In the classroom today, Jack Shea explains how to seller finance within a land trust. Learn how it works and when it makes sense to utilize.
If a buyer can’t get a traditional mortgage for whatever reason, seller financing is an option that might work out for them. You end up doing less work while your margins are higher.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Jack: Hi, my name is Jack Shea and I’m happy to appear here on the Flipnerd video education platform. And I have something I’d like to talk to you about today, one of my procedures that I’ve used for many years and many, many times successfully. And that’s seller financing in a land trust.
Mike: This show was sponsored by passiverental.com.
Jack: So I’ve done a lot of seller financing with previous rental homes that I had and I decided to segue those into seller financing for less work, more margin and kind of an endgame for my real estate.
So the way I do it, under the Uniform Commercial Code, I have a note from the buyer, a personal note signed for the $100,000, whatever the value of the house is after the down payment. I have a security agreement or a chattel mortgage. Since a real land trust or trust is revocable, trust changes the ownership for real estate to personal property. The ownership is evidenced by a beneficial interest, a piece of paper like a bond. And so what we’re doing, I’m financing that piece of paper, kind of like a car title, airplane title, whatever, which is common commercial practice worldwide. Every airplane, truck, and car is financed that way.
So this security agreement or another term, commercial term, is a chattel mortgage. That is what attaches the debt to the security. And then the house, it’s a mortgage or a deed of trust. And then personal property, a chattel mortgage, attaches the debt to the beneficial interests, to a piece of paper. So after I have that document, the borrower signs a conditional assignment of the beneficial interests to the lender. And that may be my IRA, pension plan or a partnership with other people I deal with. So the security for the loan is that piece of paper, like a car title.
So they pay, people along with a very good track record with that because people are happy, they are mostly people who had a bankruptcy or foreclosure and can’t go to a bank and get a regular loan. If they could get that 3% or 4% loan, they would do it. But these are houses that they have the affordable payment, which is very close to the market rent on the street, maybe $75 higher, but they’re buying into the property at about $150 a month. So they are happy. They have ownership and the property, they get homestead exemption. They get all the tax interest deductions and all that.
So this sign of the beneficial interest is my security. So then at some point, they stop paying. If it’s an investor, which I’ve financed many investors and after the ’07, after the crash, a lot of them did not have any reserves and they had a lot of a rehab guys that I had financed. And some of them had two and three properties in the pipeline at the same time. So when they crashed and did not have any reserves, and in one or two cases, [inaudible 00:04:19] and decide to collect the rent and not pay the mortgage payment.
So we dropped the hammer and I foreclosed on them by calling them on their cell phone and saying, “You’ve been foreclosed. It’s over. Bring me the keys.” And they brought me the keys. Because for six or eight or 10 years prior, they had been borrowing money in that fashion, and they knew the rules. So I really didn’t want the houses, but they were peacefully brought the keys. And many several other borrowers . . .
So with the investor, it’s quick and fast. If it’s a homeowner, we treat it a little more circumspectly. We send a demand letter like you would with the mortgage. “Please, you have by the 15th of December. You have to make this payment. Thirty days demand.” Then, if that didn’t happen, furthermore, another demand kind of like banks do. They send the second. Well, then, legal action may take place. And now, we really would rather get paid than take vows. But in some cases, they lost their jobs, they lost this or that and it moves . . . in some cases, they brought the keys and moved on.
But otherwise, [inaudible 00:05:43] my attorney, or my trustee wants to know if . . . oh, when I say, “I haven’t been paid. I’ve been working on it for months.” He said, “Have you send demand letters? Have you treated these people with respect so if you stood in front of a judge . . . ” And I said, “Ah, yes, I have. I have copies.” So he said, “Okay. It’s over. Who do you want me to deal with?” So it’s painless, it’s no registered letter, no foreclosure, I’d spend a year in court on a foreclosure. And I don’t want to have that similar again.
So you can do this too. It’s part of our option, our land trust course, as I say. So that’s my procedure for seller financing in a trust. Avoid the necessity of a foreclosure. Thanks.
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