inclusive Mortgages,” as they are called, are mortgages or deeds of trust created by a seller, wherein a large loan is made to a buyer by the seller, which loan “wraps-around” the smaller loans that are already secured by the property. In other words, for a property worth, say, $100,000 that has a $50,000 loan against it: a seller can create a note from a buyer for $100,000, and from it, collect payments that are large enough to easily cover the monthly payments on the first mortgage, with plenty left-over every month. Or…perhaps this same seller might require a $20,000 down payment from the buyer, and then create an $80,000 All-Inclusive Mortgage, with a portion of the buyer’s monthly payment going to pay the first mortgage payment, with a sizeable sum still left over each month.
POTENTIAL PROBLEMS WITH WRAPS: First off, they constitute a clear due-on-sale violation. Other problems have to do with the open title transfer to an unknown (usually unqualified) entity which transfer can severely jeopardize the property and the seller (or investor). Furthermore, the property becomes the first target for either party’s lawsuits, creditor claims, tax liens, bankruptcy claims, divorce actions, etc. Note too that upon either party’s’ death, the property they own or have interest in can become hopelessly entwined in their Probate proceedings (I’m currently in a Probate that’s been going on for over six years). Eviction of an errant owner is impossible without a full foreclosure process, and quite possibly even a further Ejectment and Quiet Title action to follow…not to mention months of headache, and thousands upon thousands of dollars spent for nothing.
TA DA…ENTER THE PACTRUST™: The same seller places his property in to a land trust, conveys a 90% beneficiary interest to the buyer for a fee, with an agreement to forfeit his 10% at the trust’s termination. The co-beneficiary then leases the property from the trust: thereby receiving 100% of the benefits of Fee Simple Real Estate Ownership without the necessity of further title transfer. In so doing, there is no due-on-sale clause violation (i.e., the property has not been sold or transferred beyond the authorized trust…only leased out). There is no possibility for any creditor’s lien or claim attaching to the property. The co-beneficiary interest (especially if held as an LLC or Ltd partnership) is virtually non-partition-able to satisfy judgments. Neither party has to worry about the effect on the property or the legal or personal misdeeds of the other party. Moreover, Dispossession of an errant co-beneficiary tenant is by simple eviction and/or unlawful detainer action; and a default by a co-beneficiary tenant deprives him/her of any further interest in the land trust as well.
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LEASE OPTIONS: A lease option is basically a simple long-term rental agreement wherein (or, more prudently, by separate contract) a tenant is given the right to purchase the property at some set or bargain future sale price (the “strike price”) at some future date. Typically, a lease option requires a non-refundable Option Fee in advance, and monthly payments that are somewhat higher than normal rent. This amount above normal rent is generally (though not always) credited, along with the Option Fee, toward the ultimate purchase price of the property…if and when the option to buy is ever exercised (most are not).
POTENTIAL PROBLEMS WITH LEASE OPTIONS: 1) Should the option itself, or a Memorandum of Option, not be recorded, an errant optionor can, at will, easily take out another loan on the property, or sell it--or even lease it to someone else--without the optionee’s knowledge or permission. 2) As well, a disgruntled Optionee can default in its payment obligation with impunity, claiming that the transaction is not bona fide because of the lack of recordation. On the other hand, if the memorandum IS recorded (and is recorded as a Lease Option), then the lender may be alerted to a violation of its due-on-sale Clause, which clause firmly prohibits such options without the lender’s prior written approval. 3) One’s evicting a lease optionee can be very troublesome, time-consuming and expensive, should they refuse to pay and seek to claim in court that they are immune from eviction due to having an “equitable interest” in the property (attested to by way of their Option Fee and higher than Fair-Market Rent). 4) Another serious shortfall of the lease option is that income tax benefits can not be conveyed to a resident optionee in a lease option arrangement, which severely hampers one’s justification for paying higher than normal rents. 5) In addition, a question as to whether the optionor is making timely payments to the lender and maintaining his part in the financing properly is always at the forefront, as failure to do so will easily costs an optionee all of his money, and his home. Finally…a lien against either party can attach to the property or the option and seriously affect the other party, preventing the property’s sale or its purchase.
