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Land Trusts – The Answer to Flipping Short Sales?

Flipping a property means to settle on a piece of property for one price and immediately (within minutes, hours, or a day) “flip,” or sell, the property to another end-buyer for a higher price. It’s a great situation for an investor who has little cash, as usually the investor doesn’t even need to come to closing with his or her own funds.

In today’s real estate market, it’s not uncommon for an investor to find property in which the seller is in default of his mortgage and the outstanding mortgage balance is higher than the value of the house. To make a profit, the investor will offer an extremely low price, get it accepted by the bank, and attempt to “flip” the property to another end-buyer. This flipping technique, when successful, can yield impressive profits. Unfortunately, trying to flip short sales can be problematic for several reasons:

  • First, the seller’s lender must approve the contract of sale, which includes approving the buyer. If the lender smells a flip, the contract will not go through.
  • Second, even if the investor can overcome the first issue, the end-buyer’s lender will likewise not allow it. The new lender requires the title to the property be “seasoned.” In other words, the property deed must already be in the investor’s name and recorded at the County land records for some period of time before they will agree to lend on the property. And, if the investor has not yet gone to settlement with the seller, how can he satisfy this requirement?

A land trust may be the solution to both these problems. A land trust is simply a private agreement whereby the property is placed into a trust and a named trustee is empowered by the trust documents to sign over deed, but the “beneficiary” is the one entitled to all the “benefits” of the property just as if that beneficiary were in title herself. Here’s what a land trust transaction would look like:

  1. Seller’s bank has a mortgage against Seller’s property for $150,000.00, but agrees to accept $100,000.00 as a short sale payoff;
  2. Seller creates a Land Trust naming herself as a beneficiary and records a deed at the land records placing the deed into the Trust;
  3. Investor contracts with Seller to buy her “beneficial interest” in the Trust for $100,000.00. At the same time, Investor finds an end-buyer willing to pay $125,000.00 for the property;
  4. On the day of settlement, the Seller assigns her beneficial interest in the Trust to Investor, and the Investor gives Seller $100,000.00 which, in turn, is paid to Seller’s bank;
  5. A few moments later, the end-buyer shows up for settlement and pays $125,000.00 to Investor, and the trustee of the Trust executes a deed for the property to the end-buyer.

By using a land trust, the investor solves both problems mentioned above. First, the Seller’s bank will have no idea that this transaction is a flip. The bank only sees that the investor has come to settlement for $100,000.00. Second, the end-buyer’s lender doesn’t question the transaction because there is no deed that needs to be recorded at the County land records placing the Investor in title. The Investor gained title to the property simply by purchasing the beneficial interest in the Trust, and this type of purchase does not require a deed recordation. Thus, the new lender will only expect to see a deed from the Trust to the end-buyer. In essence, the Investor becomes “invisible” to the lender and this eliminates any seasoning issues. Although this is an advanced investor strategy and only to be used under the guidance of a competent real estate attorney, this may be the best way to get short sale flip transactions done in today’s real estate market.


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