Using the Illinois Land Trust as a creative tool for real estate acquisition or liquidation. What are the potential pitfalls in this deal scenario??

At one of our Master Mind sessions, we had John Acquisto join us to illustrate how these Trusts can be used as a creative vehicle for acquiring or liquidating real property. John Acquisto specializes in helping investors use this tool properly. John gave us a variety of examples where an investor could use the Trust in an acquisition and/or liquidation. However, we only saw all of the good sides, or how the deal could work successfully. What I want to know is: What are the holes? OR how could this deal potentially fall apart? Let’s consider one of the examples he gave us at the Master Mind:

Example:

• Kevin is trying to sell a house and has a loan on the property. (Seller)
• Melanie has amazing credit score, 780.
  
• Rick wants to buy the property. (Buyer)
• John is intermediary, putting the deal together. (Investor)

Let’s say the Seller, Kevin, has an adjustable arm loan and is going to lose the property as he can no longer afford to make the payments. The Lender agrees to do a short sale, and Melanie (the FICO borrower) buys the property at a discounted price. (Takes a loan on the property in her name). Rick (the buyer) agrees to buy the property, making payments on Melanie’s loan. Here, the Investor has structured the deal with Rick to purchase the property at a higher value than the loan Melanie has on the property. This would be a positive cash flow every month from the difference between Melanie’s mortgage payment and Rick’s payment. In this example, you can structure the Trust Documents such that you can create this unique deal scenario. The Trust is like “silly putty for real estate” in that you can use it to accomplish whatever creative ends you wish to achieve through it. The percentages to the beneficiaries in the Trust as described by the Trust documents could potentially be:

• Positive Cash Flow every month: Investor beneficiary and Credit beneficiary in the Trust split the positive cash flow each month. (the difference between Rick’s payment and Melanie’s debt service on the loan).
• Investor beneficiary gets 75% of equity when Rick “purchases” the property. Credit beneficiary could get 25% of this beginning equity. (Terms are obviously negotiable here).
• Future Equity in this transaction: If Rick refinances at a later date or finds a buyer once the property has appreciated above his loan amount, he then gets 50% of Future Equity. Investor beneficiary gets 40% of future equity, and credit beneficiary gets 10%. (Sometimes credit beneficiary will demand more like 25% of future equity out of the transaction).
  

As I understand it, the best part about using a Trust to structure a deal like this is that the Trust documents can be written such that each party in the deal has their part legally defined and everyone is protected. However, what are the potential pitfalls here? Could anyone comment on this and help me see them if there are any??

by Corey Curwick of Project Liberty.