TA DA…ENTER THE PACTRUST™: The would-be optionor places the property into the land trust and names the would-be optionee as a co-beneficiary in the trust with full income tax benefits. This co-beneficiary then leases from the trust by means of a simple triple-net lease agreement (wherein he/she agrees to pay an amount sufficient to cover principal, interest, taxes and insurance to a 3rd party collection service or the beneficiaries) and wherein the co-beneficiary takes-on all of the property’s management and maintenance expense (i.e., “Full Risk and Burden of Ownership” as per Section 163(h)4(D) of the IRS Code). The “buy-out” agreement stipulates that at the end of the trust, the beneficiaries will sell the property at Fair Market Value to anyone who wants to buy it. However, the co-beneficiary may choose to buy it at the same price (FMV); but his/her own cost of acquisition will be LESS all of what the trust owes him/her at that time: thereby avoiding the necessity of a Purchase Option per se.
Upon purchase or re-finance by the co-beneficiary, the amounts owed thereto by the trust will include Equity Build-up from the loan’s Principal Reduction, Appreciation and a refund of any Contingency Funds or Reserves having been held throughout the term of the Agreement. In addition, most often, such refunds to the co-beneficiary purchaser include non-recurring closing costs having been paid at the trust’s inception. In this overall scenario, since the trustee holds both legal and equitable title to the property, the courts will ignore claims of “Equity” or “Equitable Mortgage” designed to forestall Eviction, and force a time-buying foreclosure process. And, too, since in a PACTrust™ neither party “owns” the property (the trustee does), liens, lawsuit and creditor claims against either party cannot attach to it. And above all, expedient removal of an errant PACTrust™ tenant is by a normal Eviction and/or unlawful detainer action, and can take place is as little as 30 days in most cases.
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LAND SALE CONTRACTS, CONTRACTS FOR SALE (CONTRACTS FOR DEED; LAND CONTRACTS, INSTALLMENT LAND CONTRACTS): In many states, the preferred method of seller-carry financing is by land sale contract. Basically, such an arrangement is no more than a glorified “lay-away plan,” wherein the property’s ownership is not transferred to the buyer until the property is fully paid for. In other words, the seller holds the legal title until the buyer makes the final installment.
POTENTIAL PROBLEMS WITH “LAND SALE CONTRACTS”: In such scenarios, all the same risks and drawbacks of the Wrap-Around (above) exist: due-on-sale violation, impossibility of simple eviction; legitimate claims of “equity” and “equitable mortgage.” In addition, the property can easily become embroiled in either party’s legal and personal problems: specifically including lawsuit, divorce, tax liens, creditor liens, bankruptcy and probate proceedings. As well, a Land Sale Contract does not generally convey any income tax benefits to the buyer relative to Mortgage Interest or Property Tax deductions, until such time as either—1) the property is paid for, or 2) until (unless) the entire transaction is recorded as a contract FOR sale with all the consequences and ramification of a Sale. Such land contracts FOR sale are seen, for example, in “veteran benefit installment land contract loans,” as seen in California, Alaska, Minnesota and Texas and Oklahoma (e.g., the “Cal-Vet” Loan). In these kinds of contracts, tax benefits are available to the buyer even though either the seller or the lender remains the owner of the property until it is paid for or refinanced. Again, unless the contract is FOR sale, rather than OF sale, the question of who can be trusted to collect and/or make the payments to the lender can be a major problem.
ONCE GAIN… THE PACTRUST™ TO THE RESCUE: In order to achieve exactly the objectives of a Land Sale Contract without the negatives and with enhanced protection and legal-shielding, and tax benefits to the buyer, a seller can merely vest the property with his own land trust trustee, and then sell (assign for a fee) only a beneficiary interest in the trust. By virtue of the fact that income tax benefits can be conveyed in this manner, the PACTrust™ tenant beneficiary will likely pay (and be able to afford to pay) considerably higher monthly payments, and be more likely to accept full responsibility for all maintenance, management and other monthly obligations. Under the PACTrust™ arrangement, an errant co-beneficiary can be dispossessed of its interest without a drawn-out legal process. Since the trustee holds Legal and Equitable Title, the tenant simply cannot claim having an Equitable Interest in the property, in order to thwart Eviction and to force foreclosure: thereupon acquiring even more time and free rent. Overall, nothing changes as far as the original intent and objectives are concerned…other than that protection of all parties is greatly enhanced; risk is all but eliminated and the overall desired benefits are far greater on both sides. Payments are collected and processed by a bonded 3rd party bill-paying service.
