Subject To vs. Lease Options
Investor · Orlando, FL · Member since 2015 · 86 posts · 6 votes
Hey everybody!
I am going to reach out to some landlords this week to make a few offers. I'd really like to weigh both Subject Tos and Lease Options, and how to know which is better for which situation. Some thoughts that I have is that if you do a Subject To, then eventually you can have the mortgage paid off and sell the house. With lease options, you can exercise the option, but would have to qualify a loan. Does anybody have any tips about this? Thank you!
There is no wrong answer regarding which way you want to go for a landlord deal like this.
We ran a unique landlord campaign a while ago where we looked up all the evictions in our target counties.
On the 3 day notices were the phone numbers for most of the landlords.
We then had our callers (and we made some of the calls ourselves) reach out to the owners by phone and see if they might be interested in selling.
(The idea being that they might be at the height of their aggravation having to deal with an eviction)
We actually got some good deals for creative financing (this is not a wholesaler concept)
We did both L/O and subject to.
Many times the difference was the sellers preference.
In some cases the owner was happy with a long term lease that didn't require fixing toilets. Others were so fed up they just wanted the property out of their name.
In either case, the terms of the agreement make or break the deal.
Just remember, your terms are not based on what a standard contract states, but on what the buyer and seller agree to.
My personal preference is to do the L/O or agreement for deed, with specific terms.
The reason is that I like to have a buffer between me and the bank. Instead of having the chance of default being entirely my responsibility, the owner is still in control of his mtg.
This does not mean I leave him to his own devises. The property is put into a third party land trust (my Atty is the trustee) with specific directions to the trustee to make payments on behalf of the trust.
Also, I do not have a balloon in place but have an agreement that once all payments are made, (the mtg and the owners equity) the owners name will be taken off of the beneficiary's position and replaced with mine.
I personally don't care about owning property as much as I want to control property and cash flow. This is why this works.
As far as subject to's are concerned, the process is similar in that the property goes into a land trust, still with the seller as beneficiary.
On a separate form, we do an assignment of beneficial interest, which in essence puts the property into my name.
As for the management part, I still do a sandwich lease with the land trust which allows me to manage the property without "owning it."
Hope this helps.
There is no wrong answer regarding which way you want to go for a landlord deal like this.
We ran a unique landlord campaign a while ago where we looked up all the evictions in our target counties.
On the 3 day notices were the phone numbers for most of the landlords.
We then had our callers (and we made some of the calls ourselves) reach out to the owners by phone and see if they might be interested in selling.
(The idea being that they might be at the height of their aggravation having to deal with an eviction)
We actually got some good deals for creative financing (this is not a wholesaler concept)
We did both L/O and subject to.
Many times the difference was the sellers preference.
In some cases the owner was happy with a long term lease that didn't require fixing toilets. Others were so fed up they just wanted the property out of their name.
In either case, the terms of the agreement make or break the deal.
Just remember, your terms are not based on what a standard contract states, but on what the buyer and seller agree to.
My personal preference is to do the L/O or agreement for deed, with specific terms.
The reason is that I like to have a buffer between me and the bank. Instead of having the chance of default being entirely my responsibility, the owner is still in control of his mtg.
This does not mean I leave him to his own devises. The property is put into a third party land trust (my Atty is the trustee) with specific directions to the trustee to make payments on behalf of the trust.
Also, I do not have a balloon in place but have an agreement that once all payments are made, (the mtg and the owners equity) the owners name will be taken off of the beneficiary's position and replaced with mine.
I personally don't care about owning property as much as I want to control property and cash flow. This is why this works.
As far as subject to's are concerned, the process is similar in that the property goes into a land trust, still with the seller as beneficiary.
On a separate form, we do an assignment of beneficial interest, which in essence puts the property into my name.
As for the management part, I still do a sandwich lease with the land trust which allows me to manage the property without "owning it."
Hope this helps.
VOTE! VOTE! VOTE! Loved your post! Where have you been? :) Awesome!
There are 2 terrific "cousins" to your SLO and sub2.
1. Contract for option to purchase + a Residential Lease; selling to renters. Renters do not get the option to purchase until they finish the lease, this is almost a "right of first refusal".
"Perform on the lease and you get a chance to buy."
