How to Owner Finance from a Land Trust

22 Replies

I've asked this question before and haven't received a single response, but I'll try again.  I want to buy a property sub2 by using a land trust.  I would have beneficial interest but the deed would be in the Trust's name c/o Trustee.  Is it possible to owner finance a house to a new buyer having just the beneficial interest?  If so, what would be the process?  Would I sell my beneficial interest to a buyer in exchange for a note, collateral assignment of beneficial interest and some kind of security agreement?  Has anyone ever done this?  I would really appreciate hearing from anyone with experience and knowledge on this topic.

Do the subject2 in your personal name and forget about what the Gurus teach about the land trust?


Joe Gore

Originally posted by @George Creel:

I've asked this question before and haven't received a single response, but I'll try again.  I want to buy a property sub2 by using a land trust.  I would have beneficial interest but the deed would be in the Trust's name c/o Trustee.  Is it possible to owner finance a house to a new buyer having just the beneficial interest?  If so, what would be the process?  Would I sell my beneficial interest to a buyer in exchange for a note, collateral assignment of beneficial interest and some kind of security agreement?  Has anyone ever done this?  I would really appreciate hearing from anyone with experience and knowledge on this topic.

 Only the vested owner can Sell or Grant or Bargain an interest in the property.  So, in this case, that is the Trust.  A Beneficial interest can be assigned to a third party, that is not a true sale of the [real] property but may be recognized as a sale for any mortgaged interest secured by the property which may trigger Due On Sale.  A beneficial interest is viewed as personal property not real property.  

Can personal property be financed?  Yes.  It is complicated and likely not what you are trying to do.  

I thought there were several threads on these matters floating around.  @Bill Gulley  is pretty good with such things, if he wants to comment.  

Why do you want to use a land trust vs. a warranty deed to your personal name and/or business?  What is your exit strategy for the property (short or long term)?

Dan,

It seems like on the acquisition side there are many benefits, but I get all hung up on the sale side.

1.  Some cover from the Due-On-Sale clause with a land trust (Garn St. Germain).

2. Transferring the taxes and insurance. I hope to continue to pay those through the Seller's escrow account for T&I. But, if the tax bill is in MY name, and the "Named Insured" is in My name then why would the lender pay MY bills from the Seller's Escrow account. If the owner sent a letter with POA stating that a trustee will manage his property, the problem would be solved.

3.  Also, if I closed the purchase without yet having a buyer, there would be two transfers (owner to me, and me to buyer).  Too many changes too quickly might raise red flags with the lender, but if I had a trustee and sold BI, then only one transfer ever takes place.  The subsequent sale of BI isn't recorded and wouldn't require a transfer of T&I.

I want the same benefits from a traditional transaction.  A down payment, monthly cash flow from a 2-point hike in interest rate, and some equity capture to be made upon a refi or sale.  Maybe refi isn't possible with only beneficial interest though, that's still unclear.

I appreciate your answer.

The trust needs to sell, not you as the beneficiary, the Trustee will convey title, by John C Smith, trustee of the ABC Trust, dated 11 August,2013. The trust will be the beneficiary or the deed of trust and holder of the promissory note, made by the borrower/buyer. You don't appear on anything, you also can't sell your interest in or to just any trust, depends on how the trust is set up and the type.

Good you asked as trying to sell as you suggested and it being uncovered later on could have gotten you in deep stuff, fraudulent sale of RE. You need to go to a title company and close the transaction, they will ensure the documents are correct and you'll need a copy of the Trust. :)    

@Bill Gulley

If what you say is true, then much of the reason for using the trust on the acquisition side is lost upon owner financing.

The new owner finance buyer will have the deed passed in his/her name recorded at the county.  His tax bill  will be sent to the lender, and insurance bill showing him/her as the named insured will be sent to the lender for payment from the original seller's escrow account.  I've heard people say that the lender will "just pay it", but I don't understand how they could legally pay bills for one person from an account they have with another person.  Maybe if my seller signed a power of attorney for my new buyer, but that opens up another can of worms.

If I knew how to smoothly maneuver that part of the transaction, maybe I'd give up the trust idea altogether.  I thought using a trust would help me acquire and sell without having to make those T&I changes twice or make clear to the lender that they had a due-on-sale option.  If not, then I agree with Joe Gore, why use it?

