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If I Use an Equity Holding Land Trust Can I Still Create and Sell Notes?

Aloha Dawn,

Hope everything is going well for you. I was out yesterday educating Realtors at open houses on non traditional financing, ie Land Trusts. They all seem to recognize that things are different and were open to pursuing the EHLT approach. A couple questions came up and I thought I’d ask you your thoughts on them.

Q: Assuming a $1.2M MAV with an underlying $250,000 mortgage. RB comes in with lets say $100,000 and seller agrees to carry $1.1M at 6.5%. Would it be possible to take the difference between the remaining equity of $850,000 ($1.2M – $100,000 =$1.1M – $250,000 underlying) and divide it into two notes of $425,000 each at 6.5% and then sell one of the notes at some small discount (I don’t know how much it would have to be discounted) so the seller gets more cash up front? If you did it this way I assume that the new Note Holder would then have to be a beneficiary of the trust to secure his interest?? Can I mix Notes and Land Trusts in this manner or ???

A: Tough to mix seller carry back notes and land trusts . . . you need to choose one or the other. In the above situation, why put the thing in a trust if you can sell a 1st TD to pay off the underlying financing and create more cash at closing for the seller? Create a relatively small 1st (and sell it), and a large 2nd. Then the seller has:

  • down payment
  • mortgage paid off with a little extra to boot
  • a stream of income from a 2nd deed of trust

It is very important that you put the deal together properly and underwrite the buyer so seller has optimal results when holding or selling the notes.

Q: Can we use a local escrow company to hold the funds, do a pre-liminary title search, and ultimately disburse the funds to the Trustee?

A: In my experience, it’s harder than you’d imagine to find an escrow company that is comfortable closing these types of transactions. They get hung up on the fact that there is no 1099 being issued at closing, among other things. Additionally, I like using an escrow that has processed many of these types of transactions . . . sometimes they catch things a less experienced company might miss.

Best wishes . . . looking forward to helping you put some of these transactions together.

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