2. Contract For Beneficial Interest
The contract for the beneficial interest is like a contract for deed but the difference is that the buyer is purchasing the beneficial interest in the land trust from the beneficiary rather than the land itself from the trustee.
The advantages that in a land trust of beneficial interest is personal property to the buyer does not get any vested or equitable rights in the real property.
This only works in states that recognize the land trust. However, since the law of most states is not completely settled as to the status of land trust, use of the agreement may work just because the buyers attorney does not want to litigate new law over the small sums involved. The agreement is clear on its face and if clearly explained to the buyer, it should be enforced according to its terms.
This contract is for buyers with a minimal down payment and a higher probability of default. As with the contract for option to purchase, this agreement is designed to contract for the beneficial interest of a land trust, and not to deliver equitable title to the buyer
In the buyers of the beneficial interest have a separate lease of the real estate, which is signed by the trustee rather than the beneficiary, it should be possible to evict them using a normal landlord-tenant procedure.
Stating in the lease that the relationship between the parties is governed by state landlord-tenant law should prevail over any arguments to the contrary.
Buyers under this contract receive the beneficial interest of the land trust holding the property upon completion of all the terms. At this time, they can replace the trustee was someone of their choice or direct the trustee to deed the property to them.
This contract survives the closing and provides for successor trustee and successor beneficiaries in the event of a loss of either.
The buyers better protected than many agreements for deed where no deed is held in escrow.
The property held in the land trust is protected from judgments, liens, partition, forced sale, and other problems of the property held in the owner's name.
In many areas of the country the practice is to sell the property on unrecorded agreements for the. The contract for the beneficial interest provides much better protection for the buyer.
Investors use this contract for low down buyers for pension plan and Roth IRA properties that have a higher failure rate. Upon default, without the cost and delay foreclosure, the properties are recovered and resold at minimum of expense and delay.
@David Dey Thank you for the incredibly thorough response. It gave me a lot to think about and analyze! Some questions that I have for you is if the Due On Sale clause is an issue? I've read many conflicting things about the DOS, some saying placing the deed in a land trust is not transparent, and therefore can trigger the bank to call?
And you wrote that you prefer a L/O because you can "have a buffer between me and the bank", but wouldn't this be the case with Sub2 as well? Since in both cases the owner is still named for the mortgage?
And to make sure I'm understanding, the determinant factor for which method to use is whether the seller wants to be on the deed anymore? So they do, then lease options which you in turn sandwich lease, and if they don't, then sub2s which allow you to transfer beneficiary interest.
I am super appreciative of your response! I'm excited to have eviction records as another marketing tool.
Wow, thanks for the information. I think you have reminded me that I also need to get a better understanding of landtrusts and legal implications.
I am trying to understand the contract for beneficial interest since these concepts are still very new to me; is this what @David Dey was utilizing in Sub2 deals, where there was an assignment of beneficial interest?
Does beneficial interest mean that you hold the title? Or are they both different?
And to be clear, this is utilized so that to the seller it is low expense in case of default, and to the buyer, you are more protected legally? Would you be able to provide an example of a situation this is utilized so I can better understand the opportunities and apply the theory?
The due on sale clause is very much an issue. That's why the land trust. The thing is they can't tell you not to deal with YOUR property in YOUR own best interest, and putting the property into a land trust is in your best interest.
That is why we do the transaction in two steps.
First, put the property into a land trust with the owner as the beneficiary.
Second, have them assign ownership to you via assignment of beneficial interest.
That way, if the bank really pushes you to show the trust you can show it to them still showing the original owner on the trust, thus not violating the due on sale.
No, the contract for beneficial interest is different then what we do.
We take the beneficial interest right away. The difference between what we do and what @Brian Gibbons was discussing is that we take the beneficial interest up front and control the trustee, as opposed to the contract for beneficial interest works similar to an agreement for deed in that you have to perform the contractual obligations before you get the interest, and until then are simply in a lease.
Here is land trust education in a nutshell.
The land trust is a straw entity, not a true entity that offers protection like a corporation or LLC. Think of it this way, a land trust is a curtain, not a wall. The protection it provides is anonymity.
To give you an understanding of how it works. Draw a circle, then draw a line through the middle of it.
The front of the line is public record, behind the line is behind the curtain. No one knows what's happening behind the curtain except the trustee and the beneficiaries.
