I've got a REAL problem with this "due on sale" garbage! - Posted by Kyle

Real Estate Investing Real Estate Gurus
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Re: The Reasons PACTrust doesn’t excite me…YET - Posted by Brad Crouch

Posted by Brad Crouch on April 08, 1999 at 21:45:28:

Hi Stacy,

I have been studying the PACTrust, going to seminars, training sessions, and having discussions with Bill Gatten.

I’ll admit that in the beginning I was skeptical. I have come to believe that the PACTrust system is not as complicated or difficult as I first thought. I guess it “seems” more complicated than it really is because as investors, we want to know all the “details” and legalities behind the scenes. When “proof” needs to be offerred of each detail, it can get kind of complicated.

I also thought the fees involved might be higher than a deal might support. Well. I found out that by joining the PACTrust network, some of those fees get cut in half, making it a very “doable” senario. I also like the idea that I don’t have to spend lots of time and energy with getting legal advice for each deal, and creating “gobs” of paperwork. The intracies of THAT stuff are handled by the professional folks at PACTrust (Partnership of America Corporation). Whew!

All I have to do is find a seller with little or no equity, who is willing to stay on the loan for a few years, and then advertise for a buyer that I can give some beneficial interest in the trust to . . . and in the process of doing that, I build a database of buyers . . . then find out what each buyer wants (relative to house type, amount of bedrooms, location, etc.), and find a property in the desired locations, and do it all over again! The PACTrust is very flexible, too.

The buyers typically come in with enough cash to pay “closing costs” and a few months of payments. A month or two of payments go into a “contingency fund” to insure that future payments are not late, and the “closing costs” go into my pocket. I like the idea of making cash as you go into the deal, and the “closing costs” are of an amount close to what "initial option “consideration” in a sandwich type lease option would be. And a greater “payoff” when the trust terminates . . . kinda like a “back end” income when a tenant buyer exercises his option to purchase. And of course there is a monthly spread (cash flow), too!

Also, there is a part of the PACTrust that collects the monthly payments and distributes the money in the correct manner, which allows you to put each deal on “automatic pilot”, freeing up your time to do more deals.

The PACTrust startd out to be “another tool” I could use but has become the “preferred” way to go. At least for me.

To everybody I know in this business who live in Southern California . . . and even to all those I do not yet know anywhere, I would recommend learning about this PACTrust system. I’m certainly not afraid of competition as there are plenty to go around! I think there is now around 12 million people in the Los Angeles area, alone.

The future looks bright indeed.

Y’all take care,

Brad

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Re: The Reasons PACTrust doesn’t excite me…YET - Posted by Bill Gatten

Posted by Bill Gatten on April 08, 1999 at 12:36:57:

Henny Youngman always said: “If it hurts when you go like that… don’t go like that.”

What’s happened in recent years is simpley that someone has conceived of a legal shield that makes it wholly and completely legal, honest, ethical and safe to do what folks have hoped for for years. I didn’t invent anything — the Egyptians (or may the Sumerians) invented the Net Lease, and the Feudal Brittish created the Land Trust… I just combined them.

The PACTrust is only as complex as what it becomes – a land trust conveyance, a WRAP, a Land Contract (contract for deed/sale), a Lease Option or Equity Share. The PACTrust is not an alternative…it’s a way to do these other things.

As far as the codes and cites are concerned… if you’re going to be an investor, I’d sugggest becoming acquainted with at least the ones that can make you rich (12USC 1701(d) is a good place to start… it’s made me a few hundrded thousand over the years).

Remember: Doing for a little while what others are UNWILLING to do, means being able to charge for a liifetime for what others are UNABLE to to do (relates to becoming a doctor or a lawyer… or just learning new concepts).

Hope this helps.

