Land Trust
I want to lock up a property in a subject-to deal with a land trust. Motivated seller wants to sign this deal quick. I want to explain to the bank about the land trust first but I’m not exactly sure how it works. Can someone explain just what a land trust does? Is it like a typical rental situation where the trustee manages the trust for the beneficiary for a fee? If so, wouldn't that trigger a DOS clause if the mortgage required the property be owner occupied?
Quote:I want to explain to the bank about the land trust first
Good luck explaining a land trust to a bank and more importantly - why would you? I assume you are talking about the current owner's lender. If you are, then you need to read some material on subject to.
Brenda
Thanks for the quick response, friends! Here's my deal: Never done a sub-to deal before. Read Finkel/Conti & bought the CDs. Have a buyer who has to get a committment NOW or lose his next house to a kick-out clause. I want to explain this to him, but I also want him to be sure that he understands the concept, and that his bank understands his motive for "financial planning" before I ask him to sign a non-contingent purchase contract on a $205K next house! I don't want to ask this couple to walk out on a limb that I don't fully understand and have it break off on them. I understand we don't want to spill the beans to the bank...I just want a full grasp of what we are "supposedly" doing just in case we get the deer in the headlights. Thanks again!!
I agree. You are not suppose to discuss land trust to the lender.
For the ownership of the house, you mention using the warranty deed. Does this apply to all the states. I live in California. Do I use the warranty deed to make the title transfer? or do I use the Grant deed?
what is the difference between the two?
thanks in advance.
You need to buy John Locke Subject To material on this site. No offense, but you do not know enough about subject to to do this deal without the great possibility of messing it up. Subject to is not difficult, but needs to be done correctly. I assume you could read John Locke's material in a day or two.
Brenda
My understanding is that a Grant Deed and a Warranty Deed are very similar. If a Grant Deed is the common instrument used in the area that you are working, then use it. It should serve your needs fine.
I am not an attorney, and have no experience using a Grant Deed, so opinions may vary.
Good luck,
Jeff
Let me pose the question differently: Suppose I WANT to put my house in a land trust for "financial planning" reasons. Why would I consider doing this. If you were a financial planner, what would your response be. Why would you advise me to do it? If people "do this every day" there must be a financial motive. Can someone just explain WHY?
A Land Trust will provide a layer of anonymity to the owner. While this does not in itself provide any asset protection, it does make your ownership of the property in question less obvious to prying eyes.
If someone were conducting a public records search, the Deed to your property would not list "You" specifically as the owner of the property. It would be recorded in the name of the Trustee, (as trustee).
Contingency attorneys don't generally file lawsuits on behalf of their potential clients against people that don't have any assets from which to collect.
Placing your property in a land trust is allowed by law. You are allowed to make a transfer into "an inter-vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property" without allowing the lender to invoke the due on sale clause of your mortgage or deed of trust.
Some will teach that you can then simply transfer beneficial interest of the lant trust to a new owner, and not voilate a due on sale clause. This, in my opinion is not true. The transfer of interest in the trust does violate the due on sale clause and would allow a lender to call the loan due and payable in accordance with the terms of the loan.
Here's the kicker.
How would the lender ever find out?
The same way that they would if you did the Sub2 deal without the Land Trust. Someone else's name would be on the check that they receive every month to make your monthly mortgage payment.
Sub2 deals are done both with and without Land Trusts by investors on this site with few if any D.O.S. problems. Is it worth it? Only you can answer that. I haven't spoken to anyone that claims that using a land trust saved them from a due on sale clause in a mortgage being invoked by a lender. As a matter of fact, I haven't corresponded with more that a small few that have ever had a Due on sale invoked at all. Especially when the loan is kept current, and the loan doesn't stay in place for an extended period of time.
I know that this did not specifically address your question as written. I hope you find this information useful just the same.
Good luck,
Jeff
Dear Jeff12002,
You, sir, truly are a gentleman and a scholar. Your time and obvious comprehension of the subject are both admired and appreciated. I guess my concern is if (emphasis on IF) I or a seller were ever confronted by the lender, who casually asked, "and why was it that Mr. Seller decided to put his home into a land trust?" If I, Mr. Trustee, had no clue, I would be caught red handed, look like a fool, and probably get an inquisitive letter from the lender. Beyond that, I have a personal preference for actually understanding something I am trying to convince Mr. Seller that I specialize in, and that I'm not another smooth talking BS artist. What if HE asked? I'd rather have an answer and not need it than need an answer and not have it!
This article may help ease your mind a bit.
http://www.legalwiz.com/dueonsale.htm
Good Luck,
Jeff
GOP:
You could do a quick Google search for Land Trust or Inter-vivos Trust to get a "real" answer, and realize that I'm no attorney and legal advice is best left to professional counsel...
but to answer your question, here are 2 reasons for using trusts (from http://www.taxprophet.com/Memos/Inter_Vivos_Trust_Memo.shtml):
Avoidance of Probate
The main advantage of an Inter Vivos trust is the avoidance of probate. Probate is a state court proceeding in which your property is transferred to your heirs. All Wills must be probated; not so with an Inter Vivos trust. Since probate only affects assets you own at the time of your death, assets placed in an Inter Vivos trust are not owned by you, therefore, there is no probate on those assets. Probate will generally cost about 3-4% of the value of the probate assets and will take from 9 months to 2 years (absent litigation or contested claims) to complete. You save probate fees by using a properly funded Inter Vivos trust.