The trustee is in front of the curtain and is the "hands and feet" of the trust, able to buy, sell, mortgage, lease, or what have you.
However, the trustee is not the owner, but simply an employee of the trust.
The owner, or beneficiary is behind the curtain and not a matter of public record.
Again, only the trustee and the beneficiary him/herself knows who the beneficiary is.
This creates the opportunity for all sorts of unique transactions, such as subject to, and contract for beneficial interest, among others.
There is plenty more education on the subject, but I hope this gives you a basic start of an understanding.
Hope this helps.
@David Dey I have 2 questions for you. Where did you learn all this information about land trust I would also like to learn.
Also if marketing to the eviction list brought you deals why did you not continue?
My very first mentor in real estate taught me many valuable lessons, but one of the first things he taught me was the basics of land trusts for assett protection.
Since then, I have studied all sorts of info on them, but one of the most informational influences regarding land trusts is a member on here. Jack Shea is one of the most knowledgable people when it comes to land trusts. His partner, Mark Warda an Atty in Central Florida, literally wrote the book on land trusts. Their classes are actual credit hours for attorneys.
Now of course, please make sure your state is one that recognizes land trusts. But thems the basics.
As for the marketing to eviction lists, I was primarily looking for wholesale deals, and in that, this campaign was not very successful.
We were able to get great terms, as most of the owners were willing to sell, however most were not interested in discounting heavily enough to wholesale. We got a few, but mainly options for cash flow.
Now I am doing something totally different, regarding zombie foreclosures and pre-probates. (My own name for the latter)
This is taking up most of my time for now as there is a definite window for this sweet spot.
But I do recommend looking into the eviction option if you are looking to buy and hold.
Hope this helps.
Neither of those attorneys are posting in the thread!
Listening to real estate personalities is plain dangerous and a land trust can violate the due on sale with changes to beneficiaries, in fact, most banks won't buy off on irrevocable type trusts for that reason or changes except for estate matters.
It does matter who is behind the door (or curtain)! Giving false or misleading information to a federally insured financial institution is bank fraud, good bye, see you in ten years!
The two strategies are not the same at all, sub-2 you take legal and equitable title, a lease provides an equitable interest according to lease terms, an option does NOT convey any equitable interest in real property, the optionee has an equitable interest in the option contract. So, yes, these are two different contracts and should be used depending on the transaction, the risk to be accepted by both parties and which may have the better tax outcome.
Options have changed, effective this year for contracts with a term of 12 months or more.
There is no circumventing Dodd-Frank with a lease-option to purchase or some rent-to-own scam, any method or strategy having the intention of avoiding the requirements and purpose of the Act are to be covered by the Act. So, if you sell moon cheese on payments are they get coupons to redeem obtaining title to residential real estate covered by tghe Act, you're had!
I suggest folks trying to sneak around the law and use the law to go through the correct path. A land trust can be useful, but it is not the way to try and avoid requirements of federal laws.
Fine tune your BS Meter.
And yes, you need to deal with people who can actually get a loan to meet their obligations or sell it before they have a payoff obligation. Dealing with tenants who can't, don't or won't qualify is predatory dealing, yes, now there are laws for that too.
Two people you need to talk to about installment sales, your attorney and your CPA or tax accountant. Stay away from gurus! :)
I love how @David Dey explains the land trust as a curtain. That's a great analogy. I've used land trusts since 2003. Bill Gatten was a guru who really promoted them, even using realtors, though he doesn't appear to be in real estate any more. Bill used to have the original borrower retain 10% interest in the land trust so you could honestly say the original borrower was still an owner. Realistically the due on sale is still triggered as 90% was conveyed but it is a valid legal argument to try and stop the bank from foreclosing. Even if valid if the bank proceeds, you have the legal costs of litigation which makes it a lose-lose situation but it is another arrow in the quiver to try to save the day. In Bill's trust when the borrower's loan was paid in full the borrower's interest in the land trust reverted to the party that had taken it over.
Land trusts are recognized in ALL states EXCEPT those that specifically forbid them. That is simply because unless something is codified as being unlawful, it is lawful. There is no requirement for a statute to be written for something to be lawful. It is my understanding, from many years ago, that Washington state does not like and perhaps codified that you can not use land trusts. That is simply from a long ago memory, never verified.
