When dealing with pre-foreclosures it's always best (when possible) to get the property under contract and just wave bye-bye to the departing defaulting party. Many would consider it unwise to become embroiled with the mess that too often arises "later on down the line." After the homeowner's financial situation improves, these folks somehow forget your name and that you were once their only hope, their ‘saving grace,' and their guardian angel during that minor setback of so very long ago.

We regularly receive reports from good intentioned folks across the country who thought they were doing something nice for someone (while helping themselves in the process, of course), but then got zapped in the pants a year or so later when the cause for the original crises had eased up. It seems that some of those formerly groveling ever-grateful recipients of goodwill tend to turn real mean…because an attorney says they can…and should.

Therefore, in those cases where an owner insists that the only way they'll deal with you is to remain in the property after you bring their loan current (i.e., in return for giving you a stake in future appreciation potential and maybe some portion of the existing equity), we recommend the NARS PACTrust™.

First off, it's a good idea to never deal with a property that is IN foreclosure at the time of documentation: get it OUT of foreclosure first, and then deal with it. In addition, in order to avoid risks of claims of impropriety later on, make certain that you always deal with the property and the delinquent party only at the property's true Fair Market Value. That is to say: Try to come in at a reasonable assessment of the real value, minus your anticipated expenses. Such expenses would, of course, be closing costs, refurbishment costs, arrearages, penalties paid, marketing costs, etc. If there is equity in the property at inception, it's good to leave the owner of record with no less than half of it intact after your cost computations. The homeowner's equity then becomes their contribution to the land trust: i.e., the "Settlor Beneficiary Contribution," which amount is fully refundable at termination, prior to any other distribution of sale (or re-fi) proceeds.

After assessing the viability of the transaction and the likelihood that the owner will be able to cover the payments, if given a second chance, one might consider the following:

1. Upon deciding you'd like to proceed with the transaction (after comps, title search, zoning records search, inspection, etc.), obtain a letter of authorization from the homeowner that will allow you to speak with the lender/s about the loan/s and its/their problems. Assure yourself in that conversation that reinstatement of the loan will take place when it is brought current (be careful here, in some cases they will take your money, add it to principal reduction and continue on with the foreclosure if they want to). Also, be sure to try to negotiate with the lender for a forbearance of the arrearages: e.g., possibly having them added to the end of the loan; allowing a temporary moratorium on payments; or perhaps breaking the total down into small monthly increments for a while. Note that in this conversation, you are a "friend of the borrower who is considering helping him/her reinstate the loan."
2. Once the arrearages are forborne or covered by cashier's check, then open a silent Escrow (note that in all NARS PACTrusts™ handled through our company, we work exclusively with American Title Escrow throughout the U.S.).

1. The property is then placed into a title-holding land trust (outside of Escrow), vesting 100% of the legal and equitable title ownership with a third-party trustee (we utilize our trustee, PAC Holdings, a Non-Profit California Corp.…but that part is up to you).
2. An Assignment of Beneficiary Interest …to you the investor…is then structured. A silent rider agreement will indicate the percentage of your beneficiary interest (40%, 50, 60%, etc.) in accordance with whatever percentage of profits are to be shared upon disposition at termination.
3. Next, the Beneficiary Agreement is created…between yourself (as the "Co-beneficiary") and the borrower of record (the "Settlor Beneficiary"). This silent agreement delineates each party's benefits and responsibilities relative to the trust property. It also provides confirmation of all directions to the trustee concerning title matters and the disposition of the property at the termination of the trust (at full Fair Market Value). Obviously, at termination should either of the beneficiaries choose to become the purchaser at termination they may do so…at full Fair Market Value only, less any moneys due them from the trust (e.g., their share of the profits). That is to say that any initial closing costs or equity held at inception is returned to the beneficiaries prior to any other distribution of proceeds.).
4. And following the close of Escrow, an Occupancy Agreement between the formerly defaulted homeowner and the new true owner of the property--the Trustee--is created. In this agreement, the former owner pays a lease payment sufficient to cover all monthly obligations. In order to convey tax benefits, this agreement is set up in a "triple-net" form: which obligates the tenant to all principal, interest, property tax, insurance; and to accept responsibility for all maintenance and repairs…the "Burdens of Ownership (See IRC 163(h)4(D)." Should any sum be paid to collection service, which is over and above the actual amounts due creditors, it will of course, accrue to the Investor Beneficiary (you), as positive cash flow.

Especially note that in the above scenario, even though ownership benefits (including full income tax deduction benefits) are held intact: the mortgagor (the borrower) no longer "owns" the property. The nature of the underlying land trust is such that its trustee is the owner and holder of all legal and equitable title to the trust property. Furthermore, there is no Purchase-Option or pre-determined bargain buy-out provision in the NARS PACTrust. Neither is there a loan or interest consideration between parties. The property remains a residence by at least one of the "acquiring parties…the beneficiaries of the land trust" (i.e., in conformity with CA. CC 1695-1695.17). The property is not in "foreclosure" at the time of transfer to the trust. There has been no effective compromise of regulations concerning "equity-purchaser" or "foreclosure consultant" laws (re. the Ca. Civ. Code §§1695 and 2945).


And, too, in the event of a default by the "tenant beneficiary," simple eviction takes place in lieu of a judicial foreclosure process. This is because, since the transaction's structure is hinged upon a bona fide (Illinois-type) land trust, the tenant can never claim an "equitable interest" in the property to avoid Eviction and to force time and money consuming Judicial Foreclosure processes. Also of major importance, is the fact that in the NARS PACTrust™ scenario, once the tenant beneficiary (the former owner) has defaulted in its obligations, the contract provides that his or her beneficiary interest in the trust will not be extinguished; but instead the default within itself will constructively constitute an offer by the defaulting party to sell his or her interest in the trust at full Fair Market Value, to the non-defaulting beneficiary/ies. Such fair market value purchase amount, if contested, would then have to be proven within, say, 30 days: fully at the contesting (defaulting) party's expense…and only by means of a full (and quite costly) MAI appraisal; and following a mandatory payment of, say, a $2,000, $3,000, etc. Default Fee.

For example, in terms of the former owner's second failure to perform, let's say you offer a buy-out of the defaulting tenant's interest for one dollar plus, maybe, any equity he or she had held at inception. At this point, if the defaulting party deems the offer too low, he or she has a right to prove it so, and to demand and collect what is rightfully due them. However, also note that it is agreed in the beneficiary agreement that such proof of value must only be by means of an M.A.I. Appraisal (quite expensive), and that the buy-out would only follow payment of the established Default Fee.

Then at that point, if the defaulting party is willing to spend the money and effort to prove he is owed more, and would succeed in his or her effort, then the full amount proven would have to be paid. However, the contract provides that the method of payment of the sum owed, shall be means of an UNSECURED promissory note. This note is then scheduled for retirement no sooner than when the property sells at the trust's originally scheduled termination date: AFTER a return of all of the investor's (your) original contribution, beginning equity and appropriate share of net proceeds.

A final caveat...

Remain well aware of, and well versed in, your own local foreclosure consultant laws: especially as they pertain to investors and Realtors® who would purport to "save" someone from foreclosure by effectively taking advantage of them. As you can see, the NARS PACTrust™ should avoid the pitfalls of "foreclosure bailouts"; but one would nonetheless be very well advised to rely only on the advice of his or her own knowledgeable and competent legal advisors in such matters.

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