Well........ - Posted by David Alexander

Real Estate Investing Real Estate Law
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Re: I’m in the middle… - Posted by Jack

Posted by Jack on July 29, 2001 at 12:47:26:

I think the PacTrust offers the best conveyance available. It is, absolutly, by far, the finest ownership vehicle available for this type transaction and I would recommend it if you insist on doing this type transaction.

Properly used, it does not violate the DOS clause in the mortgage, but, it gets around it legally. But the scenarios I have described are more a function of the people involved than the instruments used.

BUT…it (nor anything) can protect you from the perception of the seller. Only your actions can do that…

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Fair enough… - Posted by Mark Lyne

Posted by Mark Lyne on July 29, 2001 at 12:58:35:

The reason, I did not see any measurable difference was that in a court situation all the T/B needs to do is produce a copy of the option and claim equitable interest and it seems that your in the same boat… needing to go throught foreclosure instead of just an eviction.

Anyway, your point is that if the investor takes over ownership of the property, he is now on the hook – as owner, and that is when you need these CYA clauses? Do I have it?

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Re: Fair enough… - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 13:43:22:

Even IF the T/B claimed equitable interest because of an option and even IF the court forced you into foreclosing vs. an eviction, you still have recourse to get the property back.

In a subject to deal the seller has NO recourse of any kind against the property. They gave you the deed.

They would have recourse against you personally or the entity that you used to enter into the contract with. But their recourse is to sue you for breach of contract when you failed to make the payments on their loan. It doesn’t give them any legal rights to be able to foreclose on the property because they gave up their legal rights when they gave you the deed. They have no other liens recorded against the property to protect themselves. Their only recourse is a civil suit against you for breaching the contract.

If the investor takes over the property the investor OWNS it! He is not on the hook to the lender that has the loan against the property. The seller is still on the hook to the lender. The investor is on the hook to the seller to perform on his agreement in the contract to make the seller’s payments on his loan. The investor will be on the hook to his T/B to provide them with clear title when they go to pay the investor off.

The CYA letter is to inform the seller of all the risks involved with him deeding his property to you and informing him that he is still liable to the lender for his loan, even though he no longer owns the property. It also informs the seller that deeding his property over violates the DOS clause and that the lender could call the loan due and he would be responsible for it to the lender. Then another CYA letter is used to give to your buyer informing them of the risks involved that the loan could be called if the lender found out about it. An option also violates the DOS clause.

The problem is I don’t believe these CYA forms will be enough for a defense should someone decide to go after you with charging criminal charges against you if you were to have a problem with defaulting on these loans that remained in the sellers names because you left them with no recourse against the property.

Heck, we left them with virtually NO recourse of any kind! If you used a separate entity to enter into the contract with instead of you signing personally, who would they have to sue? The entity!

Now you have a seller that you got to just deed you their property. Left them liable for a loan in their name secured against a property they no longer have any legal rights to…YOU own it now. You used a separate entity to enter into the contract with to avoid any personal liability in this. You used a separate entity for each property to where any lawsuits against that entity has no other assets except that property which has little equity in it to have anything worth suing for. Meanwhile your seller is basically SOL while being left out standing in the cold because he has no recourse against anything and is stuck having his credit ruined and facing a foreclosure on a loan that he signed for.

Now just exactly how is this going look to some prosecutors out their if this happened on several properties you had that went bad and this got out into the media???

They’re NOT going to paint a pretty picture that shows how wonderful and kind the investor was for coming along and bailing these poor sellers out of a financial mess they had gotten themselves into! Noooo!!! They’re going to attempt exposing you as the big bad evil scammer that took advantage of these porr people while they were down on their luck! Now they’re in an even bigger mess because they have NO legal rights to the property they once owned that YOU swindled them out of! You not only took their property from them leaving them with no recourse of any kind, but you left them responsible for the loan that is in their name secured against a property you now own. You evil SOB you!!! HOW can someone do that to people like that??? Do you not have a heart??? Someone should go after you and put you away for a looooong time to teach you a lesson!!! YOU have ruined these peoples lives! Heck, you deserve to be SHOT!!!

Do you think that just might put any pressure on some prosecutor to start looking into this real hard and try to figure out a way to bring criminal charges against you??? Is it POSSIBLE???

It’s one thing to have to defend yourself in such a case. It’s another trying to have to defend yourself where everything is all in favor of you and you left nothing for the seller to have any type of recourse to protect their interest. That would be a pretty hard case to defend in my opinion.

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I am thinking PACTrust-BillG/JimP/BudB Plz review - Posted by Mark Lyne

Posted by Mark Lyne on July 29, 2001 at 17:35:56:

I am happy to say that I have not bought “Subject To” as you describe above grins But I will be doing PACTrust, and this will give the seller the ultimate stick.

I do not mean to harp on the PACTrust, but, here is the thing… and this is as I understand it, the seller has protection against the whole scenario as you described above. They never transfer title to anybody but THEIR VERY OWN TRUST.