Land trusts were greatly used by Al Capone to hide assets. Yes, Al Capone the Chicago mafioso of the 20's and 30's. To my knowledge land trusts are codified into law in only Illinois and Florida - both stomping grounds of Al Capone. They are used widely throughout the U.S. and I've used them for 12 years in Texas; buying, selling, borrowing with land trusts and using title companies and had few problems. (I'll address that in a second).
I have a more full scoped disagreement with David Dey in of his two statements, but only to a degree, and based on the situation. I use land trusts all the time so I'm in David Dey's camp 100% there. Where I differ on opinion based on current banking reality is there is currently no "due on sale" issue. Thousands and thousands of houses are sold by home owners with a wrap loan leaving their Fannie Mae/Freddie Mac/FHA loan in place which has a due on sale clause. Because interest rates are LOW and going nowhere, the banks have no interest to foreclose on a performing loan even if they know the property was transferred which violates the due on sale covenant. You can even buy a house subject to the existing lien and sell with a wrap note and 999 times of 1000 you won't have a problem. Currently, and currently is the operative word, I don't think it matters if you take a property over subject to the existing lien and put it in your name, an LLC name, or a land trust. Right now banks have no incentive to foreclose. That incentive changes the moment interest rates start to skyrocket. If interest rates jump, banks are much more likely to track down subject to properties and foreclose. I still doubt that would be a significant percent.
The second disagreement is that the "trustee" is an employee of the trust. The trustee is an independent third party "hired" by the trust, but is not an employee.
There are problems with land trusts no one tells you about:
1) if you have multiple beneficiaries you can not open a bank account unless you get a special tax I.D. number or form an LLC (and get a tax I.D. number) for the trust. Since I put every property into a separate trust this is a hassle that I would like to go away, but it is simply not worth my time, money and effort to solve this issue. I only need a bank account, potentially, at one point of the transaction and that's when I sell. Some title companies are anally retentive about paying Matt Huber, Trustee, XYZ Trust. Some even refuse to follow the directions of the trust where I have modified it to say payments are to be paid to Matt Huber and NOT, as Matt Huber, Trustee or Matt Huber, XYZ Trust. For many title companies that does not matter. They insist on keeping Trustee on the check which means I have a check I can never use. Obviously I do all transactions through the title company I've trained to do it the way I want AND modified my trust to say to pay as directed AND made the trust modifiable with 75% vote of the beneficiaries so I could modify the trust to make the title company happy if that's what is needed.
2) You need a power of attorney from the party from whom you're taking the property so you can 1) transact and 2) have permission to speak with the lender. The problem with a power of attorney is you can not force anyone to abide by the power of attorney. I've had banks, title companies and lenders ignore power of attorney all day long. It is always best to retain contact information with the original borrower as you may need it someday to resolve an issue from a party that refuses to recognized the power of attorney. It annoys me to hear people from stage talk about how a power of attorney solves the problem, it doesn't. It is only a potential solution that may work, but is not foolproof. There is no question you absolutely want to get that power of attorney, just understand it has its limits so be prepared for those contingencies.
3) Property insurance is the achilles heel of all subject to transactions including a land trust as done improperly (sometimes even when done properly) it tips off the lender the due on sale clause has been trigger. You MUST keep the original borrower as the primary insurance beneficiary or you raise a flag with the lender. You add yourself or the land trust (whoever took title) as an additional insurance beneficiary. Even if you don't tip off the lender the title is transferred, if you ever have an insurance claim it could be problematic. If you have the land trust as an additional beneficiary you STILL need the signature of the original borrower on the insurance check, plus the signature of the lender, then you have the problem of being able to deposit the money into the bank IF owned in a land trust without a bank account (which is my common problem).
In summary the land trust masks the transfer which lessens the likelihood of a due on sale clause being triggered and the property foreclosed. In today's environment that is a very unlikely problem, though that can change. Insurance tips off something has changed with ownership but less so if you keep the borrower as the primary beneficiary. You need a power of attorney from the borrower in all cases, but it still may be rejected, so there is no bulletproof answer. Banking can be a problem with a land trust unless you get a special tax I.D. for the land trust. Always try to keep contact information for the borrower from whom you've taken the property subject to their loan. You may need their help in the future to solve some of these issues that may arise despite your best efforts to mitigate problems before they occur. Land trusts are valid in all states unless that state specific law says otherwise. To my knowledge specific codification exists only in Illinois and Florida.
