The Cost of Inexperience

Front of house in the fall

They say ignorance is bliss.  What they fail to tell you is what happens when you stop being ignorant.

For 18 months, we lived blissfully under the illusion that The Investor had told us the truth:  The land trust we signed gave us all rights to the property to do with what we willed.  We could fix it up, sell it, give it away – whatever – it was okay.

I know … our trust didn′t make any sense.  After all, The Investor had given us his word he would hold our hands through the entire rehabbing process.  Didn′t happen.  He promised he′d be available whenever we needed him.  He wasn′t.  He insisted we have lots of cell phones minutes because he′d be calling us all the time  Uh … not so much.

So why we thought he was right about the land trust is beyond me.  Like I said – ignorant.

A Knock on the Door

One day as I was exercising downstairs shortly after we moved in, I heard voices on the floor above me.  When I climbed back upstairs, Andy told me the previous owner (let′s call him Doug) had stopped by to “check on things.”

Turns out Doug had been double dealt by The Investor.

Let me step back for a moment.

I′d had reservations about the land trust.  Something about it didn′t sit right with me.  But The Investor owed us money and this looked like the only way we would ever collect it.  I signed on the dotted line.

When I learned Doug had two other properties and didn′t have the funds to invest to fix up this one enough to get it sold, I felt better.  We hadn′t evicted anyone from their home to satisfy our greed.

But when Doug showed up at our door, he told a slightly different story with a very different ending.

The Facts Sir … Just the Facts

Doug had remarried and his wife also owned a house.  They purchased a third home and moved in together leaving them both with an extra mortgage to pay.

In swoops The (mighty) Investor to solve all their problems.  He took over both of their extra houses – pawned the first one off on us.  But when he couldn′t find a patsy to dump the second one, he rented it out.

Seems The Investor didn′t pick very good renters – they sort of stopped paying rent – and suddenly Doug and his wife were saddled with two mortgages again.

Which brings me back to why Doug stopped by the house – to make sure the same thing hadn′t happened in this case scenario.  After speaking with Andy, he calmed down, accepting us as responsible individuals who didn′t plan on skipping town and leaving him with extra payments he couldn′t afford.

A Trust Not to Trust

Here′s what you might not understand about land trusts – the mortgage stays in the name of the land owner.  Only the title is transferred.

It gets tricky from here on out.

As a vague explanation, I′ve chosen the following excerpt from http://www.escapeartist.com/OREQ7/Own_Land_Anonymously.html:

“As with any trust, in a land trust, the trustee — generally an attorney, law firm or bank — holds legal title to all trust property. However, in a land trust, the named beneficiaries retain use of the property and any income it generates. In addition, the trustee can act only when it receives written instructions from the beneficiaries, who maintain complete control at all times. “

In the land trust transaction, anyone can be named as beneficiary.  It could remain in the name of the mortgage holder, the advantage being no messy probate issues should he/she die.  In the case of acquiring flip properties, the mortgage holder names a bank, attorney or law firm as trustee and the investor as beneficiary.

In our situation, Doug named a lawyer as trustee and The Investor as beneficiary.  Since The Investor could do what he wanted with the property, he signed it over to us.

Starting to sound a little fishy?

Our Realtor® and title company thought so too.  Over the course of the next several weeks, we discussed it with the real estate and title agents, dug out all of the paperwork we had, and Andy phoned The Investor to get copies of the documents he′d signed with Doug.

The Investor promised us he would get them to us, but each time we called, he said he was unable to find them.  He′d recently changed offices and they were packed away in boxes in his storage unit.  He would be going over there in the next couple of days.

This went on for weeks.

We finally drove to his new “office” only to find it it was a UPS store.  We realized we weren′t going to get anywhere with him, even though he′d made noises about connecting us with the title company he′d used in the past.

Where do we go from here…

In the meantime, everyone grew more nervous as the day of the closing drew near.  If we didn′t resolve this problem the sale would not go through.  The young couple purchasing the home would lose their chance at the $8000 tax credit.  We’d have to rethink whether or not we could move to Wyoming.  And worse, we could be sued for misrepresenting ourselves.

See it turns out we never actually owned the house.  We had no rights to it at all.  The entire time we’d only been renting from Doug.

Land trusts aren′t legal in Missouri.  They don′t recognize them.  Even if they did, The Investor  had drawn up the paperwork incorrectly.

Our only option was to deal with Doug directly and have him sign over the property to us before closing.  (Keep in mind, he was a distressed home owner who couldn′t afford to maintain the house should we back out of the deal.)

In a few conversations Andy had with Doug, he′d hinted he still owned the house.  We blew it off, convinced we were right and he was wrong.

When we found out the truth, I realized my instincts to run hadn′t been far off.  Over the course of the flip, the stress got to me, and several times I mentioned to Andy I wanted to just pack up and leave in the middle of the night.  Turns out we could have without suffering any consequences.

Right … the money.

That we figured we’d flushed down the toilet anyway.  We didn′t stand to profit from the sale, only recoup a small portion (about 22%) of what we′d invested.

Armed with this new information, we set out on a different path; one which took us down a long, scary, and uncomfortable road.

Happy Transformation,

Shawn

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