Bill

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Re: In defense of Mark… - Posted by Mark

Posted by Mark on April 07, 1999 at 11:30:37:

The point is that there is a clause that was agreed
to when the mortgage was taken on the property.
If the property is sold, the loan balance is due.
I don’t see any way for that to be misconstrued. I
believe that underhanded business of any sort
damages the credibility of the industry.

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Re: I’ve got a REAL problem with this “due on sale” garbage! - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on April 12, 1999 at 12:31:59:

David,
It took me sometime to figure out why someone would pay cash for real estate, even though the reason is simple. The true wealth is in owning assests free and clear. (My prime hard money lender, 70+ yrs of age, owns over 70 homes free and clear). Don’t get me wrong, I buy “subject to” homes - more than any other kind of homes, and sell them on wraps or L/O to create cash flow. However, I realize my empire is being built on the economic sand. If the market downturns, I will lose tens and tens of these notes now producing the “great” cash flow, and I’ll be broke. On the other hand, if I owned just few homes free and clear, even in bad market I’ll still be collecting rents, could be twice as little, and I won’t lose my assets. And when the market comes back, I’ll be back swinging.

It all came down to me when I was trying to buy a 70,000 sq.ft. warehouse in Austin from a real estate
family from California who owned a number of properties in town. They had about 50% equity and I was showing them with numbers how that equity was producing a dismal returns based on the cash flow from the building. They told me, “kid, we are just paying off our loans quicky, and buying more real estate with our cash flow, it’s like clipping coupons”. They told me I was in a different point in my investment carreer, where I had to be concerned with returns that much.

So, the part of the strategy is to convert some of the highly leveraged houses into fewer free and clear ones. The return on investment is not everything. In little deals like that we barely invest a 1k-2K at a time. Even with 100% return, the absolute $$ are small. I hear Ross Perot has a lot of cash in municipal bonds at 5%-6%.

45

Re: Breach of contract, or not?? - Posted by JPiper

Posted by JPiper on April 08, 1999 at 14:11:10:

This would be the first time I’ve ever seen this particular argument made. But as I read it I think Rick makes a valid point. And so that you know, Rick is an attorney, which I’m not.

The only thing I would add is that regardless of what you call it, the result is identical. So perhaps this distinction helps those who are worried about whether this is a breach or not (and hence their ethics), but does not change in the least the effect of the clause.

By the way, just to draw a few more distinctions, even if it were considered a breach, it’s the seller’s breach, not the buyer’s.

JPiper

46

It’s Bill G’s Fault… - Posted by JPiper

Posted by JPiper on April 08, 1999 at 24:51:08:

I guess Bill G’s spelling problems are becoming contagious…I think I’ll scan my own dictionary! Nice catch.:slight_smile:

JPiper

47

Follow-Up Questions - Posted by Marvin

Posted by Marvin on April 11, 1999 at 22:08:11:

Hello Brad,

Glad to hear you’re excited about Bill’s program.
Your enthusiasm prompts some follow-up questions:

I was under the (mistaken?) impression that the
Network is for Realtors. Are you a Realtor, or did
you join as an Investor?

As an Investor in the arrangement, there will be
three parties holding beneficial interest in the
trust?

If you are a principal in the transaction, it is
not clear to me how you are able to generate cash-
flow; The resident beneficiary pays (triple net
lease) PITI, repairs, anything else they put into
the property, and your fee(?).

Do you have a good (Investor) ad to attract clients
that you would be willing to share?

A lot of questions - I realize - but I haven’t asked
you a question in a long time. Just catching up.
I (like you and Stacy) initially thought that the
PACTrust was far too complicated. Having studied
it a bit, I (somewhat) understand the reasons for
the attention to detail that Bill gave in develop-
ing it. Also, once you learn the reasons Bill does
everything the way he does, the PACTrust does not
seem so confusing. Brad, thanks for your time.

Regards, Marvin

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Re: The Reasons PACTrust doesn’t excite me…YET - Posted by Stacy (AZ)

Posted by Stacy (AZ) on April 09, 1999 at 13:32:50:

Good feedback, Brad and Bill. Thanks!

