Land Trusts = Problems

Land trusts have long been the method of choice for conducting simultaneous closings on short sales. In essence, they allow investor to buy and sell a property with no money out of pocket.

As such, they have been promoted by real estate gurus for years as the perfect way for one to build their million dollar real estate business without needing a penny (other than to buy their promotional materials).

So why are so many state attorney generals concerned? Using land trusts, particularly the Warranty Deed to Trustee (transferring ownership of the property from the homeowner in default to a trustee who is closely aligned with the investor seeking to make a profit) can become problematic or often illegal in some states.

Likewise, the largest title insurance underwriters recently issued underwriting bulletins to their agents and offices indicating that transactions involving land trusts are to be avoided, or carefully handled.

Years ago when I first learned how to use the land trust, it seemed too good to be true . . . After several successful transactions, I finally found that my suspicions were correct.

Land trusts are used in short sale transactions by investors for these two specific reasons.

Most investors are trying to set up a simultaneous purchase and resale of the property (a simultaneous closing). A problem created when trying to do a simultaneous closing is that most people buying the short sale from the investor are going to go get a loan to buy the property. Just about all lenders providing loans to buyers have a seasoning requirement. Seasoning requirements state that the lender will not loan money on the property unless the homeowner has been on title for at least 6, 12 or 24 months. Land trusts have seemingly provided a perfect foil to this obstacle –– when in fact they are deeply flawed. In using land trusts investors are able to show that the homeowner or seller is still on title when in truth they are not. The land trust is a “smoke and mirrors” tactic used by the short sale investor that allows them to pull all the strings behind the scenes to gain the profits from the transaction. Unfortunately, they are misrepresenting to the end lender the true nature of the transaction. Likewise, investors using the land trust as a method to conduct a simultaneous close are committing actions that border on bank fraud.

Many investors doing short sales have tried to create a “subject to” transaction in which the investor will short sale 2nd and 3rd mortgages (thus creating the equity and future profit). The only way to complete a subject to deal is through using a land trust. The investor would then “take over” the 1st mortgage “subject to” the existing mortgage (thus eliminating the need for the investor to use their own cash or credit to “buy” the property). Laws have been enacted specifically to eliminate this practice.

What’s amazing to me is how many investors are willing to put themselves on the line by ignoring the risks inherent in these type of transactions involving land trusts, when a better way exists.

As short sales have grown more common, more Realtors and investors have migrated over to what was once a niche market. I’m curious . . . how many Realtors have attempted a short sale using a land trust? Also, how many investors are still trying to close deals using land trusts? What have your experiences been? What questions were raised? [addsig]

I have tried about every possible way including land trusts. Double close using a grant deed is the best hands down. There are NO seasoning issues the way we do it despite the consensous claiming so.

"Double closing using a grant deed is the best hands down."

That is usually an accurate statement, however the information you provided is too incomplete for me to completely answer the question. I would need to review some of your deals particularly looking at the following documentation: the title commitment prepared by the escrow agent or title attorney that is sent to the end buyer's lender and compare that with the two HUDs, the one for the first closing where you are the buyer and the second for when you are the seller. If all of those documents are conguent and consistent with two deeds being used back to back and being recorded back to back then you are doing it exactly perfectly right. That is how the option contract method sets it up for it to happen

JackB, I look forward to your reply, keeping the typical investor in mind. You and I have had some dialogue about this, and I think you said that part of the reason seasoning isn't an issue for you is that, as a mortgage broker, you can write loans yourself that don't have seasoning requirements. Since most of us cannot do that, we need to address the seasoning issue in other ways. If you didn't or couldn't write loans yourself, how would you do that?

Dragging a buyer to our own chosen lender--and assuming we even know one who'll do no/low seasoning loans--is not always possible unless the buyer's really in love with my house and will do whatever it takes to get it. Isn't it the case that most don't want to fill out more applications and will just keep looking for another house?

So when we start the SS process and get the paperwork from the owners have the warranty deed say $0 dollars and record it?

It's called a "Conveyance given for no value". Considered a bono fide gift and the seller received nothing in exchange. Your title will know.

hey jack how many gifts can a person receive in your area? great answer by the way.

Thank you.

There is no specific number to the amount of property's you can record this way that I'm aware of.

BTW... Most of our property's are in Los Angeles, Ventura, and San Bernardino County's.

JackB are you then getting paid outside of escrow?

No, we collect our proceeds from the sale of the property to our end buyer.

Check with your title and or County recorders.

jack,

If I get this right. You have to owner sign the Deed over to you using a Grant Deed or Warranty Deed for zero $$ and you then record it at the county. In doing so, there is no seasoning issue.

Does that mean only the end buyer needs to bring funds at closing?

I am right?

Tocwan, What's your take on this?

Jack.... A grant deed in California transfers title... It also gives constructive notice... So you dont violate our nice little max of 8 selling a contract law.

