Last week a client called about buying a HUD property. After a short discussion I realized he was buying a trust that owned the right to purchase the property. After reviewing the documents I found several errors. I thought my client’s experience could help those of you interested in wholesaling property.
- In 2009 Wholesaler establishes the XYZ Land Trust with the express purpose to own real estate.
- The Wholesaler is listed as the Grantor, and Beneficiary with the Wholesaler’s corporation as the trustee;
- In October, 2010, the Wholesaler finds a property and enters into an agreement with HUD to acquire it;
- On the HUD Agreement the XYZ Land Trust is listed as the purchaser with no mention of the trust date or trustee;
- When the Wholesaler enters into the agreement with HUD, the Wholesaler lists the property on Schedule A of the trust;
- The Wholesaler approaches my client with the express purpose of selling him the property owned by the trust;
- Client contacts me and asks if everything looks ok.
Problem #1 – Trust is invalid for lack of trust corpus.
To have a valid trust the trust must have some asset however small. This is referred to as the trust corpus. When the Wholesaler created the XYZ Land Trust in 2009 he failed to fund the trust with any assets. The first asset acquired by the trust was the contractual right to the HUD property in 2010. If HUD wanted to break the agreement with Wholesaler they could argue that their agreement was with a non-existent trust and therefore unenforceable.
Solution #1 – Fund you trust with $10 upon creation. How? Simply list $10 on Schedule A as its initial funding and you have created a valid trust corpus.
Problem #2 – Corporation is not licensed to serve as a Trustee.
To my knowledge, to act as a Trustee every state, with the exception of Florida, requires that the Trustee be an individual or licensed trust company. The Wholesaler’s corporation was not licensed. If buyer wanted to break his agreement to purchase the Land Trust he might argue the trust violates state law and is therefore invalid.
Solution #2 – Have an individual serve as the trustee.
Problem #3 – Trust is not adequately identified on HUD Agreement.
When identifying a trust one should use care to distinguish one trust from another. Trusts with the same name are typically distinguished based upon the trust date and trustee. The Wholesaler listed XYZ Land Trust as the buyer. What is to stop someone else from creating a XYZ Land Trust and asserting ownership to the contract. Without other identifying information, any XYZ Land Trust could arguably be the owner.
Solution #3 – List the trust date on your agreements. The Wholesaler should have listed the XYZ Land Trust dated 3.1.2009 as the purchaser and possibly the Trustee for further identification purposes.
Problem #4 – Do not list an asset in the trust that does not exist.
When the Wholesaler entered into the agreement with HUD, the XYZ Land Trust did not become the owner of the property. The XYZ Land Trust became the beneficiary of a contract. When the Wholesaler listed the property on Schedule A of the XYZ Land Trust he misrepresented the Trust assets to my client. If my client was so inclined, he could void his purchase and sale agreement with the Wholesaler on the grounds of misrepresentation.
Solution #4 – Only list what the trust actually owns e.g., the rights under the purchase and sale agreement.
Problem #5 – Only sell what you actually own.
The Wholesaler did not own the property but he did own the beneficial interest of a land trust that held the rights to purchase a property.
Solution #5 – Only offer to sell the beneficial interest of a trust that owns the right to purchase real estate.
We corrected the Wholesaler’s errors and my client went through with the transaction. Everything went smoothly and now my client owns a trust that holds title to real property. If you are interested in wholesaling make sure your have solid documents and understand the nature of the transaction you are entering into.