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Quick Start Success Pack by Bill Gatten

Quick Start Success Pack
by Bill Gatten

Article by Bill J. Gatten


A diamond is just a lump of coal that stuck with it; no matter how long it took, and no matter how great became the darkness or the pressure.

Malcolm Forbes

Q: Can a NARS PACTrust™ resident co-beneficiary (the Buyer) legitimately move from the trust property before the end of the agreement?

A: Yes. Though all agreements that comprise the NARS PACTrust™ must be honored, a co-beneficiary may lease or rent the property out, sell their interest, or even leave the property vacant, so long as the other beneficiaries concur, and their interests are not compromised or imperiled by such actions.

Q: Can the NARS PACTrust™ be utilized in buying or selling commercial property?

A: Yes. A Title-Holding Land Trust can hold commercial property. As a matter-of-fact, multiple beneficiaries can hold varying percentages of beneficiary interest…as little as 10% each in such a trust. Do note, however, that specific protection under the "Garn-St. Germain Act" extends only to residential property of fewer than five units. This means that transfer of a commercial property may need to be approved by the lender to void triggering a Due-on-Sale Clause remedy.

Q: What happens if a beneficiary were to die during the term of a NARS PACTrust™?

A: Beneficiary interest in the NARS PACTrust™ passes to the heirs of a deceased beneficiary; which heirs then inherit precisely the same obligations, responsibilities, rights, and privileges as were held by the original beneficiary. Nothing changes.

Q: How would a seller’s placing a home into a Title-Holding Trust, and then creating a NARS pactrust™ (with respect to the seller’s applying for another home loan), be viewed by a new lender?

A: By holding a property in a NARS PACTrust™, which property is leased to the co-beneficiary, the settlor beneficiary will be seen by any lender as an "income property" owner (as if he/she were one of two partners in a rental property). However, the absence of the standard expenses of maintenance, management and vacancies, coupled with higher than normal rent, oftentimes provides an excellent incentive for a much higher-than-normal "Income-to-Rental-Expense" consideration by the new lender.

Q: What happens when a co-beneficiary fails to make payments when due?

A: In the event of default, the party or entity acting as "landlord" would issue a 3-Day Notice to Pay or Quit, which notice would, if necessary, be followed by an Unlawful Detainer Action.
By the defaulting party’s own agreement, the default itself (within itself) becomes constructive notice (to the non-defaulting beneficiary/ies) of the defaulting party’s intent to sell his/her beneficiary interest in the Trust to the non-defaulting parties at Fair Market Value as would have to be determined by an MAI Appraisal, following a substantial default fee and payment of all past-due payment. Should any sum more than is offered by the non-defaulting parties be proven, then that amount would be paid to the defaulting party in the form of an unsecured promissory note to be paid when the property eventually is sold t the natural termination of the trust.

Q: What if a NARS PACTrust™ property was to lose value during the term of the agreement?

A: If, at the end of the NARS PACTrust™ the property couldn't be sold (or purchased by the co-beneficiary) for enough to return the settlor beneficiary’s initial contribution (e.g., his/her equity at start); and should the non-resident choose not to reduce its refundable contribution amount... then the co-beneficiary could choose to simply vacate the property with no further obligation. Alternatively…by mutual agreement…the parties could extend the contract. Note that, as is the case with any real estate purchase, down payment moneys, or costs of improvements can, in fact, be lost due to ordinary downward trends in real estate demand.

Q: How is the property's "mutually agreed value" determined at the inception of the NARS PACTrust™, since there is no sale price per sé?

A: The "MAV" is set purely for the purpose of determining the settlor beneficiary’s initial contribution at start (e.g., his or her "equity," along with any non-recurring closing costs paid). The MAV is generally the greater of – A) the fair-market-value inferred by a professional Comparative Market Analysis, or B) the value of the property reflected by a mutually acceptable value determination; or C) the aggregate amount of the existing loan/s against the property (i.e., whichever is greater).

Q: Why might a buyer choose a NARS PACTrust™ purchase, even if loan on the property were to be greater than the property’s value?

A: The "over-encumbrance" on a NARS PACTrust™ property is often perceived as simply a trade-off for a party’s inability to qualify for a mortgage loan, or lack of a standard down payment or preferred credit. In that the NARS PACTrust™ purchase may avoid the handicap of self-employment, newness on the job, limited job history, or marginal credit history – one might choose to disregard the over-encumbrance. The fact is, that if by the end of the agreement, the resale value of the property had not increased sufficiently to cover the loan against it, then the resident may – 1) petition to extend the agreement, or 2) just move out and return the property to the original owner. If the aggregate monthly (after-tax) payment is in keeping with normal rent, and if the loan need not be paid-off at any particular time, a NARS PACTrust™ buyer might find an over-encumbrance inconsequential. Here’s an example:

Property A (over-encumbered):

Value: $200,000.00.

