Land Trust / Beneficial Interest
OK - I am having a hard time understanding the whole Land Trust / Beneficial Interest concept. I have been investing in real estate for over 15 years (mostly buying properties and renting them on short term / vacation rentals, etc) then selling in a few years once equity builds). I have recently stumbled across the Land Trust concept. I don't quiet understand why someone would put their home into a Trust then appoint a stranger as the beneficiary for a very small 'sell price'. For example, Property is worth approx $250K, mortgage owed is approx $225K, and for approx $8K I can purchase the beneficial interest. What exactly does that mean?? PLEASE help me understand. It seems too good to be true. Am I missing something?
When someone establishes a trust, there are a few things that happen. There is a "Warranty Deed" completed in the name of the trustee (as Trustee) for the property on behalf of the trust. The Trust agreement establishes the identity of the trustee.
Another thing that the trust agreement establishes is the identity of those with beneficial interest in the trust.
1) The Trust owns the property.
2) The Beneficiaries (in essence) own the Trust.
3) The Trustee holds title to the property as a representative of the Trust, and is bound to act on behalf of the Trust only when and in accordance with written instruction by the beneficiaries of the Trust.
Along comes Mr. Investor, and the Beneficiaries assign beneficial interest in the Trust to the investor in exchange for $$.
Mr. Investor now (essentially) owns the trust, and has the power to direct the Trustee. In accordance with the terms of the Trust agreement. Control of the property has changed from the homeowner to the investor, and the only title change was from the property owner to the Trustee when the trust was established.
In effect, The property has changed hands without notifying the lender that it occurred. It essentially masks the transfer to the investor from the lender.
The property transfer still violates the D.O.S. clause, but some feel that this type of transaction helps to avoid the loan being called due because of a title change.
I hope this brief explanation helps.
Jeff.
Thank you for that information. It was VERY helpful. One quick question....when the beneficiary directs the trustee to sell the property and the note is paid in full, who gets the 'equity'....the beneficiary???
I assume I would send the PITI to the Trust Acct who in turn sends it to the mtg company each month until it is sold? The original owner is never in the picture after they establish the trust, correct?
One more quick question....why wouldn't I just be the trust and beneficiary so that I would be the new property owner AND beneficiary?
1. The beneficiary gets the equity if any.
2. You as beneficiary can direct the trustee to make payments to the bank.
3. The beneficiary is totally behind the scenes but makes all the decisions.
You cannot be both the beneficiary of the Land Trust AND the paid Trustee.
Land Trusts are a great way to hide the identity of the property owner (beneficiary). If someone (a/k/a an attorney looking to sue you) were to check the public records, the Trustee's name would appear there, but the beneficiary(ies) name(s) would not be disclosed. The Trustee cannot disclose the name(s) of the beneficiary(ies) unless under court order to do so. If you were able to be the Trustee (or if you made your business partner or spouse Trustee), anonymity would then be lost.
Own NOTHING, but control EVERYTHING!
Quote:
On 2004-10-07 09:58, LABC wrote:
One more quick question....why wouldn't I just be the trust and beneficiary so that I would be the new property owner AND beneficiary?
Thank you for all the quick replies and great information. I'm getting a much better picture of this process now. However, when I pay X amount to purchase the beneficial interest do I get to see the Mortgage Note to ensure I am not getting myself into a balloon, arm, situation? I've seen some websites asking for 8K or less to obtain $30K or so in beneficial interest but no where do they state the actual note terms, they only list the PITI.
In answer to your assumption that you would send the monthly PITI to the Trustee: Definitely! You would send payment to the Trustee. The Trustee would then send payment from the Land Trust checking account to the lender. As the lender is still receiving payments from the same Trustee and Land Trust, they would have no clue that beneficial interest has changed from the owner to the investor. (Make sure that you tell the homeowner NOT to inform the lender that beneficial interest has changed.)
The other thing to make sure of is that the homeowner's insurance policy has been changed to name the co-beneficiaries/co-payees of any claims as 1) the Land Trust and 2) the lender.
Hope this helps.
Quote:
On 2004-10-07 09:52, LABC wrote:
Thank you for that information. It was VERY helpful. One quick question....when the beneficiary directs the trustee to sell the property and the note is paid in full, who gets the 'equity'....the beneficiary???
I assume I would send the PITI to the Trust Acct who in turn sends it to the mtg company each month until it is sold? The original owner is never in the picture after they establish the trust, correct?