All Posts Tagged With: "Subject To/Land Trusts"

As a real estate investor being unprepared can cause anxiety as well as kill any chances you have of closing deals with motivated sellers. It’s the equivalent of taking a test without studying or practicing. You will either fail or lose unnecessarily.

George Allen, one of history’s greatest football coaches, said that winning can be defined as the science of being totally prepared. So how do you prepare yourself to deal with sellers?

1) Make sure your real estate education is up to par

Why go out in the world pursuing sellers if you are totally unprepared? Make sure you study and know the essentials of real estate investing. Whether that is knowing how to fill out a simple purchase and sales agreement, executing a lease option agreement, forming a land trust for asset protection or knowing how to use and protect yourself with a CYA (Cover your assets) agreement in the event that the seller claims that they didn’t fully understand what they were agreeing to is very crucial.

A thorough real estate investing education should be an important component of your arsenal if you plan on succeeding as a real estate investor. It has been often said and rightly so “if you think education is expensive try ignorance”. In Real Estate Investing making mistakes because of you not having a proper real estate investing education will cost you ten’s of thousands of dollars.

The bottom line is be sure of what your doing and no matter how long you have been in the business you should continue to grow your education.

2) Understand entrance and exit strategies so that you can craft multiple offers on the spot.

You must clearly define the outcome that you want to achieve. You must always know your entrance and exit when crafting an offer to sellers. As a real estate investor you make money when you buy.

For example, when negotiating a lease option with a seller before making your offer you should know how you are going to profit in the front end as well as the backend.

3) Be prepared to listen to uncover the seller’s true motivation.

Most people are prepared to talk but never are prepared to listen. How do you uncover the seller’s motivation for selling if you are busy doing all the talking and not intently listening to what they have to say?

Remember you as a Real Estate Investor are there to offer effective solutions. How can you offer effective solutions if you don’t know what the seller’s problems are?
The bottom line is in the real estate business and as a real estate entrepreneur you make money when you master effective listening.

Effective listening enables you to make relevant offers to sellers that have a high probability of being accepted.
Having said that here is one way that you can use that will enable you to become an effective listener.

Asking the right questions then intently listening to the answer.

You must ask the seller the right questions to get them to “open up”. When you get them to “open up” you build rapport which will allow you to uncover the seller’s true motivation as well as understand their present situation as it relates to their property. Once the seller has revealed to you their motivation and given you a clear understanding of their situation, you are in a prime position to offer them solutions.

If you are thinking about investing in real estate, now is a good time to do it. With foreclosures on the rise, investors have a unique opportunity to cash in on a failing housing market. Homeowners are sliding into preforeclosure at an all time high and savvy real estate investors see this as a chance to obtain new property.

Preforeclosure is a term that refers to the period of time before foreclosure on a home begins. During this time, the homeowner is not making house payments as in default status on their home loan. This means the bank has filed foreclosure papers, but the sale or auction of the home hasn’t occurred. With a fist full of hundred dollar bills and the right knowledge, the real estate investor can pick up the home at a substantial discount. The following are a few inside tips that demonstrate the type of advantages investors have in a preforeclosure market.

Preforeclosure is an opportune time for investors for several reasons. First, when a home is on its way to foreclosure, no one is making payments on the property. This gives the investor leverage because he or she can essentially hold costs and use that weight to get a better deal on the home.

As always, investors should pursue highly motivated individuals who want to sell their property. A homeowner in preforeclosure with the bank hounding them constantly is undoubtedly a highly motivated seller. Lenders in this situation are like the homeowners. They need to liquidate loans gone bad because they don’t want to actually repossess the property. With that said, it is easy to see that large discounts can be negotiated.

One of the main keys to successfully investing in a preforeclosure market is to get in and get out before the actual foreclosure and auction occur. If you can negotiate a transaction during pre-foreclosure you avoid the stress of competing for a home in an auction environment. Auctions only leave room for the investor to make poor decisions. Preforeclosure deals keep the investor in control which is a good place be.

Investors, who plan on purchasing and holding the property, generally need a little more money or credit to do so. However, during the preforeclosure market, the investor is essentially taking over where the homebuyer left off. The investor doesn’t need to qualify for the home loan but instead can take over payments and not be personally liable for property. To boot, the investor can benefit from the tax advantages the homeowner no longer qualifies for. This is possible by taking the title to the property and putting it in a land trust.

Finally, while a preforeclosure market can be exciting, it still requires the investor to be smart and focused with his or her investing decisions. The savvy investor will not jump on every deal that comes across his path, instead, the idea is to develop and stick to an investing plan that will pay dividends down the road.

The Garn St. Germain Act carves several exceptions in which the lender may not enforce the due-on-sale:

With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon -

(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;

(2) the creation of a purchase money security interest for household appliances;

(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

4) the granting of a leasehold interest of three years or less not containing an option to purchase;

5) a transfer to a relative resulting from the death of a borrower;

6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

(8) 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; or

(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(The Federal Home Loan Bank Board, which was disbanded in 1989 and replaced by the Office of Thrift Supervision, takes the absurd position that the Act only applies to owner-occupied homes. See 12 C.F.R. 591. However, the clear language of Garn Act specifically states that it applies to residential one-to-four family homes. There is no mention that it must be “owner-occupied.” Although never enforced or challenged, such a direct conflict with the Congressional statute would probably be struck down in court as being “ultra vires”).