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EQUITY SHARES: “Equity Sharing” is a process originally instituted in the first part of the 20th Century by the Federal Housing Administration (FHA) as a means to encourage and facilitate low cost homeownership. The original idea was that, in order to supplant down payment burdens, when one took out a loan to purchase a home, he/she would be given only a portion of the ownership: the other portion being held by the Administration and relinquished little-by-little as the debt was paid down. The concept was poorly conceived and not well promoted, and died-out after only a brief run. But equity sharing emerged again in the mid-eighties when it became a popular form of creative financing. In this latter design, the idea was that one party would make a down payment on a property as a real estate investment, while another party lived in the property and made all the payments and handled all recurring costs and responsibilities, in exchange for tax benefits, a portion of the potential profit on sale, and all other incidents of homeownership.
The other variant of the equity share is, of course, the “seller-as-investor” equity share. In the seller-as-investor form, a property’s current owner, having already made the down payment and taken out a loan, becomes the investor co-owner along with a resident co-owner. In either case (outside investor or seller as investor), the participants would then hold title as to an undivided half interest as tenants-in-common. Then, at the end of the prescribed term of the agreement, the property would be sold, or re-financed by the resident, at which time all net proceeds of sale would be shared by the parties in proportion to their percentages of ownership.
POTENTIAL PROBLEMS WITH EQUITY SHARING: In such an arrangement, either party’s misdeeds or careless actions can cause liens, suits and judgments to attach to the property. Either party’s death will result in the Probate milieu Evicting an errant co-owner is impossible without a judicial process (and probably with the ensuing added time and expense of ejectment and quiet title). Tax benefits are curtailed by IRC 280-A (re. deprecation by the non-resident co-owner). The granting of title interest obviously creates a distinct due-on-sale violation. Differences of opinion (arguments) between parties cannot be effectively dealt with, as they each wield too much power via their title interests to be able to resolve all conflicts with arbitration. And, again, the question of who can be trusted to collect and/or make the payments directly to the creditors is always of major concern.
AND HERE COMES THAT PACTRUST™ AGAIN: Achieving the same end-result with a PACTrust™ without the legal problems and risks is quite simple. As the property is placed into the land trust, the Settlor (seller) grants only a percentage of the beneficiary interest to the co beneficiary (50%, 25% 10%, 90%, etc.), along with a proportionate share of future profits on sale at the trust’s termination. In so doing, there is no difficulty in evicting an errant co-beneficiary, there is no due-on-sale violation; there is pure secrecy, privacy and anonymity relative to each party’s ownership. The property and each participant is effectively shielded from the untoward or illicit acts of either party. Further, if either party chooses to sell or assign all or a portion of its interest (assuming all parties are in agreement), the transfer can be done with a simple assignment, rather than a complex sale process. In addition, a bonded bill-paying agency collects and disburses payments to creditors.
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PROBLEMS THAT COULD BEFALL, LIMIT THE USE OF, PACTRUST™: 1) Inability to identify a suitable 3rd party trustee, 2) Inability to arrange for a suitable and experienced collection and bill paying service, 3) Problems in locating a knowledgeable escrow and/or title insurance Company, 4) Parties could object to needing to confer with one-another re. capital improvements, 5) In the absence of a Power of Attorney, the trustee can only respond to mutual direction of all beneficiaries, 6) Locating a knowledgeable attorney is always a problem, as very few attorneys know anything about land trusts in general, and will often shoot down the idea in favor of doing something they understand better and can make more money on, rather than undertaking any research. 7) Thorough documentation, and directions to the trustee, collection service, lenders, insurers, escrow and other creditors must be carefully drawn and can appear complex to the novice.
HOWEVER…for those who need it, all of the above, including client consultation and full documentation, can be provided, handled and/or mitigated by North American Real Estate Services, Inc.
