Too often, when someone mentions the term PACTrust™, those few people who have a general idea what it's all about will pull up an image of an esoteric creative financing scheme that is an alternative to something else: lease options, lease purchases, wraps, land contracts or equity shares. However, if that isn't the perception, then one's take will likely be that it is only viable for use by over-the-barrel buyers or sellers ("OTB's") forced to deal with troublesome, upside-down or no-equity properties. The fact is, that neither the buyer, the seller, the investor or the property need be in a compromising position for the PACTrust™ to provide a highly preferable means of transfer. Let's discuss some of what a PACTrust™ can do for ANY investor, seller or buyer-irrespective of anyone's poor or marginal credit, limited cash or other extenuating circumstances (or absence thereof).

FLIPS AND ASSIGNMENTS: "Flipping" generally refers to one's acquiring a property one day and selling it the next, before any money has to be paid out by the initial purchaser. In other words, one agrees to open an escrow to buy the property at, say, 70% of value, and then opens a second or simultaneous escrow to sell the same property to an investor at 75% or 80% of value. After repairs and improvements, this second buyer will most likely sell for 100% of value to the end user. The idea here being that when the second escrow closes, it should provide the "flipper" all the money needed to close the first escrow, plus a few thousand left over as profit. An "Assignment" is similar, but is merely assigning one's right to acquire a property to another person, without the need for a double escrow. In either case, the investor starts out with "nothing" and ends up with "something": true no-down, no qualifying real estate dealing.

POTENTIAL PROBLEMS WITH FLIPS AND ASSIGNMENTS: Escrow companies often shy away from double escrows; flip and assignment buyers often don't want the seller to know the flip amount; a flip or an assignment prohibits long-term holding for the "real" security and profit to be had in real estate investing. As well, the government is becoming increasingly involved in (and opposed to) the overall process of flipping (though, for the moment, their complaints have primarily to with situations wherein prices are artificially inflated for the naive and unwary buyer) which indirectly affects anyone engaging in the practice of flipping.

ENTER THE PACTRUST™: The original seller places the property in a land trust in his name (no escrow required) and appoints the first buyer (the flipper) as a co-beneficiary with a written agreement for the seller to forfeit its own interest to the co-beneficiary when asked to do so (i.e., no due-on-sale violation). The first buyer then merely assigns his interest in the trust to the investor for a fee (no loan approval or title transfer required). After fix up, the property is then sold to the end user via an ordinary mortgage and a purchase of the property from the trust…or by a further assignment of beneficiary interest to the end user. The entire transaction is a personal property transfer and not a real estate transaction.

WRAPS. "Wraps," "Wrap-Arounds" or "All-Inclusives," as they are called, are mortgages or deeds of trust created by a seller wherein a large loan is made to a buyer, which "wraps-around" the smaller loan that is already on the property. In other words, for a property worth $100,000 that has a $50,000 loan against it - a seller can create a note from a buyer for $100,000, and collect payments on it which are sufficiently large enough to easily cover the monthly payments on the first mortgage with plenty left-over, as profit, every month. Or…perhaps this same seller might require a $20,000 down payment from the buyer, and then create an $80,000 All-Inclusive Mortgage, with a portion of the buyer's monthly payment going to pay the first mortgage payment, with a sizeable sum still left over each month.

POTENTIAL PROBLEMS WITH WRAPS: A clear due-on-sale violation; title transfers to an unknown (usually unqualified) entity severely jeopardizing ownership. The property becomes the first target for either party's creditor claims, tax liens, lawsuits, bankruptcies, divorce actions etc. On a party's death, the property can become hopelessly entwined in Probate (I'm currently in one that's been going for over six years). Eviction of an errant owner is impossible without a full foreclosure process, and quite possibly even a further ejectment and quiet title action to follow…not to mention months of headache, and thousands upon thousands of dollars spent for nothing.

ENTER THE PACTRUST™: The seller places his property in to a land trust, conveys a 90% beneficiary interest to the buyer for a fee, with the intent to forfeit his 10% at termination. The co-beneficiary then leases the property from the trust: thereby receiving 100% of the benefits of Fee Simple Real Estate Ownership without the necessity of further title transfer. In so doing, there is no due-on-sale clause violation (i.e., the property has not been sold or transferred beyond the authorized trust…only leased out). There is no possibility for any creditor's lien or claim attaching to the property. The co-beneficiary interest (especially if held as an LLC or Ltd partnership) is virtually non-partitionable to satisfy judgments. Neither party has to worry about the effect on the property of the legal or personal misdeeds of the other party. Moreover, Dispossession is by simple eviction and/or unlawful detainer action

LEASE OPTIONS: A lease option is basically a simple long-term rental agreement wherein (or, more prudently, by separate contract) a tenant is given the right to purchase the property at some set or bargain price (the "strike price") at some future date. Typically, a lease option requires a non-refundable Option Fee in advance, and monthly payments that are frequently somewhat higher than normal rent. The amount above normal rent is generally then credited, along with the Option Fee, toward the ultimate purchase price of the property…if and when the option to buy is ever exercised (most are not).

