Please advise...take deed or record opt. - Posted by JEN

Re: DOS and “not enough equity” - Posted by Jerry Donovan

Posted by Jerry Donovan on May 20, 2011 at 11:08:31:

Jen, Since that time I’ve used a land trust exclusively and that is one of the main reasons. The Countrywide issue occurred when I purchased a property and got a 1st through them. I converted to a land trust and title changed to my Trustee. They called me directly and did ask to see the Beneficiary Agreement and proof of beneficiaries but I (and my Trustee) refused to provide that information as it is protected. I simply told them that I had a right to transfer title to a Trustee and that it did not constitute a sale, but a legitimate transfer which is protected under the Garn-St. Germain Act. We argued but they eventually admitted that I was correct and their hands were tied.

I used traditional homeowners insurance that I set up prior to setting up the trust. Since my name was the borrower on the loan, there was no problem doing that and I have never encountered an insurance problem.

Good luck with B of A. They just got sued and lost in Arizona for flaky foreclosures.

Wrong, Chris - Posted by John Little

Posted by John Little on May 22, 2011 at 17:34:27:

The Garn St. Germain Act provides in part:

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.

Re: Wrong, John… - Posted by Chris in FL

Posted by Chris in FL on May 22, 2011 at 20:31:01:

John,

We will simply have to agree to disagree on this one… Transfer into an inter-vivos trust “in which borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”, means that the borrower still owns and lives in the home - they just put it into a trust for personal or business reasons. If you get the deed, regardless of if it is in a landtrust or not, the borrower is no longer a beneficiary with rights of occupancy. The way it is commonly done, you (investor) become the beneficiary, and if borrower stays in the home at all, odds are they pay rent and you have the right to kick them out if they don’t (hence rights of occupancy have passed to you). Ownership has changed, with or without a landtrust, and the bank has the right to call for Due On Sale. I have talked to a few experts, both real estate gurus and a real estate lawyer, over the years, and all I talked to were of the same opinion, so I will stay with that opinion… Perhaps you are misunderstanding Garn St. Germain, or perhaps case law later defined what it does and does not mean differently than you understand, but I am confident in what I have been taught.

I am still of the opinion banks are unlikely to foreclose because of DOS if the payments are staying current, especially with today’s foreclosure craziness, but if ownership changes (hence a sale), they have the right to if they wish, regardless of entities used. In fact, if you look at #4, even a lease/option agreement of more than three years constitutes a sale for purposes of DOS, and I believe later case law determined that to hold true even if it was a shorter term lease/option agreement, but renewals extended the total duration past three years.

You have your opinion; I have mine. Glad to hear your source(s), but just the Garn St. Germain Act does not say no DOS for landtrusts.

Best wishes,
Chris in FL

P.S. - IMO, another common misunderstanding about landtrusts - many people think they provide a type of entity protection. Not so at all. They provide one thing - privacy. If you are sued, and a court of law says tell me about all of your assets, you are required to disclose any beneficial interest in a property in a landtrust, and if you do not, you can be found guilty of misconduct and lying under oath. A landtrust keeps your name off public record - might make you less likely to be a target for frivolous law suits, but it does not provide entity protection for you or the property.

Re: Wrong, John… - Posted by John Little

Posted by John Little on May 23, 2011 at 08:09:14:

Chris, Glad you gave your understanding and I’ll be happy to explain where you are wrong. I have the seller open his own trust and make me a beneficiary as the Investor. He transfers the deed to his Trustee. There has been no sale or transfer of occupancy rights. That’s it. The seller is now the owner of personal property similar to stock in a corporation and his Trustee owns legal and equitable title to the real property. The only transfer of the deed has been from the Seller to his Trustee which is protected. This transfer is exempt from the DOS as I have reaffirmed with my Lender several times in various transactions, and with at least four trust attorneys.

EVERYTHING that occurs after that is private and covered under UCC regulations and not mortgage law. We then bring in a Resident Beneficiary to live in the property under a separate Lease Agreement.

The mistake you are making is regarding the deed. Ownership has not changed. The original seller still has his Trust with his own Trustee, and retains a beneficiary interest. The transfer to his Trustee did not involve occupancy rights. Now, everything that is done after that is protected under privacy rights and governed by the UCC. The IRS allows the RB to write off the mtg interest and property taxes as if he/she were an owner, and the original seller is entitled to write off the passive investment portion.

