Land Trusts: The Answer to Short Sales?
Flipping a property means liquidating a property for one price and immediately (within minutes, hours, or a day) “flipping” or selling the property to another ultimate buyer for a higher price. This is a great situation for a cash-strapped investor, as the investor usually doesn’t even need to come to closing with their own funds.
In today’s real estate market, it’s 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 lead to impressive profits. Unfortunately, trying to turn 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 will not go through.
- Second, even if the investor can overcome the first problem, the end buyer’s lender will not allow it 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 registered in the county land records for a period of time before they 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 arrangement whereby property is placed in trust and the trust documents empower a designated trustee to sign the deed, but the “beneficiary” is the one entitled to all the “benefits” of the property. as if the beneficiaries were in title itself. This is what a land trust transaction might look like:
- Seller’s bank has a mortgage on Seller’s property for $150,000.00, but agrees to accept $100,000.00 as a 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;
- The investor contracts with the Seller to purchase his “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 liquidation, the Seller assigns its participation in the Trust to the Investor, and the Investor gives the Seller $100,000.00, which, in turn, is paid to the Seller’s bank;
- A few moments later, the ultimate buyer shows up for settlement and pays $125,000.00 to the Investor, and the Trustee of the Trust executes a deed of ownership for the ultimate buyer.
By using a land trust, the investor solves the two problems mentioned above. First of all, the seller’s bank will have no idea that this transaction is an investment. The bank only sees that the investor has settled for $100,000.00. Second, the end buyer’s lender does not dispute the transaction because there is no deed that needs to 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 deed registration. Therefore, the new lender will only expect to see a Deed of Trust for the final buyer. In essence, the investor becomes “invisible” to the lender and this eliminates any relish 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 transact short sales in today’s real estate market.