POTENTIAL PROBLEMS WITH LEASE OPTIONS: If the option itself, or a Memorandum of Option, is not recorded, an errant optionor can, at will, easily borrow more money on the property, or sell it, or even lease it to someone else, without the optionee's knowledge or permission. As well, a disgruntled Optionee can default with impunity, claiming that the transaction is not bona fide because of the lack of recordation. On the other hand, if the memorandum IS recorded, then the lender may be alerted to a violation of its due-on-sale Clause, which prohibits such options without prior written approval. Further, evicting a lease optionee can be very troublesome, time-consuming and expensive, should they refuse to pay and then claim to the courts that they are immune from eviction due to having an "equitable interest" in the property (attested to by way of their Option Fee and higher than Fair-Market Rent). Furthermore, no income tax benefits can be conveyed to a resident optionee in a lease option arrangement, severely hampering one's justification for paying higher than normal rents.

ENTER THE PACTRUST™: The would-be optionor places the property into the land trust and names the would-be optionee as a co-beneficiary in the trust with full income tax benefits. This co-beneficiary then leases from the trust by means of a simple triple-net lease agreement (wherein he/she agrees to pay an amount sufficient to cover principal, interest, taxes and insurance to a 3rd party collection service or the beneficiaries) and wherein the co-beneficiary takes-on all of the property's management and maintenance expense (i.e., "Full Risk and Burden of Ownership" as per Section 163(h)4(D) of the IRS Code). The "buy-out" agreement stipulates that at the end of the trust, the beneficiaries will sell the property at Fair Market Value to anyone who wants to buy it. Upon purchase or re-finance by the co-beneficiary, the amounts owed thereto by the trust will include Equity Build-up from the loan's Principal Reduction, Appreciation and a refund of any Contingency Funds or Reserves having been held throughout the term of the Agreement. In addition, most often, such refunds to the co-beneficiary purchaser include non-recurring closing costs having been paid at the trust's inception. In this overall scenario, since the trustee holds both legal and equitable title to the property, the courts will ignore claims of "Equity" or "Equitable Mortgage" designed to forestall Eviction, and force a time-buying foreclosure process.

LAND SALE CONTRACTS (CONTRACTS FOR SALE, CONTRACTS FOR DEED; LAND CONTRACTS, INSTALLMENT LAND CONTRACTS): In many states, the preferred method of seller-carry financing is by land sale contract. Basically, such an arrangement is no more than a glorified "lay-away plan," wherein the property's ownership is not transferred to the buyer until the property is fully paid for.

POTENTIAL PROBLEMS WITH "LAND SALE CONTRACTS": In such scenarios, all the same risks and drawbacks of the Wrap-Around (above) exist.. As well, a Land Sale Contract does not generally convey any income tax benefits to the buyer relative to Mortgage Interest or Property Tax deductions, until such time as either-1) the property is paid for, or 2) until (unless) the entire transaction is recorded as a contract FOR sale with all the consequences and ramification of a Sale. Such land contracts FOR sale are seen, for example, in "veteran benefit installment land contract loans," as seen in California, Alaska, Minnesota and Texas and Oklahoma (e.g., the "Cal-Vet" Loan). In these kinds of contracts, tax benefits are available to the buyer even though either the seller or the lender remains the owner of the property until it is paid for or refinanced. Again, unless the contract is FOR sale, rather than OF sale, the question of who can be trusted to collect and/or make the payments to the lender can be a major problem.

ENTER THE PACTRUST™: In order to achieve exactly the same objectives of a Land Sale Contract without the negatives and with enhanced protection and legal-shielding, and tax benefits to the buyer, a seller can merely vest the property with his own land trust trustee, and then sell (assign for a fee) only a beneficiary interest in the trust. By virtue of the fact that income tax benefits can be conveyed in this manner, the PACTrust™ tenant beneficiary will likely pay (and be able to afford to pay) considerably higher monthly payments, and be more likely to accept full responsibility for all maintenance, management and other monthly obligations. Under the PACTrust™ arrangement, an errant co-beneficiary can be dispossessed of its interest without a drawn-out legal process. Since the trustee holds Legal and Equitable Title, the tenant simply cannot claim having an Equitable Interest in the property, in order to thwart Eviction and to force foreclosure: thereupon acquiring even more time and free rent.