Please try to suspend your disbelief just for a sec and let’s say the the PACTrust is easy to understand :slight_smile:

You have the seller put their property into a trust which they maintain beneficial interest in. They then designate co-beneficiaries. That’s it!

Now, since this is a beneficiary directed/revocable land trust and since you have split up the voting rights like this…

Seller – 50% Voting rights
Investor – 25%
Buyer – 25%
Of course this is an example… you could split them between the Investor and buyer any way you want… as long as the seller still gets 50%. Also as a disclaimer, since there are no buyers and sellers in the PACTrust, I am just using those terms for simplicities sake for those investors who are just familiar with subject to.

Now, if the Trust agreement says that the seller can revoke the trust any time the agreement is broken? in other words, if their note doesn?t get paid. Can you think of any bigger stick?

Also, you mentioned a few posts ago that a seller may not be as open to a subject to as a L/O because of the issue of having to transfer title to the investor. The investor may not want to have the title transferred to them, because, in your post above, well, the investor might be construed as a beast straight from the pit grins Well, here again, there is no transfer of title to anybody but the Trust, AND, you even let the seller choose the name of the Trust, heck they can name it The Jim and JoAnne Seller Trust.

This kind of brings us full circle from where I started? If there is a tool that can provide you with the protection you are looking for? why not take a sec and learn the dang thing? It?s what I?m doing :slight_smile:

I see the issue you are trying to resolve, and I think that there simply is no REAL solution. Tim has some great statements. So does David? and so do you? but if there are so many experienced folks on both sides, why not just use plan C? Why keep beating plans A & B to death, when there is no concrete solution with either method, using a CYA or not. In a PACTrust you don?t have to CYA because the Trust provides that inherently.

I have thouroughly enjoyed this discussion and wow, have I learned a lot, for example? How glad I am not to be using Subject To, but, instead using PACTrust, so I won?t have to say?

??wish I, could of, should of, why didn’t I, now I know, why didn’t I, if only, if I would of, etc., etc,. etc.?

Best regards,
Mark

http://RealEstateFreedom.com

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Use of the I “Quit Claim” Deed - Posted by gwtx

Posted by gwtx on July 29, 2001 at 16:16:04:

I’m kinda new to all this so forgive me.

In Bill Bronchick’s L/O course he suggest that you excrow all closing documents. This would include a warranty deed from the seller to you the buyer. He also suggest you include a quit claim deed from you the buyer back to the seller if you did in fact default on your agreement. There are a couple reasons of doing this:

  1. This extinguishes the question from the seller “What happens if You don’t make the payments?”

  2. It does release you of the legal responsibilities.

  3. It also helps in settling the estate of the seller when the family starts to asks a bunch of questions on what did the deceased person really intend.

Many times in the recent days individuals have been trying to think of a CYA phrase or letter to use to obsolve the reinvest of liabilities.

It is my observation that until you actually have a quit claim deed back to the seller (along with your CYA letter), you are still going to be hung out to dry by the sellers attorney.

Yes I know that it is a BB’s L/O course that I was referencing. Yes I do know that the discussion is about Subject To. But, the relinquishing power of the quit claim deed would still work. IMHO

Now, I am ready for your scalding remarks.

gary

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I am thinking PACTrust-BillG/JimP/BudB Plz review - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 19:05:21:

I thought the seller only needed to retain 10% in the trust?

The seller deeds into the trust and retains a beneficial interest, but when he appoints other beneficiaries to the trust, isn’t that giving up SOME ownership rights? The beneficiaries ARE the owners of the trust. So either way the seller IS giving up some ownership in the property, just not giving up ALL the ownership in the property.

Now, how do you protect the property from a BK if the seller was to file one within a year of deeding the property into a trust?

For argument sake, let’s assume this is a new investor starting out with bad credit, no money, finds a buyer with bad credit and neither of them could qualify at this time to refinance or get a loan. The seller files BK and has his loan discharged in the BK. The lender says screw this, we’re foreclosing to get the property back! Forget about the “theory” that they won’t because the payments are being made and are current. The debtor was discharged from the loan in the BK and the lender has NO ONE liable on the loan. They decide to foreclose to protect their interest in the property. HOW do you protect yourself or your resident beneficiary in a case like this?

OR what if the BK Court recinds the transfer into a trust because it was within a year of the debtor filing the BK and the property had equity in it the court wanted to pay towards the debtor’s creditors. HOW do you protect the resident beneficiary that put all his money into the closing costs to get into the property?

HOW does the PACTrust protect that?

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Re: Use of the I “Quit Claim” Deed - Posted by Bill Gatten

Posted by Bill Gatten on July 29, 2001 at 23:16:21:

Bill Bronchik?s advice is never bad, much less wrong, and for what he teaches it’s right on the money; however, in the PACTrust scenario being kicked about, the QCD is not necessary because the "seller: always has the right to take back his interest in the event of default by the co-beneficiary. He merely offers a $1.00 Buy-Out (As “fair consideration” and “avoiding forfeiture” are quite importantly at issue): then if the defaulting party thinks he is owed more, and is willing to prove it, he proves it with an MAI appraisal, following payment of a $2 or $3,000 Default Fee. Plus…he has to make up all the missed payments and penalties from the poceeds. If the defaulting party were to choose to go that far, then payoff by the non-defaulting party is in the form of an unsecured promissory note, to be paid out when the property is finally disposed of. All default buy-outs of this type to date, on transactions we?ve structured, have been for $1.00.