Obviously, space and time limitations here prevent an in-depth discussion of all the other uses for the PACTrust™; however, we’ll conclude with a brief mention of a few of them:
BRIDGE FINANCING: A buyer who may not be able to qualify for a loan or come up with the required down for another six months or a year, can in the interim (assuming the seller’s cooperation) have the property placed into a PACTrust™ and hold a beneficiary interest therein until the credit or money problem clears. This gives them 100% of all ownership benefits, including tax write-off, even though they are not yet titleholders (“owners”).
FORECLOSURE INVESTING: An investor can have An owner in default place the property into his own land trust, thereupon bringing all loans current in escrow. The investor would then take an Assignment of Beneficiary interest (e.g., 90% with the seller’s agreement to relinquish its 10% at termination) along full Power of Direction. In so doing, there is not compromise of regulations concerning foreclosure specialists or consultants. As well, in so doing, there is no sale of the property per se and therefore no due-on-sale violation or Redemption Period with which to be concerned.
RENTAL INCOME LAYERING: An investor holding a property in a PACTrust™ is not restricted to only selling Use and Occupancy (Rent). He/she can charge incrementally more for the various salable layers: Appreciation (all or part); Equity Build-Up from Principal Reduction (all or part); existing equity (all or part…called a “down payment” or “equity contribution”); Income Tax Write-Off (all or part); and so on. Doing so will thereby double and triple net rental income while eliminating all management, maintenance, vacancies, negative cash flow, etc.
ASSET PROTECTION: One can use the PACTrust™ to shield the property from virtually any potential threat: tax liens, divorce actions (including dower actions), bankruptcy, creditor judgments, Probate and Estate Tax. That is… to “armor plate” one’s real estate holdings.
INTERIM OCCUPANCY PROVISIONS: While awaiting a protracted escrow or loan approval, a buyer can begin enjoying homeownership benefits including tax deductions immediately while awaiting finality of the buying process.
TOP TEN LIST OF FAILURES
By Bill J. Gatten
Take a few selections from the Top-Ten List of Reasons to Fail, and see if any apply (all that's needed is the right bait).
1. I do everything the gurus tell me to, but appreciation's so good that sellers' don't want to make deals.
2. I keep on trying, but times are tough. Prospective buyers are broke and appreciation is static.
3. I keep plugging away, but there's a housing shortage and sellers are unwilling to make deals
4. I want to buy and hold, but rentals abound and competition eliminates any chance for break-even rents
5. I do everything I can, but rentals in my area are scarce and rents are high, so nobody wants to let their properties go.
6. I Try, but I find there to be just too much competition out there
7. The course says don't deal with Realtors and go after the fixers, but FSBO fixer-upper's are just no where to be found
8. I've called a few, but Realtors® in my area don't want to work with creative finance people
9. I've bought three No-Money Down courses, and ten years of one one-on-one mentoring so far, and the techniques just don't work
10. I try to talk to sellers, but they figure me out right away and are not interested in creative financing.
Anything Wrong with Land Contracts
(Contracts for Deed or Sale)?
By Bill J. Gatten
The following is not legal advice and should be verified by a competent attorney who is familiar with the law concerning Illinois Land Trusts and the various nuances of the NARS PACTrust™…it is our experience that very few are, and that many will defer to more familiar device--at the expense of the client---in order to avoid time consuming research relative to a subject unfamiliar to them.
Of the following items, none apply to the NARS PACTrust™. The reason for the creation of the NARS PACTrust™ in the first place was to protect buyers and sellers alike from the myriad dangers and risks of such creative financing vehicles as Land Contracts, Equity Shares, Lease Options, Open Seller Carry-Backs and the like.