Loan Amount: $210,000.00

Payment: $1,500 per-month

No down payment

Remaining loan term: 22 Years

Total amount remaining to payoff over loan term: $396,000.00

Property B (conforming, not over-encumbered):

Value: $200,000.00

Loan Amount: $180,000.

Payments: $1,300 per month.

Down Payment: $20,000.00

New loan with a term of 30 years.

Total amount remaining to payoff over loan term: $462,000.00.

The Best Buy…A or B? You Decide.

Q: Could a mortgage lender claim that the NARS PACTrust™ violated its due-on-sale clause?

A: Yes... although doing so would be contrary to the provisions of Federal Law (The Garn-St. Germain Act). No one can predict what a mortgage lender could [or might] "claim"; but, insomuch as none of the NARS PACTrust™ documents are recorded (and needn't be), and since the NARS PACTrust™ does not adversely affect the lender's security interest, such an assertion by a lender would be unlikely. The Garn-St. Germain Act (FDIRA 1982) provides that any homeowner may place its mortgaged property into a qualified revocable living trust, and lease the trust property to anyone he/she might choose… irrespective of what a lender's "druthers" might be. None-the-less, it is conceivable that a lender could declare the "intent" of the NARS PACTrust™ to be contrary to their best interest, and assert that it was somehow a ruse to circumvent their ability to capitalize on the prevailing real estate market.
In such a claim by a lender (institutional or private), the court would need to determine if any laws had been broken; as well as "how" and "if" the lender had been injured. Therefore, in actuality, the true (real) effect of the NARS PACTrust™ is protection of the lender’s interests by its avoidance of: A) alienation; B) prohibited ownership transfer or title involvement; and C) an unwise transfer of real property ownership under duress or threat of financial loss. The co-beneficiary (acquiring party) in a NARS PACTrust™ does not receive real estate ownership; a bargain purchase option; or any loan of moneys. If, and/or when, the co-beneficiary would choose to acquire ownership of the property owned by the nominated trustee, such purchase would only be by ordinary means. Such purchase would be by a mortgage loan… or a petition for a bona fide Assignment and Assumption of the existing mortgage financing.

Q: In its 100+ years of use in the US, have Title-Holding Land Trusts ever been challenged by lenders claiming they were damaged by the unrecorded and private assignment of a Title-Holding Land Trust's Co-Beneficiary interest?

A: Yes, and all such challenges were adjudicated in favor of the beneficiaries. However, one must note that the Title-Holding Land Trust in most states (e.g., California) is not a "statutory" instrument: essentially meaning that there is no statute (law) or judicial history relative to it, and that no specific "Land Trust Act" per sé exists (yet). The title holding land trust in most states is, nonetheless, wholly operative and legal by virtue of its exclusion from specific prohibitions under the various states’ "Statute of [Land] Uses."
Although we know of none in recent years, a few such actions have been brought in the past — and in each case, the decision of the court was in favor of the defendant (i.e., the lender lost). 45

Q: Since NARS has its own attorneys and accountants, should I consult with my own legal and accounting advisors regarding the feasibility of the NARS PACTrust™ in my situation?

A: Yes. One should always seek out and heed the advice of his/her own legal and tax advisors, as well as seeking one’s own independent real estate agency advice. However, do note that chances of locating an attorney familiar with the various nuances of land trusts (not to mention the NARS PACTrust) are remote at best. What will invariably happen is that an attorney not familiar with the NARS PACTrust™ will strongly advise (if not insist upon) forgoing the myriad safety features and protections of the PACTrust in favor of something he or she better understands and can charge more for (Lease Option, Wraps, Contracts for Deed, etc.): precisely the very creative financing schemes, the dangers and risks of which, the NARS PACTrust was designed to avoid.
Though North American Realty Services, Inc. does certainly welcome inquiries from any legal, accounting or real estate professionals, its accounting and legal staff may represent only its own best interests in a court of law due to standard Conflict of Interest regulations (note that, at this writing, in its 18 history, no such challenge of NARS, or any beneficiary party, has arisen).

Q: Are most Attorneys and accountants familiar with the NARS PACTrust™ or the workings of the "Title-holding Land Trust" in general?

A: No (not by any means). As a matter-of-fact, in most states where the title holding land trust is not statutory, were one to interview 100 attorneys, perhaps twenty-five or thirty might be familiar with, and closely accustomed to working with trusts in general; then of those, maybe only one might be reasonably well versed in the specifics and subtleties of "title-holding" land trusts: then out of a hundred of those, you might find one who has ever heard of the PACTrust™.
As mentioned in a preceding question, that which invariably happens is that an uninformed attorney will strongly advise (if not insist upon) forgoing the myriad safety features and protections of the PACTrust in favor of doing something he or she better understands, and for which they can charge more (Lease Option, Wraps, Contracts for Deed, etc.): precisely the very creative financing schemes from which the NARS PACTrust was designed to protect you

Q: What would happen in the event of an irreconcilable dispute between the co-beneficiaries in a NARS PACTrust™?

