The anatomy of a PACTrust transaction - Posted by Bill Gatten
Posted by Bill Gatten on January 18, 2001 at 21:16:26:
For interest’s sake:
Two months ago, a seller answered one of my (I buy houses?) ads and they had a house in San Bernardino, Cal. (2 hours from me) that they had not been able to sell because ??it didn’t show well.? It had been on the market for six months for $255K, and they were anxious to move out of state (there next move would have been to reduce the price to $240). They showed me a 5 month-old appraisal for $275K. (comps indicated it might be worth 255-260K at most). Payments are $2,300 PITI. The house needed about $3,000 in work (paint and clean up mainly). I squeaked air through the side of my mouth a lot and told them that it would take several thousand dollars of work to bring the property to maximal value, and wasted no time in flashing them my comps (?turned out they?d bought the property several months ago from their folks who had a VERY friendly appraiser in their pocket). They agreed tht by savings th repairs and the RE commission?they?d be in good shape to take my offer.
I said that if everything checked out I would fully take over their loan (at $220K) and that I’d give them $4,000 when I did and that I?d relieve them of any further responsibilities: further price reductions, RE commissions, Escrow Costs, more monthly payments, etc.
I next took a Purchase Option to buy (via the PACTrust) at a Mutually Agreed Value of $225K in 45 days. I gave them $100.00 for the option and recorded the Memorandum of PO with the county that day. I also, that day, arranged to have ?Andrea,? a neighbor across the street, hold the keys for me in order for her to show the property for me after the sellers were gone (they had been good friends of the sellers and were happy to do it?I?ll send her flowers).
Next, I put an ad in the local newspaper that said: NO DOWN, NO CREDIT APP, NO QUAL. As little as 3-5 Pmts and Clos. Costs moves you in. $255K home, pool, jacc, fncd, RV pkg, 1/2 ac., 5+3 only $2,140 p. mo. + tx and ins.
Then when the calls began coming in, I said the following (to each one who called):
“Yes I have this great property over there on Muscupiabe (pardon the Hopi Indian there) by the college, and if you can afford the…um?about $20,000…it’ll take to get in, and the…um…about $2,500 per month–after you add tax and insurance and so on…I’ll just GIVE it to you. The only thing we want out of it is to have you either sell it, or finance it in your own name, in a few years?maybe five. And?at that time…if there’s BEEN any appreciation we?ll just split it with you. (long pause) However, if you’d prefer, you can come in with $45,000.00 instead of the $20,000, and we won’t need to split anything?and I?ll still carry the loan, and all my equity for free, for you (They all preferred the split?and I?d never have found anyone with that much money anyway).”
On the 5th or 6th call, out of perhaps 50 or 60 received, Mrs. X called and said she?d like to see the house, so I sent her by to see Andrea. She called the next day and said she liked it, but she didn?t have the $20K yet, and she still needed to talk to her husband.
4-5 days went by and I?d screened out maybe a half dozen other folks to go by and meet Andrea and see the house (4 followed through). Then Mrs. X called and said she was ready to make an offer. I said great (Note that I?d never seen the house or the seller (my wife handled getting the PO) and it is two hours away.
Mrs. X indicated that she and her husband could give me $5,000 today, $9,000 next Monday and the remainder ($6,000 on 2/1 when the Escrow closes). I made no promises, but said we could meet.
We met at the property. I went through some diagrams explaining, how a trust works, how a land trust works, how a PACTrust works, and how a Two-tiered PACTrust works. She was tickled plumb goofy, so I took her $5,000 (in cash), a personal information sheet, and an offer from her (to buy 50% of the beneficiary interest in the land trust that holds the property). She signed the documents on behalf of her and her husband (they?ll both sign on all final docs). We discussed the repair work (maybe $3,000 worth, and I said if she and her husband would do it all themselves over the next five years, I?d let them in the property for $3,000 less: at a M.A.V. of $252K instead of $255 (don?t forget that half of the $3,000 reduction goes into my pocket anyway, because we?re sharing 50:50 in all future profits?so the discount was in reality only $1,500?half of what it would cost me to do the work).
Tomorrow, I open Escrow with American Title Escrow, and begin drawing up all the PACTrust docs (Land Trust (between seller and the trustee); Assignment (to me and my resident co-beneficiary); Bene. Agreement (between all three beneficiaries); Occupancy Agreement (between resident bene. and the trustee and collection company); and a Power of Attorney (from the seller to me?for Power of Direction over the Trustee). Other documents include letters to the lender, to the insurance company, to Escrow; cover letters, trustee directions, etc.
Now when the Escrow closes, I receive another $16,000 on top of the four I picked up today; plus I have a $200 p mo. Positive cash flow; half of the future appreciation and half of the principal reduction in the loan. Further, I have no management, maintenance, vacancies, negatives, etc… and the water heater blows?they fix it: they don?t even wake me up to tell me about it.
Quiz: How much did I pay for this property? How much are my monthly net payment? How much money have I made so far? How much will I have made (in existing equity, plus cash received) in another two weeks? And what if the property manages an average annual appreciation of 3% per year for the next five years?then how much did I make with a zero investment, no mortgage loan, credit application or credit risk? What if there is NEVER any appreciation? Did I do all right anyway? And Oh yeah?where did the $4,000 to the seller come from (not me, boy)?
The cost of doing a PACTrust?? The same as a wrap, a contract for deed, a lease option, a lease purchase or an Equity share?unless you hire me to do it all for you (which you DO NOT HAVE TO DO! Bud Branstetter doesn?t!).
Bill Gatten