Re: Wrong, John… - Posted by Chris in FL

Posted by Chris in FL on May 24, 2011 at 22:58:31:

John,

A landtrust provides protection/anonymity. That is all. Your trustee, in most instances, is not supposed to tell creditors or others who the beneficial interest is (i.e. - owner). That being said, anything that you do with property held in a landtrust is still subject to the same laws as if there was no landtrust. You still have to pay property taxes or deal with the consequences. You still have to pay any mortgages or foreclosure can happen. If there is a sale (transfer of beneficial interest), it is still a sale. You still have to pay applicable taxes on the sale/transfer of property - many people wrongly believe you do not, because it is seldom “caught”. I want to say that may vary by state - one state may say no transfer taxes due, while another may say pay them, and may even charge you with intent to defraud (tax avoidance). DOS still applies, even though it may be hard for a lender to discover/prove that a sale has happened. If you were to go to court, arguing that there is a landtrust and it is personal property, you will find out that there was a property sale, and DOS is applicable. Likewise, if you were sued, and a judge said ‘disclose all assets’, you would be required to disclose beneficial interests in landtrusts, and those assets could be attached just as easily and readily as if there was no landtrust. If you did not disclose, you could go to jail for contempt, failure to disclose, perjury, or whatever was applicable that the judge felt like throwing at you. The truth is the ‘power’ of land trusts is often overstated (especially by those who are selling material/courses about the use of land trusts)! They serve one real purpose - anonymity. They hide ownership, so that someone owning a bunch of property is less likely to become a law suit target (or, in the case of buying subject to, they make a change of ownership less obvious). That is my understanding, from talking to several experts… I understand exactly what you are saying - I understand why you are saying it - I just agree to disagree with your opinion. I know the bank may say you are right - we can’t file DOS because of use of a land trust - a land trust doesn’t prove ownership has changed; however, if the beneficial interest changes, then ownership changes, and if a bank files DOS and it goes to court, your opinion that a landtrust gives you privacy will mean absolutely nothing. The judge will say you are trying to use a landtrust to play games; you own the property - a sale has occured from the borrower to you, and the mortgage is DOS. Sorry you got bad advice about what a land trust does - go cry in your milk.

Here is quoted material from William Bronchick (pretty sure you know the name?):
‘Making Loans ?Assumable?: A non-assumable loan can become effectively assumed by using a land trust. The seller transfers title into a land trust, with himself as beneficiary. This transfer does not trigger the due-on-sale clause of the mortgage. After the fact, he transfers his beneficial interest to you. This latter transaction does trigger the due-on-sale, but such transfer does not come to the attention of the lender because it is not recorded anywhere in public records. This effectively makes a non-assumable loan ?assumable?..’

This is exactly how it was explained to me when I talked to people that know!

Best wishes,
Chris in FL

John… - Posted by jimi

Posted by jimi on May 23, 2011 at 08:19:56:

John -

That’s the clearest articulation of this approach I’ve seen. Nicely written, thanks.

Re: Wrong, John… - Posted by John Little

Posted by John Little on May 25, 2011 at 07:58:29:

I find it pretty funny, Chris, that someone with an obvious agenda against land trusts would go so far. You are so wrong when you say that anything you do with a property is subject to the same laws. Once title transfers to the Trustee, the Seller no longer owns real property, he owns PERSONAL PROPERTY. Who says so? The IRS. In fact, the IRS allows the RB, who is only a Lessee and a Beneficiary, to write off the mortgage interest. A Lessee in a Lease Option can’t do that.

Transfers of beneficial interests are NOT SALES, do not require transfer fees. They are transfers of personal property and do not affect the title which is still held by the Trustee.

In court, if I am asked if I own real property, I can legally say no. If I am asked if I own a beneficiary interest in a land trust, I will say yes. HERE IS WHERE YOU ARE WRONG. A creditor may reach the corpus of a land trust, unless there is more than one unrelated beneficiary (as with the model I use). This concept appears to be based upon the idea that a co-beneficiary in a land trust can be seen as a ?partner,? and a claim or charging order effected against a co-beneficiary would be impossible without a dissolution of the entity (the trust), and since an unrelated co-beneficiary is not responsible for the actions of the other: such dissolution would not be allowed.