A: Such occurrences are rare due to the third-party neutral trustee aspect of the NARS PACTrust™ arrangement, and due to the meticulous and comprehensive nature of NARS’ documentation. However, NARS PACTrust™ beneficiaries do contractually agree in advance that such a disputes, should one ever occur, will be settled by the rules of binding arbitration, and that each party will abide by and rely upon the decision of an arbitrator associated with, and designated by, the American Arbitration Association.

Q: What would stop a grantor, in his own revocable trust (a trust which is set up in his own name or with him as the only beneficiary), from revoking it, or changing his mind about terms, without the knowledge or consent of the other beneficiary/ies?

A: Of prime importance is the fact that a Title-Holding Land Trust is directed by ALL of its beneficiaries unanimously (i.e., Power of Direction is mutual among beneficiaries). In other words, unless special provision are made in advance to the contrary, no single beneficiary or group of beneficiaries can direct the legal owner – the trustee – to do anything, sign anything, or approve anything involving the property’s title without the absolute concurrence and unanimous direction of [all] the others. As a result, a beneficiary cannot alter the trust agreement, borrow money on the trust property, or bring about a lien against it, without the full agreement and direction (or complicity) of the other beneficiary/ies. Likewise, a single co-beneficiary cannot add a room, install a swimming pool, or encumber the property or cold the title in any manner without the full knowledge, consent, and direction of the other co-beneficiary/ies.

Q: As a prospective seller, or buyer, interested in the NARS PACTrust™, how and where do I begin?

A: First, contact North American Realty Services, Inc. (1 800 207 4273 or; website: NARS will then answer your concerns and work closely with you throughout the transaction, from the initial meeting with all parties, to the close of Escrow. NARS can facilitate all phases of the transaction for you: consultation, document preparation; legal review, provision of the corporate trustee; provision of the Escrow/Title company and provision of the third-party payment collection and disbursement service.

Q: What might be the standard costs for establishing a NARS pactrust™?

A: From 0.5% to 1.0% (half a percent to one-percent) of a property’s Mutually Agreed Value (MAV) at inception. Apart from any Realtor’s commission, typical aggregate closing costs for a NARS PACTrust™ transaction, combining both the buyer’s and seller’s costs, can run upwards of two percent (2%) to three percent (3%) of the property’s MAV at inception. The fee for setting up the Trust itself, and NARS’ consultation fee (including facilitation and documentation) generally comprises only 1/4th. 1/3rd to ½, of the total closing costs. The remainder (beyond the consulting and set-up fee) includes, but may not be limited to the following: the escrow company fee (optional); title insurance or title search (optional); prorated and advance property taxes; hazard insurance premium; credit report (optional), home warranty insurance (optional), and termite inspection (optional). Though not a part of the Closing Costs per sé: one should take care to budget for the first payment due on the contract, and for perhaps at least one monthly payment to be held in a Contingency Fund (as a buffer for delayed payments).

Q: Is there a minimum or maximum allowable term for a NARS PACTrust™?

A: Yes. It is reported in the literature that any land trust whose term is deemed a contrivance to avoid payment of income tax would (could) be challenged by the IRS and declared a "dry" or "failed" trust. For example, if the trust's term clearly conflicted with time requirements of certain tax deferment or exemption provisions (e.g., tax-deferred exchange), the trust could be characterized as a non-standard corporate entity or a security agreement. A failed trust could [might] conceivably —

  1. Deprive the co-beneficiary of mortgage interest and property tax deductions; and/or
  2. Create an untimely capital-gains tax event for the settlor beneficiary.

For these reasons only, it is recommended (though not mandatory) that two years be considered the minimum term for a NARS PACTrust™. Regulations relative to Perpetuities would also compel a "land trust" term to be limited to no more than 20 years, or the length of the underlying financing on the trust property, whichever would be greater.

Q: While a NARS PACTrust™ Co-beneficiary who is a resident in the trust property claims the "active" tax deduction for interest and property taxes, can a settlor or investor beneficiary take the "passive" write-off for deprecation?

A: The tax regulations are not absolutely clear on this issue; however, there is nothing in the tax code that would preclude a non-resident beneficiary who was holding its interest for income-production purposes, from claiming the full Depreciation allowance. As a matter of fact, if not taken, the IRS would more than likely impose it at termination in order to adjust the property’s tax "basis" downward to create a wider taxable gain.

Please check Quick Start Success Pack by Bill Gatten    

Bill Gatten, is an accomplished Real Estate Investor, Author, Lecturer and Sales Trainer. With over 40 years experience in banking, equipment financing and leasing, and real estate investing, Bill is considered among the top Creative Real Estate trainers in the U.S. today. His book, No Down! No New Loan! is now in its second printing. A new book for investors is due out in 2002: 'Making it BIG in Creative Real Estate...for the Cash, Credit, Income and Experience Challenged.'
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