Stacy

49

Mark, the point is the bank is getting paid!!! - Posted by Daniel Lubell

Posted by Daniel Lubell on April 07, 1999 at 11:55:30:

Mark,

The point is, the bank is getting paid the amount they agreed to. It does not matter, so long as the bank is getting paid. Dosen’t matter if the dollars come from you, from me, or from a little green man with polka dots. As long as the bank gets what they agreed to, why should they care? As long as the payments are getting made, when in the past they were not getting paid, (usually the case on most DOS violations) I would suggest that this actually adds credibility to our industry! If the property gets sold and the payments are not getting made, that is another
matter…

Daniel Lubell

50

Memories of Leverage and Risk Discussion - Posted by Baltimore BirdDog

Posted by Baltimore BirdDog on April 14, 1999 at 11:18:29:

Dear Alex:

First let me say that I’ve been reading and appreciating your posts ever since I found this message board in January. You clearly have a pretty good handle on various subjects in the area of REI.

Second, your post brings back memories of the higher leverage equals higher risk discussion on this board a couple weeks ago. I think it was Sean who originated it. Anyway, I still don’t understand why holding unleveraged real estate would be a good investment. Why aren’t they as concerned with returns as you and I? I assume from your post that they are savvy investors. If so, how are they making their money? I find it hard to believe that the rich are content with average to below-average returns knowing what is possible. I will give them the fact that it’s harder to make above average returns when you have larger chunks of money to invest (wouldn’t we all like to have those problems?!), but I don’t buy the fact that average returns are acceptable, which brings me back to my rambling question of how they’re making their money. Maybe they’re making their returns somewhere else (Private Stock Offerings, Initial Public Offerings, Small Business Investments, etc.), buying real estate in depressed markets for cash at a big discount and holding it as their safety net? Who knows?

There seems to be a whole other level of investing–the one that your warehouse sellers and Kiyosaki operate on–and I’m still trying to define it. I’m reading through Cashflow Quadrant now, which I hope will provide some insights. Any thoughts?

One final point. The 5-6% that Perot is earning on those municipal bonds is tax-exempt interest. His taxable equivalent yield (i.e., the 5-6% plus a margin representing taxes he would have paid on a taxable investment) is probably at least in the neighborhood of 7.5%-8.5%. Still piddly by REI standards, but not bad.

Thanks for any input you may have.

-Jeremy

51

alas… - Posted by Jim IL

Posted by Jim IL on April 08, 1999 at 18:38:14:

And this was the point I was trying to make at the start of this thread.

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Re: It’s Bill G’s Fault… - Posted by Bill Gatten

Posted by Bill Gatten on April 08, 1999 at 22:42:07:

What??

They’ve taken that one away too?

OK, that’s it. It’s time for the POUR revolution. Poor… pour… and now “pore” for other than holes in your hide? I can’t take it anymore (anymour?)

Bill

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Re: Mark, the point is the bank is getting paid!!! - Posted by JohnK(CA)

Posted by JohnK(CA) on April 07, 1999 at 15:32:25:

I don’t believe that a “violation” of the D.O.S. clause is tantamount to a sin. There were some valid reasons, at least from the lenders point of view, to have the option of calling the loan due upon sale. The fact that the loan is almost never accelerated means that for self serving reasons,the lender is allowing the allianation of title to take place.
I remember the first well publicized case in Calif.in the mid 70s was Wellencamp Vs Glendale Savings. Glendale Savings’ main arguement was that an unapproved transfer of title created an impairment of their collateral. All the lender wanted was the opportunity to pass judgement on the new buyer and collect a 1 point qualification fee. Sorry to ramble on, but I’ve never been a fan of the banking industry. Kyle, I think you solved your deliema with the title of your post. “I Have a Problem with…” If you have a problem doing deals that involve a D.O.S. clause, DON"T DO THEM.
Regards
JohnK(CA)

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Re: Mark, the point is the bank is getting paid!!! - Posted by Mark

Posted by Mark on April 07, 1999 at 15:18:54:

I suppose that if I signed a contract with you, whether it be a lease or LO, or whatever, I can then choose which clauses I will honor after the fact and my decision will be dependent on whether or not you are able to catch me breaking our contract. Is this the way you guys do business?

