The anatomy of a PACTrust transaction - Posted by Bill Gatten

import · January 19, 2001, 3:44pm

Re: Dealer status? - Posted by JohnBoy

Posted by JohnBoy on January 19, 2001 at 16:44:22:

So then what gives the tenant the RIGHT to ever buy the property if they don’t have some sort of an option to buy it?

If they don’t have any type of an option where they could choose to buy the property and if they were ever to decide they would like to buy the property…then you could just tell them, no thanks! It’s NOT for sale! Now they are SOL because they never had any kind of an option and were only at the mercy of the trust to elect to agree to sell to them, right? I know, wrong! So explain how it works where the tenant would have the right to buy but never actually have any kind of an option to buy that would guarantee them that right if they so choosed to exercise it?

import · January 20, 2001, 1:10pm

Re: Selling it to the seller (and why) - Posted by JohnBoy

Posted by JohnBoy on January 20, 2001 at 14:10:45:

It isn’t fear. Perhaps not a good example I used. I was just wondering how you could be 100% protected to where you would never have any negative cash flow occur under this type of arrangement.

As far as $10k in damage would have to be a million dollar house, I wouldn’t be so sure on that. I have one that is $130k house and it will cost close to $5k to fix up after the tenants vacated.

Would insurance cover for new carpeting through out the entire house because the tenants never took their shoes off and when they moved out they tracked in mud everywhere? Would that be considered vandalism? In addition, pet stains and smell throughout the house? The carpet is beyond cleaning, it will need to be replaced. Corners on walls where their pets have damaged the wallpaper that needs replacing or at least removed, walls repaired and repainted of the house plus the cost of eliminating the pet odors? Would those things be considered vandalism or just wear and tear from having pets? Would your insurance cover that? What about where the tenants removed the stove to replace with their own stove. Then upon moving out they took their stove and shoved the origional stove back into place and ended up tearing up the vinyl flooring? Would that be considered vandalism where the insurance would cover replacing the floor? I would think if anything it might be considered gross negligence on the tenant’s part, but not vandalism.

In this case the tenant’s filed BK. They have several months rent due which I can go after and I can go after them for the damages also since all these costs were incurred after their filing date, but first I have to find them, then try to collect from them. Meanwhile, I’m out about $5k in damages which is covered by the $5k I got in option money, but unless I can collect from them I’m out the several months in rent at $1300 per month. This means I’m at a negative cash flow at the moment.

Perhaps the Pactrust is structured in such away where even if the resident beneficiary was to file BK they could be removed from the property immediately whereby avoiding further losses?

My main point of the question though, wasn’t based on fear, it was based on how you can guarantee 100% of never having a negative cash flow. Even with selling on a L/O or contract for deed we can take steps to protect ourselves by getting a decent amount upfront and taking action to get them out quickly if the circumstances should ever come to that, but it’s not 100% that you would always come out OK without suffering a negative cash flow.

I agree that when someone is putting money into a property that they are less likely to trash it, but that doesn’t guarantee they won’t. Look at all the homes in foreclosure where people have put a lot of money into them over the years and where some even have a decent amount of equity in them? Rather than sell the thing and get some of that equity out, they turn around and just TRASH the place! I mean, they just trash their house instead of trying to salvage anything from it just to get back at the lender foreclosing on them. Stupid, but some people do it regardless.

Anyhow, my point was, how can you guarantee 100% you would never have a negative cash flow in any given situation. I don’t see anything being 100% fool proof. Only that we can take every precaution to limit or risks the best to our abilities.

import · January 19, 2001, 5:30pm

Chiseled in cement (as it were) - Posted by Bill Gatten

Posted by Bill Gatten on January 19, 2001 at 18:30:09:

Hey. Think about it. It’s chiseled in concrete. The Resident Beneficiary agrees to buy at Fair Market Value at term (if he chooses)…MINUS ANY MONEYS OWED TO HIM BY THE TRUST at the time.

That means if he came in at a Mutually Agreed Value of $100K, and the property went up to $500K, and he was to receive all of the profits at term: the trust would owe him $400K at that time, plus any accrued equity build-up by loan principal reduction. The remainder (the $95 or $96K left on the loan) would then be his acquisition price?even though the contract clearly states–for the eyes of the courts or the IRS–that he will buy at FMV, if he chooses, just like anyone else, if he wanted to at term (LESS ANY MONEYS OWED TO HIM BY THE TRUST). If he chooses not to buy, the trust (in this analogy) stills owes him $400K plus the principal reduction from the loan?s pay down).