1. An attorney’s advocacy of the use of a land contract is considered Mal Practice if constructed without a Clients Waiver relative to the risks of the transaction and the likelihood of a lender’s discovering the Due-on-Sale violation (obviously, this waiver is necessary due to the dangers inherent in such a transaction) – this is not true w/r the PACTrust
2. A land contract is a direct violation of a lender’s Due on Sale Clause and alienation provisions (as per FDIRA 12USC 1701-j-3; Garn St. Germane Act of 1982) – this is not true w/r the PACTrust
3. A land contract requires specific secrecy and subterfuge relative to the unauthorized assumption of a non assumable mortgage loan – this is not true w/r the PACTrust
4. A Land Contract subjects the vendee’s (buyer’s) property title to any lawsuit that would befall the vendee (seller) – this is not true w/r the PACTrust
5. With a land contract, any suspected or asserted illegal act of the vendor (seller) can cause a lis pendens (notice of pending lawsuit) on the property, impeding or preventing its sale, use as collateral, or even issuance of (new) insurance – this is not true w/r the PACTrust
6. A bankruptcy by the seller would involve the property and could result in its being seized by the bankruptcy courts – this is not true w/r the PACTrust
7. A land contract brings about a taxable event for the vendor (seller) upon its execution, versus deferring taxation on capital gain until the end of the contract – this is not true w/r the PACTrust
8. A land contract will subject the property, and jeopardize the seller, relative to any lien, suit, creditor judgment or IRS claim against the property – this is not true w/r the PACTrust
9. A land contract will necessitate the reassessment of the property for property tax purposes – this is not true w/r the PACTrust
10. A land contract will necessitate payment of transfer tax upon possession by the vendee (buyer) – this is not true w/r the PACTrust
11. A land contract will enable the enforcement of mechanics liens, which may be placed against the property without the seller’s permission or knowledge – this is not true w/r the PACTrust
12. A land contract does not provide for a 3rd party trustee acting specifically on behalf of and at the direction of the vendor and vendee (buyer and seller) and mutual power of direction by all beneficiary who have something to lose should the other party misuse or misconstrue the contract – this is not true w/r the PACTrust
13. A land contract subjects the parties to personal injury relative to the property – this is not true w/r the PACTrust
14. A land contract can force the vendor into judicial fourscore process in order to cure a default, which process may precede further ejectment action and quite title action in order to regain the ability to resell the property – this is not true w/r the PACTrust
15. A land contract does not protect the property from an asset protection standpoint
16. A land contract can not avert Probate proceedings and inheritance taxation in the even of one’s death
17. A land contract does not avoid ancillary administration in the event of the death of a beneficiary
18. Many real estate companies demand that no land contracts, Wraps or Lease Options be done through their companies due to the extremely risks involved and the history of litigation in such transactions. Brokers are always named in any suit relative to a land contract gone bad. In the state of Colorado, the state’s Department of Real Estate has threatened to sanction and take away the licenses of any Realtor® who is found “guilty” of using any of these devices without the direct, express permission and approval of the lender.
WORKING FORECLOSURES
THE NARS PACTrust™ WAY
By Bill J. Gatten
Working foreclosures can indeed be for the “newbie” or grizzled old salt, and needn't require a penny out of pocket, good credit or a lot of experience if done properly. It’s an excellent way for a "beginner (whatever that is…there are no grade levels in owning real estate)" to get involved in creative real estate acquisition and management.
For example, I picked up a property yesterday (one of a couple this month) for $500,000 that is worth $568,000…with $426,000 owed on it at $3,600 per month. It cost me nothing...I have no payments to make, no credit risk to take, and I didn't have to qualify for, or take over, any loans, fill out any forms or offer a credit report.
I merely explained to the seller in foreclosure that I would arrange for his arrearage to be covered and his payments to be made on time, and that his equity would be re-paid to him at the end of seven years: minus my cost of bringing his loan current…assuming appreciation allows for such refund. The loan payoff will come out first, then costs of sale, then my contribution (the arrearages and any closing costs), then his contribution (his present equity): then everything else will accrue to me.
The arrearages are $26,000.00
My acquisition cost is $500,000 less the $26,000
My Resident investor will come in at $560,000 with about $40-50,000 (8-10%) and take over all payments, management, maintenance, repairs and upkeep in exchange for tax benefits and HALF of any future appreciation there might be.
In the deal, I should clear about $20,000 up front (more, if I can get the lender to give me a forbearance on all or part of the arrearages), $300 (or so) per-month positive cash-flow for seven years: and at the end, given any appreciation at all, I will receive my bumped equity ($60,000) plus half of the loan’s principal reduction (est. $12,000) and half of any actual appreciation there will (may) have been over the term of the agreement.