55

Re: Memories of Leverage and Risk Discussion - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on April 14, 1999 at 18:11:13:

Jeremy,

Jim has made some excellent comments about risk vs. reward. When you have nothing, you have no choice but to only play with high leverage high risk invsetments if you ever dream of making it big. Once you start accumulating some wealth you have to become more conservative with SOME of your investments, sort of start gradually shifting things around from one pool to the other. Once you are rich, you are putting less and less into high risk category. The rich still play high risk games, the ones you mentioned and others, but they don’t need to put everything on the line. Even a small part of what they have allocated to risk is still a lot of capital.

Speaking of Kiyosaki, he defines 3 kinds of money: survival money, real money, and play money. Survival money could be a job. Real money could be free and clear real estate - you can’t lose it in bad times, it still produces income (perhaps a bit less). Play money is something you can lose and don’t get too hurt. You invest it in high risk ventures, or blow it on vacations…

But, of course, who am I to ramble about it.

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Re: Memories of Leverage and Risk Discussion - Posted by JPiper

Posted by JPiper on April 14, 1999 at 17:47:35:

Most savvy investors that I know understand that there are two components to any investment. One is the return on the investment, the other is the risk of the investment. The component of return is one that is easy to put a pencil to. Risk is not. Risk is a subject that requires some experience to evaluate.

Maximizing return incurs the risk of high leverage, and most people that have been around awhile understand that leverage is a double edged sword. I would say that this is what Alex’s owners were referring to, and what Sean generally fails to consider.

The history of finance is full of examples of people who have failed to fully consider risk. For a recent example that turned out well read about Donald Trump in the 90’s. For a prior example of the risk of leverage take a look at William Zeckendorf, a well-known real estate developer and entrepreneur, who went bankrupt due to leverage.

JPiper

57

OPTION OF THE LENDER - Posted by leslie dear

Posted by leslie dear on April 07, 1999 at 23:41:24:

Has anyone read a due on sale clause lately? Due on sale is at the lender’s option, not the same as not honoring or breaking an agreement.

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Re: Great Point - Posted by Tim Jensen

Posted by Tim Jensen on April 07, 1999 at 21:29:15:

Mark,

Well said.

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Tim, both you and Mark can pay me till you die! - Posted by Daniel Lubell

Posted by Daniel Lubell on April 07, 1999 at 22:59:22:

Mark and Tim,

First of all, if you were lease optioning one of my homes in violation of my due on sale clause, kept good care of it and paid me on time, I would be GLAD to have you there. In fact, such a thing has already happened to me. A local investor took over one of my loans. I could care less! The only reason I would care is if I was not getting paid on time or my collateral was being harmed. In this case neither has happened.
So, in answer to your question, I would be glad to have you buy a home from me on a lease option basis. I would choose which clauses I would allow you to break (after the fact) and my decision would be entirely dependent upon my own self interest.

So, when do you guys want to become my new payors, in violation of the due on sale? I want you (or your assignees) to start paying and keep paying until you die! In fact, I have several people I would like to get rid of, and I would be happy to have you take their place in violation of my due on sale! I certainly don’t want a little thing like the DOS to stand in the way of me getting paid!

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Re: Tim, both you and Mark can pay me till you die! - Posted by Tim Jensen

Posted by Tim Jensen on April 08, 1999 at 02:02:28:

Dan,

I couldn’t resist. You stated that “you would choose which clauses I would allow you to break”

By not telling the bank that you are the new owner or you that interest has transferred, you rob the bank of that choice.

tim jensen