If it was a 50:50 equity sharing arrangement, the trust would owe him half of the profit…which means that in order to own the property, he’d pay off the loan, give the non resident (or investor) beneficiary what the trust owed him_) and keep the rest for himself.

Remember that at term, the trustee is the owner and the seller has no choice but to abide by the contract, no matter what, and neither beneficiary can direct it to do anything that’s not in the agreement…unless they all are in concert and deliver such executed trustee directions by certified mail.

Bill

Remember (Old Chinese proverb): Questions in the form of statements will always run the risk of p**ing off the teacher. Yours didn?t, however, because I know your a nice guy, who would never go ?sour grapes? on me.

import · January 19, 2001, 4:50pm

Re: Dealer status? - Posted by Brad Crouch

Posted by Brad Crouch on January 19, 2001 at 17:50:36:

JohnBoy,

It’s in the paperwork that the property must be sold at FMV at the termination of the trust . . . and that the resident beneficiary has "first dibbs (first right of refusal). Of course, any amount owed to the resident beneficiary by the trust, would be subtracted from the amount owed.

Brad

import · January 21, 2001, 4:41pm

Re: Selling it to the seller (and why) - Posted by Bill Gatten

Posted by Bill Gatten on January 21, 2001 at 17:41:42:

::As far as $10k in damage would have to be a million dollar house, I wouldn’t be so sure on that. I have one that is $130k house and it will cost close to $5k to fix up after the tenants vacated.

I believe his point was that on a $130K property his deductible would only be $1,300.00 (1%), and that in order for his portion to be burdensome, the house would have to be an extremely valuable one.

And, you’re right. Nothing is perfect, and therefore there can never be a 100% assurance of anything, even that the sun will come up tomorrow. forgive me my hyperbole.

MY point is that with the PACTrust structure, such occurences are eliminated “100%” to the extent that they can be.

Bill Gatten

import · January 19, 2001, 6:24pm

Re: Chiseled in cement (as it were) - Posted by JohnBoy

Posted by JohnBoy on January 19, 2001 at 19:24:55:

OK, without p***ing off the teacher here, the way you’re explaining this makes it sound like a contract for sale.

You say: The Resident Beneficiary agrees to buy at Fair Market Value at term (if he chooses)…MINUS ANY MONEYS OWED TO HIM BY THE TRUST at the time.

Wouldn’t that be an agreement based on the resident beneficiary having an option to buy at a predetermind price based on FMV at the term of the trust?

On the other hand, the way Brad just explained it would seem more clear as to this NOT having an option or a contract to buy in any way, but merely a “first right of refusal” to buy the property.

What this sounds like then to me in terms of having a “first right of refusal” is that the trust is set up to where it will lease to a tenant that will also be a beneficiary of the trust. At the end of the trust term according to the trust agreement, the property is to be sold where all proceeds would first be used to pay off any underlying loans and all remaining monies are to be divided amongst all beneficiaries according to the trust agreement as to which beneficiary will get what percentage of the left over monies. In this particular case, the resident beneficiary never had an option, contract to purchase, etc., but merely a “first right of refusal” since he was the resident beneficiary residing in the property and he/she may choose to like to continue owning the property on their own once the trust has come to term. Therefore, they can do so by electing to buy the property out right by exercising their “first right of refusal” to purchase the property at the FMV and pay off any underlying loans, beneficiaries, etc. and they would retain their percentage of the deal in the form of equity left over after getting a new loan to pay off the trust!

So basically, the beneficiaries are all more of being in a partnership together as co-owners under certain rules and agreements written up under the trust and one of those agreements within in the trust allows for the resident beneficiary to have “first right of refusal” to buy the property if they choose and pay off the trust and it’s co-beneficiaries according to the percentage each beneficiary would be entitled too under the trust agreement.

Am I getting this or am I heading out farther towards Pluto? LOL

import · January 19, 2001, 7:36pm

Why I like you. You already know the answer. - Posted by Bill Gatten

Posted by Bill Gatten on January 19, 2001 at 20:36:23:

Right.

First right of refusal…or what I said (first right to buy, if he wants to, but without any bargain price, predetermined buyout, contract to have to purchase, option per se, etc.). Our guy can buy and keep the house; sell and and keep the money; or give the house back and walk away.

Bill Gatten