A land trust is form of a revocable, living trust which is exempted under the Garn Act. A land trust, like a living trust, is create by two legal documents:

1) A trust agreement between the creator (called “grantor” in legal terms) of the trust and the trustee which defines the trust arrangement; and

2) A deed from the creator of the trust to the trustee.

The trustee holds title for the benefit of the grantor (in this case, the grantor is also the “beneficiary”). If you place title to your property into a land trust, you have not violated the due-on-sale (so long as there is no change in occupancy).

Let’s say that you come across a seller who is willing to give you title to his property. The only “glitch” is that the loan is not assumable because the mortgage has a due-on-sale clause. Here’s the process for getting around it:

STEP 1: Sammy Seller signs a trust agreement with you as trustee of his trust. Sammy is named as the “beneficiary” of the trust.

STEP 2: Sammy Seller transfers title to the trustee (no violation of the due-on-sale clause).

STEP 3: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record. Sammy moves out and you move in.

STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.

Keep in mind that the assignment of Sammy Seller’s interest under the trust to you does trigger the due-on-sale, but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:

1) Change of name on the deed. Not likely, since lenders don’t readily have “spies” at the clerk’s and recorder’s office;

2) Different name on the check received for payment. Not likely, since the bank officers are far removed from the clerical workers who process payments; or

3) Change of hazard insurance beneficiary. This is the most common way a lender discovers a transfer of interest in the borrower’s property.

If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change. However, if you transferred title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. The lender will probably not object, since it will assume the seller has implemented an estate planning device. If the beneficiary of the trust is assigned, the lender will not be notified since the insurance beneficiary (the trustee) has not changed.

This strategy is not much different than simply transferring title directly from seller to buyer (called taking a deed “subject to”). However, the chances of the lender discovering the change of ownership are greatly reduced. This is especially true where the lender has contracted to use a “servicing” company to deal with most facets of the loan.

If you have had any experience with servicing companies, you may know that most are so poorly managed that they don’t know which way is up (I would wager that a survey of 100 servicing company employees would reveal that 98 of them wouldn’t know the meaning of a due-on-sale clause).

There are over 80 million lawsuits filed every year in the United States. Landlords and real estate investors are especially susceptible to liability. Are you a target? Are your assets easy to locate? Is your real estate titled in your name?

You wouldn’t walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder’s office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button!

Any mortgages on your property will be recorded as well. Most recorded mortgages will state the amount of the original principal balance and the date the mortgage payments began. All one has to do is figure out the balance of your mortgage and subtract that amount from the market value of your house. Bingo! Now they know how much equity you have and hence whether suing you is worthwhile.

If a tenant or creditor is contemplating suing you, he will make an appointment with a lawyer. Unless he can afford an attorney by the hour ($150 and up), he will likely seek a contingency-fee lawyer. A contingency-fee lawyer does not charge by the hour; he charges a percentage of whatever he collects. Most contingency fee lawyers will not take a case unless there is something upon which to collect.

If you have no real estate in your name, then finding out your ownership interest will not be easy for a typical lawyer. It’s not that lawyers are lazy. It’s simply a matter of allocation of resources; lawyers focus on cases they can win and collect. If they don’t find any assets in your name (and there is no other apparent deep pocket), they probably won’t take the case. As you can see, appearing broke is the best lawsuit repellent money can buy!

There is another problem with owning real estate in your own name. If a judgment is obtained against you and filed in any county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in that county, since no title insurance company will guarantee a clean title. You’re stuck until you pay off the lien.

Some people use a corporation or limited liability company to hold title to their real estate. While these entities will protect you, they will not protect your property.

If you own all of your properties in one corporation, a judgment against the corporation will create a lien on all property owned by the corporation. Furthermore, the directors and officers of a corporation are public record, so a corporation will not hide your ownership.

The solution for holding title to real estate is a land trust.A land trust is a revocable, living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The beneficial owner or “beneficiary” can be an individual, corporation or other entity for further protection.

Land trusts were first used in Illinois, hence the nickname, Illinois Land Trust. In nine states (AL, FL, GA, HI, IL, IN, ND and VA), land trusts are specifically recognized by statute. In most other states the validity of land trusts are supported by common law and general trust principles (land trusts are not recognized in TN & LA).

A land trust, if properly setup and implemented, will hide your name from the public records. No one will know who owns the property but you, your attorney and the trustee. If a judgment is entered against you, a lien will not automatically attach to the property, since title is not in your name.A transfer of realty into a land trust virtually no income tax consequences. A land trust is considered a revocable “grantor” trust under the Internal Revenue Code, so it does not require a separate tax identification number or income tax return.

Thus, you continue report the property for income tax purposes as though you still own it. Furthermore, a transfer of property into a land trust will not usually trigger the due on sale clause of your mortgage. A land trust will allow you to assume an FHA or VA loan without recourse. Anyone can assume an old FHA or VA loan without qualifying, but few investors realize that such an assumption is with recourse.

If the investor sells the property and the buyer assumes then defaults on the loan, the investor (and anyone else who previously assumed the loan) may be held liable. If a land trust is established to take title to the property and assume the loan, there is no recourse against the beneficiary.

Furthermore, the loan will not appear on the beneficiary’s credit report as a liability. So What are your waiting for?

Get that Property Out of Your Name!