Let me guess, you've been watching podcasts. Sounds like you want to buy sub-2 then sell wrapping the sub-2 with your seller financing, is that right or am I getting to use to the creative guru stuff?

Never thought I'd agree with Joe Gore again (did once and this makes the second time), drop the Trust junk. Yes, what I said is true. LOL 

Need to start at the beginning, what a note is, being a unilateral contract, google that, see what the requirements are in all states. Notice that you can't require a lender to accept any borrower without them agreeing to accept an assumption between you who has requirements to perform and someone of your choosing. This is beyond the due on sale clause you were concerned about.

Another point about guru stuff teaching "beneficial interest" angles, unless dictated by law, such as inheritance laws, "beneficial interest" means financial interest as well, what interest you have must be determinable in value, that ties into your financial investment as well as your promise to pay or to act.

Now, none of this applies to the conventional method of doing a sub-2, problems come in when you have the original lender allow you to sell without their consent, they have the right to access their risks involved.

Ask your attorney about doing a second sub-2 after you do yours, keeping you on the hook to clear the obligations and give good title. Again, drop the Trust, you're clouding the issue, make it as simple as you can, it's easier to explain to the buyer and if ever necessary, to a judge. 

There` are strategies of giving notice of sale to a lender and stating that acceptance is to be assumed if they fail to object, I have done that many times, if push really comes to shove pay off the loan, but many times it makes it appear to be more complicated than it might be worth for a lender to proceed, it always has bought more time in negotiations for me, but it doesn't work 100% of the time.

Getting creative, mixing ideas without a deeper understanding of law, finance, real estate customs and requirements is pretty much penny wise and pound foolish, meaning see an attorney. Gurus and wannabe gurus aren't in the business of keeping you out of trouble or in your success, they are in business to further their success, more or less, at your expense.  All IMO :)    

@Bill Gulley,

You should agree with me because you were one of my students, and I taught you well...


Joe Gore

@Joe Gore  Since you taught Bill, I don't do much sub2, but I heard of something new maybe you understand, that I don't. I think maybe it was in Texas or Arizona.  Have you ever heard of getting title by means of a Quiet Claim deed?  I'm familiar with Quiet Title actions and Quit Claim Deeds here in Florida, but never a Quiet Claim deed.  Any ideas?

Never heard of Quiet claim deeds. I have heard of Quit Claim Deeds.


Joe Gore

Originally posted by @Joe Gore:

@Bill Gulley,

You should agree with me because you were one of my students, and I taught you well...


Joe Gore

Wow, you can tell some woppers Joe!

Originally posted by @Bill Gulley:
Originally posted by @Joe Gore:

@Bill Gulley,

You should agree with me because you were one of my students, and I taught you well...


Joe Gore

Wow, you can tell some woppers Joe!

You was one of my best students.

Joe Gore

This post has been removed.

Originally posted by @George Creel:

2. Transferring the taxes and insurance. I hope to continue to pay those through the Seller's escrow account for T&I. But, if the tax bill is in MY name, and the "Named Insured" is in My name then why would the lender pay MY bills from the Seller's Escrow account. If the owner sent a letter with POA stating that a trustee will manage his property, the problem would be solved.

You know, I'm pretty sure when the lender sends a tax payment, some of which must be direct deposit or wire these days, the name discrepancy doesn't matter.  It should, but tax collectors where I am will accept any payment from anybody.  And then worry about the details later.   Escrow makes mistakes sometimes and sends the wrong amount or puts the wrong APN on the payment.  The tax collector accepts and processes every payment and applies it to whatever account they think it goes to.  Then you have to duke it out with them to get a refund, even if you are entitled to one.

The insurance escrow is a different matter.  If you are on title, you need to buy your own policy, in addition to whatever policy the escrow is paying for.  The policy for the borrower will not cover you as a successor owner.  The current policy covers only the owner/borrower and the lender.  Naming yourself as additional insured will be useless in the event of a claim IMO.  The policy wasn't issued to you as an owner.  Try making a claim on a policy like that.  Additionally, if the current policy is for an owner occupying borrower and you've got tenants or tenant buyers living there, that's exactly the out the insurance company is looking for. They'll deny the claim when the see that the borrower no longer owns the property.  

