How to Wholesale REOs Using a Land Trust

Right now is the perfect time to be investing in real estate! Home prices are at an all time low, and the market is flooded with short sales and foreclosures just waiting for savvy investors to snatch them up. Unfortunately, if you have poor credit or no money to invest with than real estate investing can be scary. A good investing strategy for someone who has poor credit and no money is wholesaling. Wholesaling is where you find a property 30% to 50% below market, lock it up with a contract that states you can reassign the deal, find an end buyer and sell that contract for $5k, $10k, etc. Bingo! You just made $5k and you didn’t use a dime of your money, except maybe a small earnest deposit of at least $1. If you do 10 or more of these deals, soon you will be able to leverage your money to purchase your own property and start creating passive income. You’re on your way to being a millionaire! Right about now, you’re probably thinking to yourself “This is awesome!” Not so fast my friend. Regrettably, due to the banks owning all the homes this scenario is difficult to practice.

Banks employ people who have no clue how the real estate market works. After all, they’re in the business of loaning money, not property. As a result, you will find that the banks have “restrictions,” “guidelines,” and “regulations.” You can put an offer in on a house 25% below the fair market value (FMV) and they won’t accept it. So, the house sits on the market for another month or two. You decide to put in another offer 5 weeks later. You’re kind of ticked that they didn’t take your first offer, so you offer them even less. You offer 50% below FMV. Bingo! The bank has accepted your offer. About now you’re scratching your head because 5 weeks ago you were willing to pay 25% more for the property, but they wouldn’t accept it. Now they just lost 25% more money for themselves. Perplexing isn’t it? Don’t think to hard on this because they are clueless… plain and simple. Due to their cluelessness they don’t understand investors. So, when you go sign your paperwork with the intention of assigning your deal to another investor, don’t be surprised if the agent tells you, “No way! The bank will not accept an offer with “and/or assignee” on the title. No ifs, ands or buts!” You think, “Who cares who takes title as long as the bank receives their money?” Again, they’re clueless, but WE are SMART, SAVVY investors! We know how to break the bank’s “restrictions,” “guidelines,” and “regulations.” And the best part… it is ALL legal! So, how do you assign bank owned property? With a land trust, of course!

First, what is a land trust? A land trust is an agreement between two parties, the trustee and the beneficiary. The trustee agrees to hold ownership of a property for the benefit of the beneficiary. On title is the trustees’ name not the beneficiary. The beneficiary holds all the equity of the property. Investors (smart ones) who own multiple properties use a land trust to keep their personal information private. For example, your trustee takes title to a property you own, but you’re the beneficiary. That means if someone wanted to sue you and they looked for property you owned, they wouldn’t find any because it is under your trustee’s name. Most likely, the attorney would tell the suing individual there is nothing to sue for because on record it appears that you don’t own anything. So, how does the land trust work in wholesaling reo property?

When you make your offer, you are going to tell the agent that you are purchasing the property through a trust. Therefore, you want to take title as… Joe Sample, Trustee, exact vesting TBD at closing. Now the reason you need to add “exact vesting TBD at closing” is because you want to have time to sell (or assign) the beneficiary rights to another investor. If the agent asks you why you can’t determine vesting now, you tell them that you have several investing partners and depending on what you all decide to do with the property will determine which LLC or investor is going to take hold of the vesting. Once your offer is accepted, you immediately take pictures of the property, write an ad on CL saying something like “Wow! 50c on the dollar! Great cash flow property! Hurry before you miss out on the best deal in town!” You are also going to want to email all your buyers from your buyer list. When you find a buyer, you’re going to want to explain to them why you took title as a trustee. You want your fee upfront and a proof of funds letter immediately. You can’t wait around for a loan approval. Your buyer needs to have cash.

Now, you have two options. The first, and best option, is to call escrow and tell them that you and your partners have decided how you’re going to take vesting. Give escrow a copy of your end buyers proof of funds letter and his/her information. The escrow company will remove your name from the title. Now you can walk away (make sure you have your fee first) from the deal and the end buyer finishes the deal. What if the escrow company says, “No way, your name is on title as trustee, and if you want to finish this transaction it needs to stay on title”? This is where option number two comes into play. You still collect your fee from the end buyer, but you tell them that the bank will not allow you to put his/her name on title. So, you’re going to finish the transaction (with the buyer’s money) as trustee, but put his/her name as the beneficiary. After you close, you immediately deed the property to the buyer, thus dissolving the trust automatically. Option one is a much cleaner method.

About now, you’re probably thinking “Wow, great method, but what about putting money down”? Well, you’re going to have to at least put a few hundred (preferably not more than $500) earnest money down if the offer is accepted. The key to getting your offer accepted is telling the bank you’re paying CASH for the house through private funds. You can get a proof of funds letter from a hard money lender or coastal-funding.com allows you to do it online. Just remember to have the amount you’re offering exactly the same on your proof of funds letter. You don’t want to offer $60k for a house, but on your proof of funds letter it says you are approved for $70k. The bank will definitely come back asking for more money if they can get it.

I am going to tell you right now that only a few, and I mean a few, lawyers know about land trusts. In California, I found one! That’s right one attorney! So, if you go to your attorney and they start giving you a bunch of nonsense (one told me I needed a probate attorney and that I should think of using LLC’s) then you need to be forceful and tell them to research an Illinois Land Trust. I've attached a copy of a land trust. You might want to have your attorney look at it.

Happy Investing!
KimmyJ

“Commit to the LORD whatever you do, and your plans will succeed.” Prov.16:3