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Considerations When Selling on an Installment Contract

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By Mr. Land Trust, RANDY HUGHES

One of the many ways to make money in the real estate business is to buy low and sell higher on an installment contract.

The traditional method of contract selling is known as “Contract for Deed.” It is a risky way of selling property when the buyer does not have cash or conventional financing. The risk involves the buyer defaulting on the contract.

Where’s the Risk?

By law, even though they have defaulted, the buyer still has an “equitable interest” in YOUR property. That interest must be foreclosed upon.

Foreclosure is a time-consuming and expensive legal process that can take months to accomplish while the contract seller makes payments on her underlying loan with no income to offset her payments. This is the WORST part of real estate investing.

One of the many benefits of using a Land Trust to hold title to investment real estate is the ability to sell the Beneficial Interest (which is personal property and not real property in most states) on an installment contract with the capability to “repossess” the Beneficial Interest when default occurs instead of having to “foreclose” the interest. Repossession takes about 30 days, foreclosure can up to a year.

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A Guiding Example

Regardless of which method you use to “sell on a contract,” selling the real property or the Beneficial Interest, you should check your State’s law regarding Contract Sales. For example, in Illinois, there is the Installment Sales Contract Act. It represents an excellent example of why I am always recommending that you seek competent legal counsel. There are certain disclosures required under the Illinois Installment Sales Contract Act.

The Act states that it means a “. . . legal device whereby a seller agrees to sell and the buyer agrees to buy a residential real estate.” Wait!, you say. Didn’t you just write that the Beneficial Interest is personal property? You are correct. I did. It is in most states and that is why I like to set my trusts up in states that consider the Beneficial Interest of a Land Trust personal property. And as documented in the DePaul University Law Review, volume 18, issue 2, article 37, page 878, it is.

Since the Beneficial Interest is not real estate, does the Act apply? The attorney in Illinois with whom I consulted encouraged me to comply with the Act anyway in case a judge rules that the Act does apply. When you go in front of a judge, anything can happen . . . no matter what the law in your State says. Judges “make law” every day in their courtrooms and if you don’t like it, you can appeal.

This Could Be a Good Thing

Even if you view the attorney I consulted as being overly cautious, you might consider fulfilling the requirements under that law. They could make your contract even more defensible if it should be challenged.

Here are highlights of those requirements:

  1. The contract must be in writing;
  2. The Seller must give the Buyer a copy of the contract at least 3-days before closing.
  3. The contract must contain many disclosures, including, but not limited to the following:
  • Purchase price
  • Down payment
  • Interest rate
  • Payment due date
  • Balloon payment due date (if any)
  • Amortization Schedule
  • Statement of who is responsible for repairs.
  • Who pays real estate tax bills
  • Who pays for property insurance
  • A list of building code violations
  • Amount of any unpaid real estate property taxes
  • If there are any liens against the property
  • If the property has been condemned
  • The Seller must record the contract or a memorandum of the contract at the Recorder of Deeds Office in the county where the property is located
  • The Seller must provide the Buyer with an account statement upon request
  • No pre-payment penalties can be charged for payments not due yet
  • If you default, you have the right to pay all fees and charges currently due under the contract to cure the default in 90 days.

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I encourage you to learn more by going to my FREE online training at www.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone, unlike most other businesses in America today!)

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Behold the Cockroach – It has survived and thrived

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By Randy Hughes, Mr. Land Trust

Starting in the late 1970s and up through the 1990s pitchmen were all over television extolling the ease at which you could “become rich in your spare time” if you just followed their real estate investment “program.” After 52 years in the real estate investment business, I know of no one who became rich through real estate quickly (I am sure some investors got rich quickly through luck, but I have never met one).

I do know a lot of people who became rich using real estate as their vehicle. They all earned it by working hard and putting in years of devotion.

This article for Realty 411 is for all of you who have not yet become a millionaire in your “spare time.”

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What does all this have to do with cockroaches?

When it comes to being able to survive and expand its operations, nothing has ever surpassed the lowly cockroach. Despite chemical warfare, I often find them in my houses after tenants vacate. Some tenants seem to cohabitate with cockroaches intentionally (and quite well)!

In New York’s Museum of Natural History, they used to point tourists’ attention to a pickled roach between the toes of their biggest dinosaur to demonstrate that roaches have survived in the same form since the period before dinosaurs stalked the Earth.

This means that cockroaches lived on even after the mass extinction of the dinosaurs. For perspective, man has been on Earth during only 1% of the time that cockroaches have existed on the planet!

How have cockroaches survived?

How have cockroaches survived so successfully for millions of years? 1). It never challenges anything bigger than itself 2). It stays out of sight 3). It can survive for lengthy periods under adverse conditions or in a hostile environment 4). It is fast and elusive 5). It lives in the cracks of society never calling attention to itself 6). It reproduces quickly and with ease 7). It can make a meal out of about anything organic regardless of how unappetizing!

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What can we learn from the cockroach lifestyle?

We small investors must be adaptable, maintain a low profile, and be prepared to move quickly when either an opportunity or danger presents itself. We must be able to recognize opportunities, whether foreclosures, rehabs, discounted paper, single-family house opportunities, or value-added property prospects. We must also avoid hostile environments (and hostile tenants) which are high on risk and low on rewards.