There is some good reading on DOS in the recent thread called DUE ON SALE-o-METER. And some very good links to articles on subject to insurance by Tim Norris

I'd focus less on strategies and entities to avoid triggering due on sale and more on doing deals where the DOS risk is manageable. Do only sub2 deals that make sense in the event the loan gets called.

@George Creel,

I think you will be ok just spend a few minutes with a lawyer to get a clear picture. Don't put any trust in the last post because that person is not a lawyer just throwing out hot air.

Joe Gore

...Getting back to the thread topic (a hmmm), gurus and yogi's aside, it's much easier to diagram out what you want to accomplish and prioritize the objectives. There is no sense in making things unnecessarily complicated.

A trust can own real property. Vesting as Gulley stated, "John Smith, trustee of the ABC trust, u/t/d 1/01/2014". With the exception of AZ, the beneficial is not necessarily disclosed to the public (that's the point).

Beneficial interest can be pledged contractually via an assignment. This is not advisable for most because, from a practical side, there may be clauses that restrict or interfere or are later modified concerning the trust corpus such that I'd never want to be left holding that bag. 

This is also why the cash inheritance advance is so weary of "beach bum trusts" which contain spendthrift clauses that prevent the beneficiary from assigning, pledging or otherwise using their beneficial interest as collateral or to obtain early liquidation.

I've been in the business of making mortgages to trusts (and estates) for 25 years. We only lend on the total asset as held by the trust subject to the powers contained in the trust or pursuant to court order.  I let the trustee/successor trustee and attorney deal with the beneficiaries.

It's also easy to forget which gat you intend to wear. The way some people work loans is that they have the individual sign the note personally and have the trustee sign the deed of trust encumbering the asset. That's not my way, nor my competitor's and we've do hundreds of these loans without problems. 

Hope the trainers didn't get you too spun, regardless of who trained who. I stay out of that.

Btw, caveat: I'm not a lawyer. 

Joe, are you by any chance admitted to the Bar in your state?

Thank you all for your answers.  I just spoke to an attorney and (oh boy) he agrees with Joe Gore (and Bill Gulley.)  He said to transfer the deed from the seller to the buyer. 

He said my Trust idea (acquiring and then financing beneficial interest) could be done, but it is unnecessarily complicated and the buyer would not be able to refinance if all he had was beneficial interest.   Since I eventually want the buyer to refinance so I can get paid, the end justifies the means.

I specifically asked how the lender can pay for a Sub2 buyer's taxes and insurance from the seller's escrow account (after all, isn't the escrow account in the Seller's name?), and he said they "just do". I gave up there. I still don't understand it, but if they do, they do!

I wanted him to provide me all the docs necessary, but he said to take my contract & addenda to a Title Co. and they will prepare the docs and disclosures.  

His advice was not to try to hide from the Due-On-Sale, just disclose and make sure the payments are made on time.  I've heard that before, but I resisted accepting it until now.

And so, (I say with some regret), my obsession with Land Trusts is over.  

@George Creel  Glad to hear the attorney straightened you out on the land trust idea.  Sorry, though, that he wasn't better able to explain the payments for taxes and insurance coming from the escrow account. My experience with lenders in sub2 so far is that tax payments will continue as before.  Be sure to research the insurance issue.  I would not rely on the owner/borrower policy in place to pay out any claim to you. (And I don't.  I buy my own policy to cover my ownership.) http://www.biggerpockets.com/articles/607-insurance-for-the-subject-to-deal

Be sure read Dion DiPaoli's new thread on Wrapping an FHA Mortgage. Totally relevant to your plan if the loan you are taking over is FHA:

http://www.biggerpockets.com/forums/50/topics/142165-wrapping-a-fha-mortgage

@Rick Harmon,

No I am not admitted to the Bar should I be.


Joe Gore

Originally posted by @Joe Gore:

@Rick Harmon,

No I am not admitted to the Bar should I be.


Joe Gore

 Maybe the corner bar. 

Originally posted by @Dion DePaoli:
Originally posted by @Joe Gore:

@Rick Harmon,

No I am not admitted to the Bar should I be.


Joe Gore

 Maybe the corner bar. 

Thanks Dion.  I must have needed that.  I really did laugh out loud.

@Dion DePaoli,

I think the corner bar or was it the strip bar where I saw you and K. Marie Poe in the back corner with dark sun shades on.

Joe Gore

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