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.