seller carry-back seconds illegal? - Posted by eric-fl

Posted by Brent_IL on March 05, 2001 at 14:56:41:

As I re-read your post, I see that my response was abrupt. It sounded pseudo Zen-like. What you have said is unarguably correct.

You’re right. The PACTrust holds title, just like an LLC, or a corporation, and just holding title can’t change the financial worth of a property. But, without additional input somewhere, neither can anything else. The present value is the present value. The rest is only funny money.

Again, you’re correct about junior liens. Not all seller seconds are illegal, only undisclosed ones because the junior position presumes there is a first.

I do believe that in the examples you gave, a PACTrust, or equivilent would best serve. With a L/O, all the loans are recorded up-front. If the value isn’t there when it’s time for the lessee to exercise, your second or third is sitting right on top. The new first mortgage lender is going to insist that your lien be paid off, forcing a higher income qualification, more points, et al. This may also skew the banker’s interpretation of LTV. Then, you have to write a new second, one without the benefits of seasoning.

The trust documents give you not only the flexibility to adjust your financing targets as the situation changes, but also the privacy to work it out internally. For me, it is much easier to sit down with the RB, seller, and trustee and say, “We can’t finance the whole thing, 100% cash is out. Can we change the percentages, or the timing of the payout? What’s the fair thing to do?” than it is to ask a first lender, who realizes he’ll be paid off, to finance a weak buyer to 110%.

While a trust, of itself, cannot cure the financial problems facing a property, it makes it easier to deal with them.

.02 only

seller carry-back seconds illegal? - Posted by eric-fl

Posted by eric-fl on March 01, 2001 at 11:02:58:

Here are some excerpts from an article on ANN:

"Let’s take a look at a real life example. The buyer purchases a single family home for $135,000. The first lender agrees to make a loan of 80% or $108,000. Therefore, the buyer has to come up with $27,000, right? Normally this would be correct, but not in this case! The buyer and the seller make a side agreement to create a note outside of escrow and without the knowledge of the first lender. They claim the buyer has put down $27,000, but in reality he only puts down $15,000. The buyer gets the first loan for $108,000 and gives the seller a “Silent Second” for $12,000 which is the remaining balance.

The first lender is unaware of both the smaller down payment and the second note for $12,000. If the lender knew about these factors, it would have never approved the loan. Is this practice illegal? You bet it is! Do you want to buy these type of notes? NO!"

So my question is this: How is this any different, than if, say, I L/O a property for 100k, and sandwich L/O it for 110. Then, if it only appraises at 100 when the T/B goes to exercise, and I carry back a note for the remaining 10? Or, another scenario, I buy a rehab for, say, $25k, my costs overrun, so I’m into it for 55k or so when everything is said and done. Suppose it’s only worth 60k, but I needed to make 10k on the property, so I took back a 5k note. Similar situations happen frequently in rehabs.

Surely, not all seller carry seconds can be illegal. What is the distinction? What am I missing here?

Turn it around. - Posted by Brian Mac

Posted by Brian Mac on March 01, 2001 at 23:52:25:


How secure would you feel if you were ANY of the note holders in the ANN example? How secure is your position re. the notes you took back?

Brian Mac

PACTrust solves most problems. - Posted by Brent_IL

Posted by Brent_IL on March 01, 2001 at 21:56:59:


Re: “Silent” notes are illegal - Posted by Stacy (AZ)

Posted by Stacy (AZ) on March 01, 2001 at 11:35:23:

Here’s the key in your example:

“The first lender is unaware of both the smaller down payment and the second note for $12,000.”

Lying to the lender is fraud. However, there are lenders that allow seller seconds. Just keep everything up front and honest.


you know… - Posted by eric-fl

Posted by eric-fl on March 02, 2001 at 08:13:29:

I’m getting just a little tired of people lauding the PACTrust as a cure for everything. I HAVE the PACTrust course. I have been in direct contact with Bill Gatten via email several times with questions about the PACTrust, and he could not have been more helpful each time. He always has given me a timely and relevant response. I think the guy is great, and would highly recommend the PACTrust course for anyone considering any type of investment strategy that involves holding property for a period of time.

But the PACTrust is a title-holding method, period. It is not a financing vehicle. As Gatten himself states several times on his tapes, “The PACTrust isn’t WHAT we do, it’s HOW we do it.”

Understand, this reply isn’t really directed at you per se, Brent. It’s meant for all the posters that have been saying “PACTrust” as a knee-jerk reaction to almost any question which doesn’t have an immediate answer otherwise. I think it’s a dangerous sentiment to have. No one vehicle, strategy, or device is the single solution to all problems, real estate is too complicated for that. I’ve even seen Gatten himself at times state that a PACTrust is not appropriate in certain situations, which only serves to enhance his credibility. I think some of his followers should take a page from his book.