Investing a property means liquidating a property for a price and immediately (in 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 close with his own funds.
In today’s real estate market, it is not uncommon for an investor to find a property in which the seller defaults on his 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, make the bank accept it, and try to “sell” the property to another end buyer. This turning technique, when successful, can yield impressive benefits. Unfortunately, trying to reverse 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 bad, the contract will not be honored.
- 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 title deed must already be in the investor’s name and recorded in the county’s land records for a period of time before they agree to lend 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 the property is placed in a trust and a designated trustee is empowered by the trust documents to sign the deed, but the “beneficiary” is the one who is entitled to all the “benefits ” of the property. as if that beneficiary was in title herself. This is what a land trust transaction would look like:
- The seller’s bank has a mortgage on the 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 itself as the beneficiary and registers a deed in the land registries placing the deed in the Trust;
- The investor hires 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 settlement day, the Seller assigns its beneficial interest 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 final buyer shows up for settlement and pays $ 125,000.00 to the investor, and the trustee of the trust executes a deed of the property to the final buyer.
By using a land trust, the investor solves both of the problems mentioned above. First, the seller’s bank will have no idea that this transaction is a draft. The bank only sees that the investor has reached an agreement for $ 100,000.00. Second, the end buyer’s lender does not dispute the transaction because there is no deed that must be recorded in the county land records that places the investor on the 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 record. Therefore, the new lender will only wait to see a deed from the Trust to the final buyer. In essence, the investor becomes “invisible” to the lender and this eliminates any seasoning problems. Although this is an advanced strategy for investors 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.