It doesnt have crap to do with getting around seasoning... If you as the seller are not the owner ( on title) then you are not on the pre for the buyers lender.

Hence a posible seasoning issue.

Michael Quarles

No, a Grant Deed is used in California only. The other 49 states use a General Warranty Deed. [addsig]

Let's look at why lenders have seasoning underwritting guidleines to begin with. They are concerned about the value of a property. When a property is purchased for X amount then resold immediatley for a higher price and a lenders asked to loan on that higher price it has to make sense.

When you record a Grant Deed (yes, only in California) for no consideration, their is NO purchase price and no value is given thus, no seasoning concerns.

Yes, you need to be owner of record on the pre when your buyer submits their loan.

You can fund these with your buyers end dough or pay off the 1st with your own, either way.

[ Edited by jackbenimble on Date 05/12/2008 ]

Jack... Youre giving bad advise... The issues of seasonig are much greater than how long someone has owned a property and at what value they purchased the property.

And then you tell the investment world to lie to the recorders office regarding the transfer.

It is investor who do what you just discribed who make the reat of us who actually invest have a bad rap.

No one has to cheat the system to make bucket loads...

"Lie to the recorders office". What are you talking about? If a homeowner that has no equity position deeds a property to someone else that hasn't paid them anything for it, it is considered a 'bonofide gift' and is a LEGAL transfer of title.

The issues of seasoning in this regard are value related, period. Anyone that says seasoning is an issue simply doesn't know what they're talking about.

So Jack when you Buy a property with a 200,000 loan on it, leaving in place, and give the seller zero how much is your funny math paying for the property?

It would appear to be that the property costs $200,000 but in acquiring the property, as I understand it, Jack is not "paying" anything.

Example: House is worth 200k. Seller owes 250k. We pay them zero. Am I missing something?

I understand that no money is passing hands and I also know that a transfer tax is not due and the county will consider it a gift, the reality is the issue of seasoning will take form once the resell value is in excess of the gift value... Assuming a quick flip and when the borrower is marginal.

Also the buyers lender in a situation where seasoning is an issue is going to require the seller to be named on the Pre lim as the owner.

And although escrow can create an instruction to pass the buyers funds to close the purchase escrow rarely will the buyers lender allow that transfer without a title guarantee...

My issue with Jack is that his statement is way too simple and leads new investors to think "Just get a Grant deed" well hell a grant deed is what we use in California to transfer title....

- There is no 'gift value'. We are speaking of a simul closing. On title/pre their will show no transfer price.

-I'm not saying the process of completing a successful short sale flip is easy, it's not. It's complicated and needs to be done the correct way and in a timely manner. The point I'm making is that seasoning is not an issue and I think I've explained why it's not as well as I can.

For those out there that 'get it', good for you and I wish you the best of luck. I just have a problem with those that don't that keep saying seasoning is an issue when they've never even attempted it. Oh well.

I think when investors argue over their methods of closing a deal, it does nothing but confuse the crap out of the new investors. If you have done RE transactions successfully; great., let share the success. What work for one person may not work for others.

Until recently, I was getting ready to do SS deals using land trust, now I have to rethink that method, because of everything I am hearing. I am trying to learn the whole option method cause I hearing some positive things about it.

Has anyone in the NY city area done SS using the option method?

A no-consideration deed from seller to investor can create a seasoning issue and other issues as well.

The deed from the seller to trustee where seller retains 100% beneficial interest is a mere change of identity and eliminates the seasoning issue. Further, this no consideration transfer creates a preferential transfer issue. If a creditor obtains a judgment against the seller after deed execution, the judgment will have priority and the title company will require that it be satisfied.

I cannot emphasize it enough, all advice must be tailored to the State you are working (or in my case, practicing) in. I find the land trust transaction to be far superior here in NY with a short sale transaction and I close them successfully on a weekly basis.

[ Edited by TheShortSalePro on Date 06/07/2008 ]

Dear Jack,
Be so kind as to share a snipped of the title commitment, particularly the 24 month chain of title off of one of these deals that you talk about doing

What I suspect is going on is the title commitment is being prepared showing the person receiving the title through the grant deed has been the vested owner for at least 90 days prior to the transaction taking place where the property is sol by the investor i.e. jackbenimble to the end buyer. If my suspicions are correct, then the title commitment is a misrepresentation and it is incomplete.

Posting a copy of the title commitment may not be practical, perhaps you will answer the following question:

How do you disclose to the end buyer's lender the previous transaction that occurred with the grant deed?

Interesting series of posts! [addsig]

No, title isn't doctoring dates to fit our objective. Nice try.

There is no need to disclose recording a deed to an end lender as it's right on the prelim for them to see.

I will note that we do not accept offers from buyers that need fha as their guidliness regarding seasoning are very strict. I am speaking of conventional financing.