Buying a HUD property is often touted as simple, hassle-free, and safe — as long as you follow a few guidelines. But problems can lurk beneath even an unassuming surface in purchases like these, problems it can take a little “ferreting” to discover.
Recently, one of my clients called me about purchasing a HUD property. However, as the conversation went on, I realized he was actually buying a trust that owned the right to purchase that property. When I looked over the documentation, I found several things that were capable of blowing the agreement out of the water. In the interest of a few “words to the wise,” here’s how this particular agreement started to shake out.
In 2017, the wholesaler established the XYZ Land Trust, with the express purpose of owning real estate. In the paperwork
- the wholesaler is listed as the grantor and beneficiary, with the wholesaler’s corporation as the trustee;
- in October 2017, 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 then approaches my client, offering to sell him the property owned by the trust;
- the client contacts me and asks if everything looks ok.
Without hesitation, this Asset Protection Pro says, “No, everything doesn’t look OK.”
Here’s why I said what I did.
Problem #1 — The Trust Was Invalid Because of a Lack of Trust Corpus.
In order to be valid, a trust must have some asset, however small; this is referred to as the trust corpus. But when the wholesaler created the XYZ Land Trust in 2017, 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 2017. All HUD has to do to break the agreement with the wholesaler is argue — correctly — that their agreement was with a nonexistent trust, and therefore unenforceable.
Fund your trust when it’s created. How? Simply list, say, $10 on Schedule A as its initial funding. and you have created a valid trust corpus.
Problem #2 — The Corporation Is Not Licensed to Serve as a Trustee.
To my knowledge, every state with the exception of Florida requires that a trustee be an individual or licensed trust company, not a corporation, and the wholesaler’s corporation, therefore, wasn’t licensed to act as a trustee. If the buyer wanted to break his agreement to purchase the land trust, he could argue that the trust violates state law, and is therefore invalid.
Again, this is simple: have an individual serve as a trustee.
Problem #3 — The Trust Is Not Adequately Identified on the HUD Agreement.
When you identify a trust, you need to distinguish one from another! Should two trusts have the same name, you differentiate them by trust dates and trustees. However, in this instance, the wholesaler listed XYZ Land Trust as the buyer, with no other identifying characteristics. The way this agreement is set forth, there’s nothing to stop another party from creating an XYZ Land Trust and asserting ownership of the contract. Without any other distinguishing detail, ANY “XYZ Land Trust” can be the owner!
Trust dates should always be part of agreements. The wholesaler should have listed the XYZ Land Trust, with a 3/1/2017 date, as the purchaser — and, even better, included the trustee as well, for concrete identification purposes.
Problem #4 — An Asset Listed in the Trust Did Not Exist.
Even after the wholesaler entered into the agreement with HUD, the XYZ Land Trust did not become the owner of the property; it became the beneficiary of a contract. Therefore, listing the property on Schedule A of the XYZ Land Trust was a misrepresentation of trust assets. If the client is so inclined, he can void his purchase and sale agreement with the wholesaler on the grounds of misrepresentation.
The wholesaler should only what the trust actually owns: the rights under the purchase and sale agreement.
Problem #5 — The Wholesaler Was Trying to Sell Something He Didn’t Own.
As we mentioned above, the wholesaler actually doesn’t own the property; he owns the beneficial interest of a land trust that holds the rights to purchase a property. He can’t “sell” the property itself to my client; that tangible asset isn’t even owned by the land trust, at least not legally speaking. He can “sell” only the option to purchase the property in question.
The wholesaler can offer only to sell the beneficial interest of a trust that owns the right to purchase real estate, nothing else. My client would not be purchasing the HUD property so much as he’d be purchasing the rights to buy it!
All’s Well that Ended Well
Fortunately, once we corrected the wholesaler’s errors, my client was happy to go through with the transaction. Now, my client owns a trust that holds title to real property…something he could not have legally held before with all those “holes” in the agreement.
NOTE: I refer the trust as a land trust because this was the situation I was dealing with; however, for wholesalers, I prefer the use of a Wholesale Trust that contains many of the same elements as the land trust but with is specifically drafted for these types of deals. At Anderson, we have created such a trust and its uses are described in this video: