Use of Land Trusts in Residential Real Estate Transactions (clause, mortgage, mortgage)
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Has anyone ever used a land trust in real estate transactions. I have a property that I have considered offering as a lease-to-own. I had an investor contact me and suggest using a land trust. According to him, it’s safer for both parties. He pays me a non-refundable “Option Fee,” and a monthly fee to maintain the option. In turn, the occupants may exercise the option when they are ready to complete the sale. Is this legitimate or some hairbrained scheme or worse? I did a few google searches and it does indeed to be used legitimately in many cases. What are the pro and cons, pitfalls, etc.?
The most common legitimate use for a land trust is to keep the house out of probate. You transfer the title of a house to a trust. That trust names a beneficiary who is entitled to occupy the house. You write the trust so that on the death of the beneficiary, someone else will become the new beneficiary and can immediately take possession. In the "normal" way, if the homeowner dies the house becomes part of the homeowner's estate, and cannot be transferred to someone else until the estate goes through probate, which can take some time. Meanwhile the house may sit empty while the estate pays the mortgage.
Another use for a land trust is to conceal the ownership of the property. You can find out the record owner by searching property records, but you may not be able to discover the beneficiary if the home is in a trust. Unscrupulous people sometimes structure a deal with a land trust to avoid the due on sale clause in the owner's mortgage. This clause provides that on the sale of the home (or the transfer of a beneficial interest in the property, such as an option to purchase), the note and mortgage immediately become due and payable. Under federal law, a home can be placed into a living trust with the occupant as the beneficiary without triggering the due on sale clause. Some investors try to hide the transfer of the property by getting the seller to set up a trust like this and then simply change the beneficiary from seller to buyer. The problem is, once the buyer becomes the beneficiary, the trust no longer meets the requirements for the federal exception, and the seller is then liable under the due on sale clause. Depending on the state, the transaction may also be used to avoid transfer taxes that would have to be paid if a new deed was recorded (although those usually aren't that big of a deal). Whether the mortgagee can detect this is another matter.
My question is why would you want to put another party between you and the potentional purchaser?
Consult an attorney that can advise you on your specfic situation. (and not one recommended by the "investor"!)
The trust could be the "purchaser," but more likely the investor thinks this is a way ownership can be changed without anyone finding out. Unless you're looking to solve the potential probate problem I discussed, there's no need for a trust. If the buyer wants to set up a trust, let them do so but I wouldn't get involved in that as the seller.
trusts are a wonderful thing, especially if you're servicing a contract. contact a real estate attorney.
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