EQUITY SHARES: "Equity Sharing" is a process originally instituted in the first part of the 20th Century by the Federal Housing Administration (FHA) as a means to encourage and facilitate low cost homeownership. The original idea was that, in order to supplant down payment burdens, when one took out a loan to purchase a home, he/she would be given only a portion of the ownership: the other portion being held by the Administration and relinquished little-by-little as the debt was paid down. The concept was poorly conceived and not well promoted, and died-out after only a brief run. But equity sharing emerged again in the mid-eighties when it became a popular form of creative financing. In this latter design, the idea was that one party would make a down payment on a property as a real estate investment, while another party lived in the property and made all the payments and handled all recurring costs and responsibilities, in exchange for tax benefits, a portion of the potential profit on sale, and all other incidents of homeownership. The other variant of the equity share is, of course, the "seller-as-investor" equity share. In the seller-as-investor form, a property's current owner, having already made the down payment and taken out a loan, becomes the investor co-owner along with a resident co-owner. In either case (outside investor or seller as investor), the participants would then hold title as to an undivided half interest as tenants-in-common. Then, at the end of the prescribed term of the agreement, the property would be sold, or re-financed by the resident, at which time all net proceeds of sale would be shared by the parties in proportion to their percentages of ownership.

POTENTIAL PROBLEMS WITH EQUITY SHARING: In such an arrangement, either party's misdeeds or careless actions can cause liens, suits and judgments to attach to the property. Either party's death will result in the Probate milieu. Evicting an errant co-owner is impossible without a judicial process (and probably with the ensuing added time and expense of ejectment and quiet title). Tax benefits are curtailed by IRC 280-A (re. deprecation by the non-resident co-owner). The granting of title interest obviously creates a distinct due-on-sale violation. Differences of opinion (arguments) between parties cannot be effectively dealt with, as they each wield too much power via their title interests to be able to resolve all conflicts with arbitration. And, again, the question of who can be trusted to collect and/or make the payments directly to the creditors is always of major concern.

ENTER THE PACTRUST™: As the property is placed into the land trust, the Settlor (seller) grants only a percentage of the beneficiary interest to the co beneficiary (50%, 25% 10%, 90%, etc.), along with a proportionate share of future profits on sale at the trust's termination. In so doing, there is no difficulty in evicting an errant co-beneficiary, there is no due-on-sale violation; there is pure secrecy, privacy and anonymity relative to each party's ownership. The property and each participant is effectively shielded from the untoward or illicit acts of either party. Further, if either party chooses to sell or assign all or a portion of its interest (assuming all parties are in agreement), the transfer can be done with a simple assignment, rather than a complex sale process. Obviously, space and time limitations here prevent an in-depth discussion of all the other uses for the PACTrust™; however, we'll conclude with a brief mention of a few of them:

BRIDGE FINANCING: A buyer who may not be able to qualify for a loan or come up with the required down for another six months or a year, can in the interim (assuming the seller's cooperation) have the property placed into a PACTrust™ and hold a beneficiary interest therein until the credit or money problem clears. This gives them 100% of all ownership benefits, including tax write-off, even though they are not yet titleholders ("owners").

FORECLOSURE INVESTING: An investor can have An owner in default place the property into his own land trust, thereupon bringing all loans current in escrow. The investor would then take an Assignment of Beneficiary interest (e.g., 90% with the seller's agreement to relinquish its 10% at termination) along full Power of Direction. In so doing, there is not compromise of regulations concerning foreclosure specialists or consultants. As well, in so doing, there is no sale of the property per se and therefore no due-on-sale violation or Redemption Period with which to be concerned.

RENTAL INCOME LAYERING: An investor holding a property in a PACTrust™ is not restricted to only selling Use and Occupancy (Rent). He/she can charge incrementally more for the various salable layers: Appreciation (all or part); Equity Build-Up from Principal Reduction (all or part); existing equity (all or part…called a "down payment" or "equity contribution"); Income Tax Write-Off (all or part); and so on. Doing so will thereby double and triple net rental income while eliminating all management, maintenance, vacancies, negative cash flow, etc.

ASSET PROTECTION: One can use the PACTrust™ to shield the property from virtually any potential threat: tax liens, divorce actions (including dower actions), bankruptcy, creditor judgments, Probate and Estate Tax. That is… to "armor plate" one's real estate holdings.

INTERIM OCCUPANCY PROVISIONS: While awaiting a protracted escrow or loan approval, a buyer can begin enjoying homeownership benefits including tax deductions immediately while awaiting finality of the buying process.

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