You can skip “make a meal out of about anything organic”. I don’t recommend that.

About those Pitchmen

I knew a real estate guru once that bragged that he bought a property every month. He later confessed that he felt so obligated to follow through with that public statement that he would buy bad deals just to “keep up his image” as a monthly property buyer.

Be patient, be diligent, analyze, and then act. Some investors never succeed because they catch the “paralysis of analysis” fever. They buy books (sometimes they even read those books they buy), attend meetings, talk with other investors, analyze data, buy mentor programs, and never buy any real estate.

I encourage you to learn more by going to my FREE online training at www.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone, unlike most other businesses in America today!)

Apply these lessons from a cockroach lifestyle and you WILL succeed!

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

What is a Trust?

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By Randy Hughes, Mr. Land Trust

Has anyone asked you yet, “What is a Trust?” I am asked many times each month what a trust is and why someone should use a trust to hold title to their real estate investments. Oftentimes the person asking me these questions is a real estate investor or an attorney. Most attorneys are not familiar with Land Trusts, also known as title holding trusts, because most law professors do not teach about them in school. The result is that they typically do not recommend them to their clients. Many attorneys opt to suggest the use of an LLC to hold the title.

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You May Be in the Same Situation

If I am frequently encountering these questions, you may be too. Your current attorney may ask, “Why are you messing with all that unnecessary Land Trust stuff?” Or you could be interviewing a new attorney to work with, and they want to know why you are interested in trusts.

Perhaps a fellow member of the real estate investment club or association of which you are a member, or a real estate friend of yours asks, “Why bother with Land Trusts?” (By the way, if you are not a member of a real estate investment club, I encourage you to find one that suits your style and join. The benefits to you and your business are numerous.)

Let’s face it, the answers to these questions may not flow off your tongue. Since I’ve had more practice than you responding to these inquiries, I’ll share with you some of the points I make.

You know by now that there are many ways to hold title to real estate, whether it is a personal residence or an investment property. The title can be held in an individual’s name, joint tenancy, corporation, limited liability company, joint venture, partnership, limited partnership, association, or trust.

Each of these forms of holding the title carries benefits, detriments, tax, and asset protection implications. There is not space enough in this issue of my Land Trust University newsletter to compare and contrast all these consequences. We can concentrate on the Land Trust and its many advantages to the everyday real estate investor.

Start with the Basics

Let us start at the beginning. What is a trust? It is merely a few pieces of paper whereby one person or entity (the Trustee) holds the title for someone else (the Beneficiary). The Trust Agreement is a contract between the parties involved and as such, dictates the actions of all parties involved. There are many types of trusts available to use. As members of the Land Trust University, we typically deal with a Grantor Revocable Trust (GRT) to hold title to our real estate investments.

Technically, the IRS says that a GRT is NOT an entity but a “contractual arrangement.” The IRS does not require that a GRT has a tax ID number, and they don’t demand that a tax return be filed on behalf of the trust. All tax results from the property held inside the trust flow through to the Beneficiary who files a return. (See Revenue Ruling 92-105 and IRS Code Section 677.)

When combined with Corporations, LLCs, or other trusts, the Land Trust can be a formidable opponent to those who would like to inflict financial pain on the owner.

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Land Trusts were not designed to be asset protection tools on their own. Some practitioners perceive them as great estate planning tools that prevent the Beneficiaries (and Successor Beneficiaries) from experiencing probate.

However, I have found that the mere fact that a real estate investor does not own property in their personal name is a great benefit. And if the investor makes the Beneficiary of the Land Trust an LLC or Corporation, it yields the best of both worlds. Primarily, you receive the privacy of ownership afforded by the Land Trust (there is no “registry” for Land Trusts) and the asset protection benefits of the LLC/Corp as the Beneficiary.

Privacy Makes a Difference

Why is privacy of ownership important? I receive calls every month from people across the nation that think I am the trustee of a trust they are trying to investigate. (They find my phone number when they search the Internet for Land Trusts.) Typically, these inquiries are about a problem the caller is having with a tenant next door or across the street from them. They want to register a complaint or find out who to sue over their dissatisfaction with the adjacent property owner.

If your attorney or your real estate friend have not yet heard a war story from someone who was sued just because their name was on the deed, they will. You can also encourage them to read the testimonials and blog posts on my website. People whose lives were turned upside down because they were the defendant in a lawsuit contact me frequently.

These calls and the challenges people have lived through represent the top reason real estate investors use trusts. It is to stay out of the public purview. Trusts can help avoid frivolous problems. We have a highly litigious society in America today. If you make it easy for someone to sue you, they probably will. If it is difficult to sue you, or they can’t discover who you are, they probably will not . . . they will take someone else to court who is an easy target.

Many advanced Land Trust strategies can be employed in conjunction with other entities that can create dy-no-mite asset protection for the everyday real estate investor.

To learn more visit Randy’s FREE online training at www.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for his free booklet, Reasons to Use a Land Trust. Readers can also reach Randy the old-fashioned way by calling me at 217-355-1281. (He actually answers his own phone, unlike most other businesses in America today!)

I encourage you to learn more by going to my FREE online training at www.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone, unlike most other businesses in America today!)

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.