Henry H. Keno on Land Trusts, IICLE, Springfield, Illinois (1989)
Smith v. B of A; Houghton v. Pacific Southwest Trust and Savings Bank: 111 CA 509, 295 p. 1079,
The CA. Code of Civil Procedures §697.510]

This is the law, Chris, and I know of no case in over a decade of using and teaching about land trusts, that proves me wrong. Your theory is correct on its face, but you have overlooked the beauty of having a co-beneficiary.

One final thing, you say that when a beneficial interest changes, ownership changes. Not the way I do it. The Seller RETAINS a % of ownership and his Trustee retains legal ownership. NO SALE. What we do with the ownership of the personal property has no effect whatsoever on the title. It is private business of personal property governed by UCC regulations.

Where you are quoting Bill, you say that after the fact the Seller transfers his beneficial interest to me. THAT IS WRONG. He always retains a percentage of ownership and the DOS is not affected. I’m afraid that you are going to have to be the one who cries in his milk. Thanks for the lively discussion.

Re: Wrong, John… - Posted by Chris in FL

Posted by Chris in FL on May 27, 2011 at 02:49:35:

John,

First, when I talk about landtrusts, I mentioned at least once or twice, I am talking about the way they are commonly used. You may play a bunch of games trying to avoid common traps, and that is your business. What I hate is when people sell the idea of land trusts (or LLCs, or any other vehicle) like it is an end all, be all, that can bullet proof real estate. That is hog wash. Every vehicle has its strengths (and weaknesses). A land trust serves to hide ownership (provide anonymity). It changes to personal property, I know, but that fact does not take away most of the inherent real estate rules, property taxes, mortgages, etc.
Most investors get the deed - not give the owner/seller a %. Also, when you bring that into play, the land trust is not giving you what you claim, per se - you are getting that protection from the partnership aspect (the land trust just makes your transaction less apparent; keeping the seller a % owner does the heavy lifting in this instance, with or without a land trust). Also, when you play games, trying to deflect the purpose of certain laws, taxes, etc., what often happens is eventually a judge looks past the details, says your intent is obvious, and you are going down. Hopefully that doesn’t ever happen to you, but it does happen. If your intent is to “beat the system”, and you find tricky ways to do that, good chance the last trick will be on you. Either way, John, we are back to what I said all along - we are going to have to agree to disagree. I am done with this thread - we are beating a dead horse. You love the land trust - keep loving it. I know it’s strengths and weaknesses - I don’t build it up to be more than it really is. Obviously, IMHO, you are trying to turn it into an end all, be all. I see people routinely think land trusts provide protection similar to entities (they don’t). I see people think entities or land trusts can protect them from personal law suits (they can’t; though the charging order of an LLC helps discourage law suits). My biggest beef - the reason many investors think these things do more than they really do, is because people trying to sell courses or material or systems hype them up way beyond what they really do!

Best wishes, John, and I hope your system works for you always. Really.

Re: Wrong, John… - Posted by Margret

Posted by Margret on May 26, 2011 at 09:48:54:

“Transfers of beneficial interests are NOT SALES, do not require transfer fees.”

In CA transfers of 50% or more of interest in a land trust do require reporting and do require transfer fees, see Revenue & Taxation Code §§ 480.1 and 480.2. This started in 2010. Other states may have similar laws.

Do you comply with this law?

Re: Wrong, John… - Posted by John Little

Posted by John Little on May 27, 2011 at 10:18:04:

Chris, I think that you and I are often comparing apples and oranges. First, we NEVER take the deed. You say that most investors do, but those are not investors who use my system.

You are referring to a simple land trust. I use “you know who’s” EHT system which combines the land trust with an Equity Share and Triple Net Lease Agreement. It’s much stronger and flexible than a land trust. Because we convert real property to personal property, we are not bound by the restrictions of various state and local laws governing real estate transactions. With no worry about the Due-on-Sale Clause, equitable interest, disguised sales, or any other roadblock to proper asset management, we have a variety of methods we can use to achieve the goals of any of the traditional investment methods.

Our system may be seen an effective legal shield for virtually ANY creative financing objective. It can be tantamount to:

a Long Term Lease (i.e., more than 3 years);
a Lease Option;
a Lease Purchase,
an All Inclusive Trust Deed,
an Equity Share Arrangement,
or a Land Contract (e.g., Contract for Sale, Contract for Deed, Contract for Warranty Deed, etc.).

My system can meet the objectives and functions of any of these arrangements without the many risks associated with them and so it is an end-all in that regard. Thanks again for the friendly discussion and good luck to you.