Given $100,000 in appreciation I will have earned some $175,000. If there were to be no appreciation, I’d still have made $125,000.
In effect, if I am to receive that money over 7 years, didn’t Just give myself a $2,100 per moth raise for the next 84 month, on just one transaction? Now, think about it…what is it here that anyone (newbie or not) in our business couldn’t have done, had they known how to find the property and how to make the deal? How much would the property have cost them? How much would their monthly payments have been? What would their personal credit risk have been? How much would they have paid in property tax, insurance, management, maintenance, repair and upkeep? How much time would it have taken (‘has taken me about an hour so far)? How many times would they have had to stand up from their easy chair after having inspected property, in order to make it all happen? Actually my wife does my inspections, so I never have to stand up at all?
YES! County records filing ARE ideal for someone who wants to make big money early on: foreclosures, tax liens, tax sales, tax defaults, divorces, estate sales, bankruptcies, zoning and building code violations, etc.
YOUR PLAN OF ACTION
by Bill J. Gatten
Have you any idea what it is that you truly want at this point in your life?
Have you ever honestly sat down with pen in hand and pondered that question? Is it wealth that you want? Is it income? Is it financial security, fame or respect? Or could it be that all you really want is “show them” – i.e., retribution for someone’s telling you you’d never make it (you’re too dumb, too uneducated, too slow, too ugly, to fat, too skinny, too poor, too old…)?
And of the “wants” and “wishes” you harbor, how many of them are desires, and how many are actually “dire needs”?
Many, if not most, of us regularly confuse the concept of wanting something with needing it, and end up stopping miles short of our objectives as a result. A person may “want” a T-bone steak: but their real “dire need” is protein. They may “want” a smog-free environment: but their real “dire need” is…air.
All too often we say we would like to be wealthy, and then go to some considerable length to learn how to achieve wealth: but the fact is that if we haven’t established an honest dire need for that wealth, it will more than likely never dangle within our reach. One can wish for an apple to fall from a tree and maybe have that happen, if he or she is willing to wait a while: but when the apple becomes a matter of survival, and the difference between hunger and starvation…then out of dire necessity the “wisher” becomes an “initiator,” and will ‘make’ that apple fall by any means conceivable.
I was contacted this morning by a former PACTrust™ workshop attendee who said that after having attended workshop, at the end of the day, despite my “excellent advice (her words),” she left the meeting perplexed and not understanding how to implement the advice I had tendered (at considerable cost to her and sincerity by me). Her lament was that, without a complete understanding, she had been forced to return to her “regular job.” My response was that she could easily have asked questions and opted to stay for the free Q&A session afterward; she could have joined us weekly on the free TeleMentoring sessions we hold every Saturday morning; she could have called me or anyone on our staff with questions and concerns at any time; she could have stopped me in the middle of the presentation and demanded that I slow down because she wasn’t “getting it (as the more indomitable students do from time-to-time).”
My honest response to the lady was that it appeared to me that her “Want To” had been overridden her “Don’t Need To.” In other words, she would surely have chosen to change her life and relinquish her mundane job, had it not been a bit too much trouble. At that juncture she wasn’t desperate enough to put the need of a career change up there with the need for air. Do you suppose she might have paid closer attention and asked a few more questions and participated in the follow up sessions had she NOT had the tolerable job and sufficient income to fall back on, and hadn’t eaten for, say, a week or two?
Let’s assume for a moment that this same woman, even with her job to fall back on, had suddenly become a victim of certain dire needs that her salary just couldn’t cover. Say, a child that required special medical treatment that her insurance couldn’t cover; a husband who had bailed out on her leaving her with all the bills and insufficient means to handle daily life (and maybe throw in a broken a leg (or two). NOW do you think her “Want To” might be more readily replaced by a “Dire Need To”? You bet! And that’s why the careful outlining of your wants and dire needs, and knowing well the difference, is so extremely important.
