Land Trusts: The Answer to Short Sales?
Flipping a property means liquidating a property for one price and immediately (in a matter of minutes, hours, or a day) “flip” or sell the property to another end-buyer for a higher price. This is a great situation for an investor who is short on cash, as the investor usually does not even need to come to closing with his or her own funds.
In today’s real estate market, it is not uncommon for an investor to find a property where the seller is in default on their mortgage and the outstanding balance on the mortgage is greater than the value of the home. To make a profit, the investor will offer an extremely low price, get the bank to accept it, and try to “flip” the property to another end buyer. This flipping technique, when successful, can generate impressive profits. Unfortunately, trying to change short sales can be problematic for a number of reasons:
- First, the seller’s lender must approve the sales contract, which includes the buyer’s approval. If the lender smells a flip, the contract won’t go through.
- Second, even if the investor can overcome the first problem, the end-buyer’s lender won’t either. The new lender requires that the title to the property be “seasoned.” In other words, the deed to the property must already be in the investor’s name and be registered with the county land records for a period of time before they will agree to lend on the property. And, if the investor has not yet reached an agreement with the seller, how can he satisfy this requirement?
A land trust can be the solution to both problems. A land trust is simply a private agreement whereby the property is placed in a trust and the trust documents empower a designated trustee to sign the deed, but the “beneficiary” is the one entitled to all “benefits” of the property. as if the beneficiaries were in title herself. This is what a land trust transaction would look like:
- Seller’s bank has a mortgage on Seller’s property for $150,000.00, but agrees to accept $100,000.00 as short sale payment;
- The seller creates a land trust naming himself as the beneficiary and records a deed in the land records placing the deed in the trust;
- Investor contracts with Seller to purchase its “beneficial interest” in the Trust for $100,000.00. At the same time, the Investor finds a final buyer willing to pay $125,000.00 for the property;
- On the day of the liquidation, the Seller assigns its participation in the Trust to the Investor, and the Investor delivers to the Seller $100,000.00 which, in turn, is paid to the Seller’s bank;
- Moments later, the ultimate purchaser shows up for settlement and pays $125,000.00 to the Investor, and the trustee of the Trust executes a title deed for the ultimate purchaser.
By using a land trust, the investor solves the two problems mentioned above. First, the seller’s bank will have no idea that this transaction is an investment. The bank only sees that the investor has reached a settlement for $100,000.00. Second, the end-buyer’s lender does not challenge the transaction because there is no deed that must be recorded in the county land records giving the investor title. The Investor obtained title to the property simply by purchasing the beneficial interest in the Trust, and this type of purchase does not require a record of deed. Therefore, the new lender will only expect to see a Deed of Trust for the ultimate buyer. In essence, the investor becomes “invisible” to the lender and this eliminates any seasoning issues. Although this is an advanced investor strategy and should only be used under the guidance of a competent real estate attorney, this may be the best way to conduct short sale transactions in today’s real estate market.