Land Trust to Reduce Risk of Due on Sale Clause

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Land Trust to Reduce Risk of Due on Sale Clause

Rental Property Investor · Beaufort, SC · Member since 2020 · 119 posts · 98 votes

Hello BP!!

Anyone familiar with how one can use a land trust to gain ownership interest in a property? Pros and Cons? I have been doing research and found something saying by utilizing a land trust one can reduce risk of the due on sale being enacted on them a clause most convenienal mortgages have. I want to partner with someone on a deal where they will be obtaining the loan and I will be bringing forth the money/asset management essentially. Any tips, attorney advised to just quit claim, in spite of the due on sale clause and wanted to see what other options I have. Both of us would be 50:50 on everything

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Bill ExeterBusiness Member

1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes

Hi @Jabbar Adesada,

Be extremely careful here when attempting to use the Title Holding Trust (Land Trust) as a means to avoid or reduce the risk of triggering the due on sale clause. When anyone tells you that it can minimize or reduce the risk of the due on sale clause, they have likely crossed over into the "lender fraud" area.

What they really mean is that the lender will likely never find out, but it does not change the fact that if the lender documents define the due on sale clause to include a transfer of a beneficial interest in the land trust it will trigger the due on sale clause. You must refer to your loan documents.

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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
5y
Originally posted by @Jabbar Adesada:
Hello BP!!
Anyone familiar with how one can use a land trust to gain ownership interest in a property? Pros and Cons? I have been doing research and found something saying by utilizing a land trust one can reduce risk of the due on sale being enacted on them a clause most convenienal mortgages have. I want to partner with someone on a deal where they will be obtaining the loan and I will be bringing forth the money/asset management essentially. Any tips, attorney advised to just quit claim, in spite of the due on sale clause and wanted to see what other options I have. Both of us would be 50:50 on everything

You would use the quit claim deed to put you on title for your share of the property. That would not cause a Due on Sale action. It's when he is taken off title (as signer on the loan) since he is the one guaranteeing the payback of the loan, that there may be a problem. But, if he stays on the loan it isn't an issue.
I usually form a joint venture agreement with the partner. It's a lot cleaner than other options. I always have 51% ownership so somebody (I) can make a decision when there is a disagreement. A 50 / 50 ownership leaves a stalemate and no one can move forward. The problem doesn't get solved. However, you can disburse funds 50% & 50% that's what I do.

If you have someone obtaining a loan, why do you need a trust since you haven't said why the DOS is possible. You may be thinking of two different ways to buy and conflating them.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
5y
Hi @Jabbar Adesada,
Be extremely careful here when attempting to use the Title Holding Trust (Land Trust) as a means to avoid or reduce the risk of triggering the due on sale clause. When anyone tells you that it can minimize or reduce the risk of the due on sale clause, they have likely crossed over into the "lender fraud" area.
What they really mean is that the lender will likely never find out, but it does not change the fact that if the lender documents define the due on sale clause to include a transfer of a beneficial interest in the land trust it will trigger the due on sale clause. You must refer to your loan documents.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.826 Reviews
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Jabbar Adesada
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Rental Property Investor · Beaufort, SC · Member since 2020 · 119 posts · 98 votes
5y
@Mike Hern
This was very insightful thank you so much! There is so much conflicting information out there even from attorneys that I am probably confusing the use of a trust vs a quit claim. I will also be sure to talk through that point you made about 51-49 to my partner, so we can avoid that issue now that we aren’t unhappy with each other. Thank you again!!
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Jabbar Adesada
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Rental Property Investor · Beaufort, SC · Member since 2020 · 119 posts · 98 votes
5y
@Bill Exeter
Thank you for informing me of that! I have no intention ever to commit fraud, my honor and integrity are way more important to me than a couple thousands dollars in cash flow... I will refer to the loan documents then and be sure to move forward with honesty! Thank you
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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
5y
Originally posted by @Jabbar Adesada:
@Bill Exeter
Thank you for informing me of that! I have no intention ever to commit fraud, my honor and integrity are way more important to me than a couple thousands dollars in cash flow... I will refer to the loan documents then and be sure to move forward with honesty! Thank you

When you read the documents (which I actually do read them) you will notice that the lender MAY call the note due. It does not say the lender WILL call the note due. There is a very big difference. It's rare under the present circumstances for a lender to call the note due and you have the right to transfer ownership anyway. You just have to be aware that the lender CAN call the note due. If you have sufficient funds or access to money, even if they call the note due, you simply pay off the note and everything is fine.

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