Another thing about the Quitclaim is that it is a very weak document, and can easily be challenged and invariably voided by a court, in favor of a judicial process. Also note that the courts frown too upon forfeitures taken in advance, and if such a forfeiture is contested it will almost definitely fail (or so I’m told by our attorneys).

So the value of a Quitclaim Deed depends upon whether your are on the giving end, or the receiving end. If I?m pitcher I?m OK with it; but if I?m catcher?I?ll take the PACTRust third party trustee FMV buy-out.

Bill Gatten

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Re: Use of the I “Quit Claim” Deed - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 22:56:35:

One other thing. I don’t think by just signing over a quit claim deed will release your liability. The quit claim deed only releases your interest in the property. You would still remain liable under your contract to perform. You might be able to solve this by having the seller sign a release of liability form that would be held in escrow along with the quit claim deed that you as the buyer would sign. Then have the written instructions provide for the seller to get the property back back recording the quit claim deed and the release of liability form released to you the buyer releasing all of your liability in the deal.

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Re: Use of the I “Quit Claim” Deed - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 16:27:13:

You’re a quick study. Having docs signed and held in escrow with written instructions would be a way to handle this.

If you as the investor signed a quit claim deed that released all your interest back over to the seller with written instructions conforming to the provisions of the default terms set up in the contract should work as good as anything else.

This is the way we do it with our buyers that buy from us on a contract for deed.

Having those docs already signed and held with a 3rd party escrow would only add to your defense that you weren’t out trying to take advantage of the seller by leaving them hung out to dry by having no recourse against getting the property back.

Was I giving scalding remarks on this topic?

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Bill G /Jim P / Bud B Plz review - Posted by Mark Lyne

Posted by Mark Lyne on July 29, 2001 at 22:16:22:

You are correct in saying that the Settlor Beneficiary (Seller) only needs to retain 10% Beneficial Interest in the property. I was speaking to voting percentage in the Trust.

The Settlor Beneficiary is not giving up any “ownership rights” other than the same rights he would be giving up by transferring title to a land trust normally.

The beneficiaries are not the owners of the trust, they are the directors of the trust, the Trustee is the owner of the trust.

I believe the BK question goes to partitionability. For a more complete answer, it would be great if Bill Gatten would weigh in on this one.

Best regards,
Mark

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Weighing in at your wish - Posted by Bill Gatten

Posted by Bill Gatten on July 29, 2001 at 22:56:53:

A couple points:

In the PACTrust, the lender’s right to foreclosure for legitimate reason is not impinged upon: that?s why it works. If the payments are not made, or if for any legitimate reason they have a need to protect their interest, they can foreclosure and take the property?unless such foreclosure is prohibited by Federal Law.

The issue is that the PACTrust does not, Jack’s excellent narrative above, notwithstanding, harm the lender in any way other, than by prohibiting them form doing the things to consumers they used to do before Garn St. Germain put a stop to it.

If one were to file bankruptcy, theoretically the courts could unwind the transfer and take the property; however, understand that federal regulation require that in order to do that, the property would have to have been divested of for less than Fair Market Value, and that the divestiture would have to have taken place specifically to defraud judgment creditors.

In a PACTrust where a bankruptcy is at issue, one would assure that the MAV (Mutually Agreed Value at Inception) was also the FMV (Fair Market Value). Remember the settlor?s equity in the property remains intact, and the settlor beneficiary can have a lien placed against him or her in order that a judgment creditor can collect from him when the trust terminates and the equity is liquidated.

Note that the BK court shouldn?t be able, legally, to unwind the trust if the transaction occurred earlier than the 180 days prior to filing: and they would not be likely to do it unless there was a blatant violation of provision within the Uniform Fraudulent Conveyances Act. And there the key is ?intent to defraud or deprive creditors?; and disposition at less than true Fair Market Value. As an analogy, consider this: If you are about to file bankruptcy and in a last minute attempt to get whole, you sell your house on a seller-carry back, with a promissory note and trust deed for your equity. Can the Bankruptcy court unwind the sale if the house was sold at Fair Market Value and the note was declared as an asset and made available to the court? There is no reason they would treat your co-beneficiary interest in a land trust any differently, that I know of.

Despite all of this?can the government do anything it wants to: legal, logical or not? Yes it can. The PACTrust only attempts to provide the best protection possible not eliminate the illogical and unforeseeable.

Bill Gatten

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Re: Bill G /Jim P / Bud B Plz review - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 22:28:17:

I think the partitionability would only happen when the owner files a BK after 12 months from deeding into the trust. The court could view a transfer into a trust as a way of trying to hide assets and recind the transfer if it happened within 12 months from filing.

Then there is still the thing about the bank calling the loan and foreclosing if the debtor is discharged from owing on the loan.