Appreciate all the help. I have a better understanding of land trusts and beneficiary interest!
Hae-Yuan asked a couple questions privately about insurance, marketing and when to form the land trust. I'll share my response here publicly as well.
Hae-Yuan, casualty insurance is the big issue that there is no way to resolve without informing the bank you have taken over the property. Sure it could be a liability issue as well, but casualty claims are many times more frequent than liability claims. You implicitly inform the bank you have taken over the property : 1) because you must add the new owner (you) as an additional beneficiary on the insurance policy. The lender insists on seeing insurance coverage every year so when an insurance policy is changed or a name is added as an additional beneficiary of insurance, anyone paying attention to detail at the lender knows title has likely changed, or at least to ask the question. 2) The real problem occurs when you need to collect on an insurance policy because with 3 named parties, the check will be made out to ALL 3 parties. You can not deposit the check until the lender, 1st insurance beneficiary (original borrower), and you all sign on the back of the insurance check. The lender may not ask questions but that would seem extremely out of place because it is boldly in their face with the 3 party check. If you were trying to hide the transfer of title, it is out in the open now.
You could market for deals in the pre-foreclosure market. All of these people are behind on their mortgage so could be more motivated to let you "take over payments" which is the easier explanation than "subject to the existing lien". You will find subject to candidates in all marketing but they become MOST apparent when there is little equity but have a PITI payment below market rent. In a situation with low or no equity a seller may have to come out of pocket with money to sell a house. Selling with "subject to/take over payments" they usually let you just take over because it will help save their credit from a foreclosure.
Your offer to take over payments will be rejected more than accepted, even when helpful to the seller/borrower. People in that situation are in great stress and often think irrationally. If you explain "what's the worst that can happen, you're about to lose your house and your credit right now!?", some may see your alternative as a ray of hope in a nothing to lose situation because the other alternative is a guaranteed bad situation for them.
Generally you have to bring money out of pocket to bring their payments current and often offer a few hundred dollars to a few thousand dollars to help them move. What you're willing to pay depends if the deal has some meat in it where you can make some money. You can't make money, don't be foolish and give them a lot to move out in a scenario where there is little chance for you to profit. Some people are more aggressive and actually ask the seller to pay them to take over their mortgage because they are doing them a favor plus taking on the risk of a house with little to no equity. It all depends on the seller's mindset and circumstances as well as your belief in yourself to present the offer.
If you do take over payment you need to be a responsible person and pay the mortgage on time after that point. You can rent for positive cash flow or sell with a wrap, at least you can in Texas. I can't say definitively yes or no in any other state but I've rarely heard that you can't. Ask around of those that do it in Florida. I'd be surprised it isn't OK to do, but always best to check first.
If there is no equity, selling for the mortgage amount remaining would cost you money if commissions and closing costs were involved. Even if the house has no equity, that does not mean it does not have value. If $100,000 is owed on a house worth $100,000 and the monthly principle, interest, taxes and insurance cost $1,000 but you can rent the house for $1,250 per month is that not value? You were able to take control of a house for (hopefully) little to nothing, or perhaps even convince the seller to pay up the arrearages and a little to you, and now you have a business vehicle (the house) that can spin off $250/month of positive cash flow. That's not a great deal because maintenance issues will come up from time to time, but it can create an income stream from nothing on your part. You didn't qualify for the loan, you are not guaranteeing the loan, you are not responsible (legally speaking, I think you are morally) for the loan. Opportunity was created due to the borrower/seller's misfortune or own bad actions, lack of creativity and inability to think of other solutions for themselves. In this scenario they could move out, rent it, and that would pay their mortgage and put a little money in their pocket.
