Thursday, June 26, 2008

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.

4 comments:

  1. If you want to learn all about the Illinois land trust from experts, go to: www.realestateforprofit.com

    They are the NUMBER ONE source for land trust information in the country!

    ReplyDelete
  2. Advantages of Using a Revocable Land Trust

    1. Avoids property being probated (out of court transfer upon death of beneficiary)
    2. Ease of Transferability
    3. Judgments do not attach to the property
    4. No Partition (avoids spouse’s “forced share” sale buyout upon divorce)
    5. Easier management with multiple owners (multiple owners do not have to sign docs)
    6. No costs upon transferring beneficiary
    7. No registered agent needed
    8. Legal and Equitable property interest in trustee’s name
    9. Income and Expense conduit, not a business with tax consequences
    10. No tax return to file (pass thru entity)
    11. Trustee has no personal liability
    12. No annual fees like other entities, if trustee is an individual or friend
    13. Estate planning – successor beneficiaries
    14. Less expense in grantor creating trust over entity
    15. Avoids the due on sale clause
    16. Privacy of ownership – Helps Avoid Identity Theft of your name
    17. Keep sales price private
    18. Able to fracture interests of multiple owners w/o being partners
    19. Ease of linkage to other asset protection entities
    20. Non-judicial repossessions of real estate sold on installment contract
    21. 1099 not required for transfers (personal property not subject to real estate regulations)
    22. Ease of operating across state lines
    23. Ability to insert poison pills
    24. Lots of case law to support land trust law
    25. Many attorneys do not study this section of the law – not profitable for them
    26. No recordation of the Trust Agreement
    27. To avoid “seasoning” problems (secondary market rules of ownership)
    28. To save title insurance premiums (Trustee-insured-remains the same)
    29. Good negotiating technique in the sale or purchase of property (Disney World used trusts to acquire land prior to construction to avoid price escalation)
    30. To provide non-recourse financing
    31. Lowering of real estate taxes (prevents re-assessment)
    32. Avoids state regulations that apply to corporations and LLC’s

    As you can see, Land Trusts are a wonderful tool for you to hide your assets, avoid real estate tax increases, privatize your sales transactions, avoid probate and use for many other benefits. Now that you have a basic understanding of why people use Land Trusts, please consider acquiring our Land Trusts Made Simple Basic Home Study Course. You will be amazed at the logic behind how to structure your Trusts Agreement so no one but YOU understands what is going on. At the end of the course we give you all of the forms needed to create and maintain your own Land Trusts. This is available by going to www.realestatateforprofit.com and clicking on “Shop Online” then clicking on one of the “Home Study” tabs at the top.

    Are you working hard to acquire assets? You will spend a life time building your financial estate… spend a little time and money learning how to protect your net worth from the deadbeats and their contingency fee lawyers!

    WWW.REALESTATEFORPROFIT.COM

    ReplyDelete
  3. One glaring thing that I see about the Land Trust is that indeed YOU are the only one that understands it.

    It will be hard to explain to anyone who wants to understand it.. be it the seller, the buyer, the tb, a judge, the RE licensing boards, the SEC, your lawyer, the title company, the mortgage company, your CPA, the IRS, etc.

    I have no doubt that it CAN be used as stated above, but I think that EDUCATING everyone who will be involved in the transaction should at least be a consideration before just "using" this tool.

    ReplyDelete
  4. I do not disagree with you and that is why we have a Land Trusts Made Simple Home study course. It is available at:

    https://www.realestateforprofit.com/secure/default.aspx?cid=11

    Randy

    ReplyDelete

 

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