In today’s real estate market, trying to flip short sales can be problematic.

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, the end-buyer’s lender likewise will not allow it. The new lender requires a “seasoned” title. In other words, the property deed must already be in the investor’s name and recorded at the County land records for a period of time before the lender will loan the money.

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.

A land trust is simply a private agreement that puts the property into a trust. A named trustee is empowered by the trust documents to sign over the deed. The “beneficiary” is entitled to all the “benefits” of the property, just as if that beneficiary were in title.

Here’s what a land trust transaction looks like:

1. Seller’s bank has a $150,000 mortgage against Seller’s property, but agrees to accept $100,000 as a short-sale payoff;

2. Seller creates a Land Trust naming Seller as 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” for $100,000. At the same time, Investor finds an end-buyer willing to pay $125,000 for the property;

4. On settlement day, Seller assigns her beneficial interest over to the Investor. The Investor gives Seller $100,000, paid to Seller’s bank;

5. A few minutes later, the end-buyer comes for settlement, pays Investor $125,000, and the trustee of the Trust executes a deed for the property to the end-buyer.

By using a land trust, the Seller’s bank does not see a “flip,” only the settlement for $100,000. The end-buyer’s lender doesn’t question the transaction because the Investor gained title to the property by purchasing the beneficial interest in the Trust, which does not require a deed recordation. The new lender will only expect to see a deed from the Trust to the end-buyer. The Investor becomes “invisible” to the lender, eliminating 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 dicey real estate market.

Jeffrey Shiller is a Maryland-based attorney specializing in real estate. He is a principal of Jeffrey P. Shiller P.A. and Hard Money Bankers LLC. Visit www.viprealestatelaw.com .

Tags: advanced strategy, flip, land trusts, lender, mortgage, REAL ESTATE, short sales

This entry was posted on Friday, January 8th, 2010 at 12:46 pm and is filed under REAL ESTATE . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.