The land trust is created when they still are the owner. The reason the trust can be created is Congress passed a law, the Garn St. Germaine Depository Institutions Act of 1982 that forbade mortgage lenders from foreclosing on property owners when owners transferred a property into a trust for estate planning purposes. That's why a land trust is useful as the bank has no way of knowing the land trust is not the borrower's estate planning purpose. So you create the land trust, file a deed from the owner to the land trust and its designated trustee. (I Bob and Mary Seller deed to XYX Trust, Hae-Yuan Chang, Trustee). You want to be the trustee or have someone you REALLY TRUST as trustee as that is the legal owner in the laws of the eye, at least for control, but not equity. Once owned in the land trust, beneficiaries can be changed without any public knowledge or filing required. That's when you transfer the borrower OUT as a beneficiary and you become the beneficiary. The trustee of the land trust controls the trust and property, but the beneficiary is the real owner, even though the public does not know the identity of the beneficiary. Texas requires more than one beneficiary or the trust is a dry trust, meaning not properly formed or maintained. You can solve that issue by having a contingent beneficiary in Texas, so you do not have to have more than 1 current beneficiary as long as there is also a contingent beneficiary. It's always wise to have contingent beneficiaries anyway and costs nothing to add them so why not do it.
With no intentions of getting into any sort of conflict or heated discussion.. there is a lot of misinformation being tossed around in this thread and some of it involves coaching people on how to commit fraud. I am all for creative real estate investing, but in my humble opinion some of the advice here is crossing the line.
Even though the assignment of beneficial interest is a private matter that is not recorded in public record, representing one thing to a bank while having the intention of actually doing another is misrepresentation at best.
Also, the application of St. Germain to these types of investments is one that falls within a very narrow window that should not be represented in such broad terms.
I agree with everyone here that Mark Warda's book on Land Trust is the best. It's the one I read years ago when I wanted to start learning about them, but it is only a basic overview. The application being discussed here is more advanced.
Please do your own research before following anyone blindly and if possible confirm with your attorney before pursuing a particular investment strategy.
@Eddie T. The complication is generally the underwriter and/or attorney for the title insurance company. Title insurance companies have the right to decide which "risks" they will insure and thus they can put their own requirements on a transaction to let it qualify for the insurance they offer. I bought two houses this year, from the same (very prolific) wholesaler, and used the exact same title company for both purchases. I could NOT sell one house I bought through the same title company with the same unaltered trust and same beneficiaries 3 months later AND get a check in the name I needed. In this case there was more than one beneficiary and the trust did not have its own tax ID. The trust never needs a tax ID as it is a flow through entity, tax wise, unless it applies for its own tax ID. The trust had multiple beneficiaries with multiple tax IDs so it was essentially a partnership for tax purposes. Without a single tax ID, the bank I use will not allow me to open a bank account, hence I can not accept a check made payable to the trustee when named as trustee of the specific trust, and not as an individual.
For whatever reason some title companies INSISTS the check must be paid to John Doe, Trustee, XYZ trust even though the trust SPECIFICALLY STATES payment is to be made to "John Doe" and NOT as "John Doe, Trustee" and NOT as "John Doe, Trustee, XYZ Trust". I can not deposit a check made out to the payee in the manner this title company insists so I would end up with a useless check unless I go through the extra effort to get a tax ID, or perhaps incorporate with that exact name so I can open a bank account in that exact name. I had the conversation with the closer when I bought the second house and told her I couldn't do more business with them because when I called prior to the sale with the question, I was told they wouldn't do it. The closer also thought the policy was asinine and asked me to write something up to see if she could get it approved. (I haven't bothered yet.)
Since I typically make a new trust for each property it is not worth the hassle to get a tax ID or form a new corporation for each trust, especially when an existing corporation can be the beneficiary.
My solution to the problem was to find a title company that will actually follow the trust as written, rather than violating the trust and insisting on payment in a manner contrary to the trust instructions. I found that title company by accident when I sold a property and they wouldn't make payment to me (personally), as instructed. I had to wait for 4 days after closing to get them to change the payee on the check so I could deposit my own funds. Since I always use the same title officer, he calls the same underwriter and/or corporate attorney for approval "just like last time" and it flies through with no further problem. Luckily the approval was even entered into some electronic record which proved handy. A recent sale went through without a problem even when that particular underwriter and/or corporate attorney was on vacation. All the closer had to do was refer the supervisor, or VP to the correct place and there was never an issue.