Confidentiality and Continuity of Ownership
Confidentiality and Continuity of Ownership: Since probate is a court proceeding, your Will and the valuation of your assets are open to public inspection. An Inter Vivos trust, however, is confidential and the transfer of assets from the Inter Vivos trust is kept from public view. When the settlor of an Inter Vivos trust dies or becomes incapacitated, the successor trustee continues the administration of the Inter Vivos trust. With an Inter Vivos trust, there is no "gap" period between the time of death and the appointment of the executor which occurs under a Will. Also, the continuity of the Inter Vivos trust is preserved if the settlor becomes incapacitated through illness or accident through the successor trustee. In this case, the Inter Vivos trust would be administered for the benefit of the grantor.
Andy
I am in awe of the generosity and intellect shared on this site! I will be checking both sources today. Can I ask anyone to address the second part of my first post: does NON-owner occupancy trigger DOS? I recall when I bought my first home, Mr. Banker made it clear that I had to live in it; that's how I got such a "good" interest rate. Thanks guys!
NOO is completely unrelated to DOS. People move out and rent what was their primary residence all the time. I would not worrry about it.
The fact of the matter is that lenders are in the business of loaning money out, and getting more in. They are not looking for ways to call DOS. The only time it should be a problem is if you miss a payment. Most often DOS is not an issue. Go ahead, and do your deal. And, in the mean time, read some more on the subject.[ Edited by bnorton on Date 09/28/2004 ]
Thanks to everyone for your response. I am finding this site to be very informative, inspiring, refreshing and even a challenge!
Sincerely, GOP
Certain Gov't programs require you to be an owner occupant when you purchase the home. These would include VA homes purchased within the period of time when they are only accepting bids from potential owner occupants, and I believe all HUD homes. You would be required to sign a statement that you intend to live in the home for a certain period of time and I believe that it must accompany your bid. If you acquire the property, and don't intend to live there, you are committing fraud, and could be charged as a result.
In addition, I believe that any lease agreement with a term longer than three years can be considered a disguised sale, and could be in violation of the DOS.
Andy,
Good input on the legitimate uses of trusts. It's always a pleasure to learn something new. Thank goodness it happens every day.
Good luck,
Jeff
Here is my two cents regarding Land Trusts:
Tell your seller to notify their lender that they are putting the property into a Land Trust for financial/estate planning (actually, this looks even better to the lender if the seller's attorney sends the letter) This statement is actually TRUE. As mentioned before, it avoids probate delays for the property in the event of their deaths (prior to the sub-to sale).
As for buying sub-to after the Land Trust is formed, the seller assigns their beneficial interest in the trust to you. You would send your monthly mortgage payments to the Trustee, who would then forward payment to the lender using a Land Trust checking account.
Regarding the DOS clause: The bank would never know beneficial interest was transferred to you (UNLESS you or the seller told them). It is my understanding that the Trustee, by law, cannot reveal the beneficiaries, unless under court order.
One other thing regarding the Land Trust: the house insurance should be changed FROM the co-payees being the seller and lender TO the co-payees being the Land Trust and the lender.
Hope this is helpful.
Is it my assumption that most of the people using land trusts are doing so as a means to assume the "sellers" mortgage? Because if thats so, under the usc since the seller moves out of the property it would allow the lender to execute a dos due to the occupancy requirement... thoughts?
Re. the last couple of posts (PLEEEEASE don't think of this as adversarial or contradictory...just a bit of valuable info that might have been omitted, and why I advocate land trusts as the basis for virtually every seller-carry type of transaction.
Some facts:
The US Code (1701, etal.) does NOT require a borrower to remain in the property: as a mater of fact it authorizes leases for up to 3 years, as long as they do not relate to any option to purchase.
It is the Code of Federal Regulations (the CFR, a loose interpretation of the actual Federal Law (the USC), which implies that a borrower must be the only beneficiary of an inter vivos trust and must reside in the property. Note careful that it is the USC that is the Law, not the CFR. The CFR is promulgated by a banking industry peer group’s wishful interpretation of the law. The CFR is a list of rules promulgated by the OTC (Office of Thrift Supervision, which used to be the FHLBB (Federal Home Loan Banking Board).
Never forget that the USC is the LAW and the CFR is not...and such contrary statements (contrary to the law) would undoubtedly be preempted and superseded by the USC and not upheld at all if challenged in court. (Some CFR regulations are law, however, that concerning USC 1701 is not).
Next...Peter Conti and David Finkle are among the best in the business of Lease Purchases (and are master marketers). However, do bear the following closely in mind:
Anytime any arrangement would grant an equitable interest in a property to a tenant: that tenant is now an owner and no longer subject to eviction, and must be foreclosed upon to cure a default (such foreclosure to then be followed by ejectment action to regain entry and possession, and most likely an expensive quiet title action to boot.
What is it in a lease option that would convey equity (an equitable interest) to a tenant in possession? Any Option Fee, and Rent Credit, or any statement to the effect that the Optionee tenant could buy the property at some predetermined amount (assuming any fee were to have been paid for such privilege, or any credit-back given for such purpose).
Does a lease option violate a due on sale clause? Yes, the same as would any lease for more than 3 years. (1701-j-3 again)
Can someone with an equitable lease option cause the property to be pounded with creditor and judgment liens on their part (BK, creditor claims, tax lines, probate, marital dissolution claims, etc.)? Yep. 'Fraid so…IF equitable interest can be asserted and proven.
Is a land trust complicated? No, just a deed to the trustee and a simple document. That’s it. Then what you do with the property after that can avoid virtually all of the pitfalls and short sides of creative real estate financing.
Bill Gatten