You don’t have to break your legs or become destitute in order to carve out a better life: you only need to need to. When your dissatisfaction with the way things are outweighs your need for something better, then you will act accordingly. That will happen when you sit down and take inventory of your life…when you finally figure out what you are missing in this life that belongs to you just much as it does anyone else. The more aware you become of the inequity you are causing by your inaction, the more you will resent it and begin to do something about it. Do you know anybody is no smarter than you are, no better educated, no better qualified who is making five the money you are? Do you suppose they might be onto something you haven’t taken the time to discover yet?
The carefully guarded so-called “Secret of the Universe” is that you are its master. You think and create on purpose, and you are one with its very creator: the Universe’s creations by accident…it’s you that is in charge. Anything you can conceive of is already yours for the asking: just do what’s necessary to be able to hold it in your hand.
What are your own wishes, wants and dire needs?
Some of us are born with the gifts that seem to automatically make superstars of us without a lot of effort (natural athletes, natural actors, natural musicians, writers, the unnaturally lucky, etc); but unfortunately, most of us are not superstars by virtue of our birthright. In fact, most of us have to establish whatever stardom we ever attain, in the face of sometimes seemingly insurmountable handicaps that life has dumped on us. We did not choose our parents or their mindsets or the conditions under which they were raised or how they raised us. We are, however, victims of all of those aspects of our own heredity, parentage, peer-pressure and early environment. Fortunately, though, we have been given the gift of free will, and the right to override or neutralize any part of our personal programming that we are willing to look at and take the time to try to understand.
The most common error (and the most disastrous one) in goal setting is that of mistaking wishes (wants) with burning desire (dire needs). It is only the latter that can lead us to real life-change and abundance. To but make a wish, we need do nothing but put it out there and wait and see what happens: with dire needs, however, we die in some way when they are not fulfilled…we are simply incapable of allowing them to go realized without severe damage to our psyche, and we will fight hard to prevent that from happening.
The difference between wishing or wanting…and sincerely needing is analogous to the difference between asking Santa for something, or demanding it of someone who owes it to you. If you’d like to build a 40-story high-rise or a 1,200 foot-long aircraft carrier, you certainly are free to do so if you wish, and if you have the means and knowledge to complete your work. But, until completion of such work becomes an absolute dire necessity, you likely never will. It’s when a major aspect of your life depends on it that you will do what all builders of 40-story high-rise buildings and aircraft carriers have always done…imagine it, design it and build it.
So…before writing out your objectives, choosing a mantra, and heading off on your trek to riches, take the time to figure out what your goals actually are; which of your “wishes” are worthy of being converted to “dire needs”; and what your resources are for accomplishing these aspirations. Should you come up short in the “means” area, then you need to write-out a plan for either attaining what you are lacking, or for replacing what your are lacking with something else of equal value that you have more than enough of (e.g., physical work can replace the need for cash; eliminating someone’s burden can replaces the need for credit; patience can replace experience; caution, diligence and research can replace formal education; know-how replaces a college degree, and so on)
Never forget that, according to Epictetus in the 5th Century BC: “A [person’s] wealth is measured only by the expense of [that person’s] pleasures.” In other words, when life itself is your reward, and when the least expensive pleasures are your greatest reward, you are already wealthy beyond calculation: no matter how much or how little money you have. My own true net-worth quadrupled when my children were born, and quadrupled again with the arrival of my grandchildren. Think about it…who is wealthier, the man with a big mortgage and a 60 month payment plan on a new Mercedes Benz convertible, or a well-loved, warm Eskimo with eight good dogs, a jolly fat wife and two years worth of walrus meat in his locker?
Converting a need to a burning desire (dire need) is the first real step in goal setting and requires definitive action. To wit: If you’re having difficulty in making the decision to jump off the high cliff into the cold raging river below, in order to save your own life…just do this: Tie the end of a long rope around your waist, then tie the other end around a massive round rock and roll the rock toward the cliff. When you’ve finally rolled the stone over the edge…your fate is sealed. You needn’t worry about making the decisions any longer. Definitive action tied to need is what brings “pre-existent potential” into the physical universe.
To become successful in life you must first know what it is that you want, and then you must decide what you truly need. Just ask yourself which of the following you could live without if you had to…what’s left over are your needs.