As you can imagine I was more than a little ticked off so I altered the trust to address that problem for all future uses, since on the first occasion in 2015 I hadn't expected this problem. My alterations were to give specific instructions as to how the payment was to be titled AND I added an amendment provision in the trust so I could do ANYTHING necessary to make the title company happy so I could get paid as needed if there was something else that could be done to make the underwriter happy.
To me the best answer to the question of why it is a problem is simply because most attorney's do not understand it. What they don't understand they fear. What they fear, they won't allow as they perceive it as a risk. Title insurance is the business of avoiding risk, so they simply don't allow payment as instructed as they perceive it as a risk.
I strongly believe this title company is 100% in the wrong but my alternatives are to fight them legally or to find a title company that will do business with me in the way I need it to be done. It is much easier to find the reasonable title company.
Surprisingly this issue first came up about 11 (eleven) years AFTER I first began to use land trusts. I had done many deals through multiple title companies and that issue had NEVER ever come up until last year. You may have no issue at all, but it is best to ask questions in advance to avoid the problem.
As to Laura Richard's reply I complete agree you should NOT misrepresent anything to the bank. Since most large financial institutions are federally licensed you may put yourself in federal hot water by doing so. Further understand every state has different rules and interpretations, do's and don'ts and the rules often change so you are best to consult with a real estate attorney licensed in the state of interest.
There are only 2 ways to take control of a property subject to the existing lien: overtly or covertly; everything else is details.
Overtly is to write a letter to the bank telling them you have taken title to the property and put the named owner in the public records (deed) in any manner you want. It is up to the bank to determine whether they want to foreclose or not, now or at some point in the future. Their recourse is generally described in the loan document. Ownership and security interest are not one and the same. The lender's security interest remains even though the borrower transfers ownership.
Covertly is to put into a land trust and change beneficial interest. It is trying to conceal the change of ownership. In that case I believe you should say NOTHING to the bank, simply do what you're going to do. If there is a later discussion with the bank you should be honest with answers. Transferring the title to someone else does not break the law, it triggers the right, but not the obligation, to utilize recourse agreed in a contractual agreement between a lender and a borrower. The recourse of the lender is the right to accelerate the loan and begin foreclosure proceedings to secure the collateral for the loan. Misrepresenting the situation is what can get you into legal trouble so don't do it.
Realize the Garn St. Germaine Law was for estate planning purposes and if you transfer beneficial interest within a trust outside of those purposes that law will not apply and you will have none of the protections afforded in that law. Strategically thinking, that is why people use the land trust as a "cloaking device" to hide the transfer. They hope the bank thinks the transfer was within the rules allowed by Garn St. Germaine law. Transferring beneficial interest in the trust, outside the scope allowed by Garn St. Germaine law, will be considered a violation of the due on sale clause in "conforming" residential home loans.
In Texas, with laws as they now exist, I have to believe the powers that be are fine with 3rd parties taking over houses from a distressed borrower and leaving the loan in place and are OK with that same house being sold with a wrap note. Why do I say that?
In Texas when buying a house with an existing lien state law requires one of the following:
a) report the transaction to the existing lien holder OR
b) close through a title company.
If it so important to disclose to the lien holder shouldn't that have been made a requirement and not simply one of two different alternatives?
Personally I believe the state title insurance industry lobbied for this law as they wanted to direct commerce through their own portal. This law made sure those that don't want to report the title transfer to the lender must use a title company. Which alternative do you think most choose?
"Subject to" and "wrap note" sales occur frequently in Texas with both transactions violating the due on the sale clause in the loan covenants. These transactions follow state law and parties are able to purchase title insurance, naturally with an exclusion by the insurer pertaining to the due on sale issue. If the transaction was not lawful, title companies would not be allowed to insure.
Like much else in life there is a right way and wrong way to do things. Learn the right way and seek guidance from a real estate attorney, preferably one familiar with creative real estate investing, licensed in your state. Be wary of guru's passing through your state because they may not be familiar with state laws. Lastly, be cognizant advice given on Bigger Pockets is coming from people familiar with their own state, so that advice may or may not be valid or legal in your state regardless if the author is correct pertaining to their own state. It is your responsibility to verify laws in your state.
@Bill Gulley hey Bill,
so if I'm understanding correctly, in laming terms a subject to (wrap around mortgage) is actually legal? And once I have the deed I can refinance, rent, or sell?