* Happiness
* Contentment
* Freedom
* Permanent Financial Security
* Acceptance/Popularity
* Good Health?
* Fame/Recognition?
* Monetary Wealth?
* A more fulfilling lifestyle
* A new career
* A new spouse
So what will be your Plan of Action (your “POA”…your “rope” and your “big ol’ rock”)
Your POA is your design for success. It is the very map of your destiny. It becomes your guide to all of what you must do to become who and what you need to be, and to attain all of what you need to own and control.
Goals that are held only in the mind are never goals at all. They're just residual random electronic impulses left over from wishes. It’s only when these wishes are physically transformed into matter by the process of putting them down on paper that they can begin to metamorphose into dire needs. Handwriting your goals is always preferable to typing them out in your word processor…the more arduous and physical the mind-to-hand task is, the more likely the transformation will be (i.e., moving a concept from the ethereal realm of potential into the realm of physical reality).
Forty years ago, I was dissatisfied living on only $326 per month (before deductions), but with that income I could cover a $60.00 per month rent payment, a $35.00 per month payments on my new Ford Falcon; I could buy gasoline, JC Penny’s clothing and groceries; and I could still have enough left over to go to the drive-in movies once a month or so. In those days I was envied by many who couldn’t afford even as much as I could: but I was also looked down upon by those with whom I most wanted to associate: high school friends who were coming out of college as doctors, lawyers, engineers, dentists, etc.). But now, 40 years later, I find myself earning more than most of my friends, but prone to becoming frantic if my monthly income drops below $20,000.00 (after deductions).
What do you suppose it is that I’m doing any differently today that I was forty years ago? Absolutely nothing except for following a plan. Because of my plan, I live in a bigger house now and drive nicer cars. And I’ve thrust necessities into my current lifestyle that weren’t there before (vacation cruises, country clubs, frequent airline travel, nice hotels, fine dining, fine clothing, housekeepers, gardeners, maintenance people, big screen TV’s, etc.): luxury items that were unheard of back then. But now a days I never think of these items as luxuries…today they are (in my mindset) integral pieces of whom I have worked and planned to become and whom I choose to be (and I ain’t finished yet). And were I now to be deprived of any one of these previously unnecessary items and services, a part of who I envision myself to be would cease to exist (i.e., that part of my persona would die). My so-called luxuries are no longer just wants and wishes…but are now a part of my bundle of dire needs to be defended and preserved. Could I live without these things? Certainly! Could I be happy without them? Absolutely. Would I fight to hang on to them? You bet!
Writing your POA:
When you outline your goals, be sure to write them in the present tense as a note to yourself, as if you were writing to a third party to whom you are making reverent, unbreakable promises: vows than can not, and must not ever, be compromised: “My earning are becoming $xxx per year and shall reach that amount by the end of 20___.” “My property acquisition requirement is at an average of no less than one property per-month, to be achieved by the end of 20___” “I am already as wealthy as I have a honest need to be, and must only convert the potential of my God-given wealth into physical reality by my promised actions.” “I am becoming ever more perfectly in tune with the abundance and intelligence that is existence itself, and can only prosper in the most spectacular of ways…always.”
Over time, you'll need to be continually adding to, subtracting from, and refining your objectives: reorganizing and making changes as your circumstances change (because of the success of your plan of action). By constantly reviewing and adjusting your Plan of Action, you will begin to develop an ever clearer focus, and begin to realize that what were originally mere hopes and dreams, are now moving ever closer to necessity and manifesting in three dimensions. For example, once you have fulfilled some of the early promises to yourself, and progressed to, say, actually having gotten a property under contract, the “wish” of someday being a property owner, now becomes reality and creates an unyielding need to bring in a resident beneficiary, tenant or buyer…a true “dire need,” the fulfillment of which is merely a part of your survival.
With a written plan, the possibility of success become the probability of success, an as you continue to tighten up the plan you can’t help but move closer and closer to the certainty of success: finally fulminating in the rich, rewarding and bountiful life and lifestyle that was yours for the taking all along.
It’s so easy. You merely need to sit down and determine once and for all what it is that you truly want at this point in your life. Whatever it is, it already belong to you, you merely have to reach for it by making it something truly you can’t live without.
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