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How a Florida Land Trust Can Help Investors Buy Properties When Taking Over Mortgage Payments

Florida real estate investors have long used land trusts as a versatile legal tool with multiple benefits too numerous to discuss in detail here.  The basic framework of a land trust is as follows.  The property owner conveys title through a deed to the new owner, the trust.  The trustee of the trust holds legal title, while the beneficiary owns a beneficial interest in the trust asset—real estate.  The beneficial interest is considered personal, rather than real property.

The beneficiary has authority over the trustee through a private land trust agreement that is not recorded in the public records, unlike the deed.  The trust deed does not name the beneficiary, so they enjoy privacy by keeping the identity of the party with legal control over the property out of the public record.

Land Trust Benefits

Land trust benefits include asset protection from the privacy that helps prevent the beneficiary from being a target for litigation.  Land trusts also allow investors to create “silos” around their individual properties, so that a legal action against the trust title owner of one property doesn’t put other assets at risk.  Therefore, it is a good strategy to have one trust per property.

Another asset protection benefit is the ability to avoid government liens on a property that an investor owns from cross contaminating their other properties.  A municipal lien, such as from a code enforcement violation, on one owner’s property creates a lien on all other properties they own in the same county.  By making the legal title owner of each property its own land trust, that lien problem is avoided.

Land trusts are also good estate planning tools.  Succession planning and probate avoidance are among the estate planning benefits.

By selling the trust’s underlying beneficial interests, instead of title to the property itself, property tax re-assessment may be avoided, although doc stamps remain payable to the Florida Department of Revenue.  Land trusts also create ease of use and flexibility for investors to collaborate in joint ventures through their respective beneficial interests.

What Is Subject-to-Mortgage?

Though all these virtues, and others, deserve further discussion, this article focuses on one land trust benefit, which relates to their use in “subject-to mortgage” deals.  Investors often purchase real property without paying off its existing mortgage(s).  Commonly known as a “subject-to” deal, various forms of this technique allow buyers to acquire properties without requiring the cash to pay off their mortgage debt.

The main leveraging power for the buyer is that they can take title without needing the cash to satisfy the mortgage, although it’s common for the buyer to put some money in the seller’s pocket.  The seller benefits by having the seller take over their mortgage payments.  The buyer pays a purchase price for the home, but the amount of the outstanding mortgage balance they take over is booked as a credit against that sale price.

Risk vs. Reward

Like any deal, the numbers must work for this to make sense.  If the seller’s mortgage payments and other carrying costs, including insurance, property taxes, and maintenance, are low enough to create a spread between those expenses and market rent, the buyer will profit.  Also, if the seller has fallen behind with the mortgage, the resumption of payments by someone else will help repair their credit.

The subject-to deal is a popular investor strategy in the realm of creative financing, or what some call “transactional engineering.”  The buyer receives legal title of the home and eventually pays off the seller’s mortgage through a sale or refinance.

It is very important to note that the buyer doesn’t “assume” the debt as far as the lender is concerned.  In a typical subject-to deal, no one requests the lender’s approval.  Quite often, the lender doesn’t become aware that title has been conveyed and someone else is now paying. When I represent subject-to buyers, I make sure to include prominent language in the papers stating that the seller remains legally liable for the payments the buyer promises to take over, and the lender will seek to collect from their borrower should the buyer default.

There is another serious risk associated with the subject-to deal.  That risk involves the common “due on sale” clause found in most mortgages.  This gives the lender the right to accelerate the loan and demand immediate payment of the outstanding balance when the borrower conveys legal title of the property.  Fortunately, the land trust helps avoid this problem.

Garn-St. Germain Act

In 1982, Congress passed the Garn-St. Germain Act (“the Act”) to ease regulatory pressures on banks.  The Act also helped mortgage borrowers by allowing the transfer of title to trusts without triggering the due on sale clause.  The Act’s public policy rationale was to help consumers use estate planning techniques involving trusts with their properties without being penalized.

It is rare for banks to exercise the due on sale clause, so long as they continue getting paid following the title transfer, but their acceleration rights remain available.  By conveying title to a land trust instead of to the buyer or their entity directly, the Act protects both sides of the deal from the lender’s acceleration.

The Act, however, includes an important requirement to follow for its protection to work.  The former owner/borrower must stay on in the trust as the primary beneficiary owning equitable rights to the trust asset.  There must be “no change in beneficial ownership” of the property.  This means the seller must be the primary beneficiary of the land trust for the due on sale shield to be activated.

This requirement to make the seller in charge would seem to hurt the buyer by depriving the buyer of authority over the trust.  There’s a solution for that also.  The buyer can be named Director of the trust to have authority over the trustee.  Ideally, the trustee should be a neutral third party appointed to follow the terms of the deal.

Another buyer protection is to have the seller sign a contingent assignment of beneficial interest.  This agreement works to automatically convey the seller’s beneficial interest to the buyer upon the latter’s satisfaction of the mortgage.

Understanding the Terms (and Avoiding Problems)

The legal academic discussion in this article ignores a practical reality.  This stuff may be easy for experienced real estate investors and attorneys to understand and execute, but to the average homeowner considering such an offer to purchase, it’s an intimidating, exotic foreign language.

Investors should avoid legalese as much as possible and use plain English in their discussion and contracts.  For example, they shouldn’t call it a “subject-to” deal.  Instead, the buyer will “take over payments.” It can be a major challenge to establish trust while explaining the terms and overcoming misconceptions, including the common belief that all outstanding mortgages must be paid off when selling a property.

Unfortunately, there are unscrupulous and incompetent investors, as in any business.  Some buyers have misled and cheated sellers or let them down by not completing what they promised to do, such as to pay off a mortgage.  There is an effective way to protect the seller and help convince them to agree to a subject-to deal.

The trust agreement should have language empowering the seller/beneficiary to remove the Director and extinguish the buyer’s rights in the event they default on the mortgage payments.  The best practice is to require the seller to give the buyer written notice of default and a reasonable opportunity to cure by bringing the mortgage current.  This protection lets the seller put the deal “on a string” to get rid of the buyer and put the seller back to where they were before the deal, which makes it easier to sell the deal to them.

What Should You Do?

In summary, real estate investors should understand and consider using the subject-to mortgage deal as an effective leveraging tool to buy properties and more quickly build their empire.  Not all homeowners and their properties are right for this arrangement.  If the deal isn’t fair, transparent and win-win, it shouldn’t be done.  If you’re an investor driven to build a greater life and business, contact me to be your trusted advisor and help you with legal and title closing services.

If you have any questions about the information in this article or need assistance with legal issues related to land trusts or other real estate investment or transaction matters, please do not hesitate to contact me to discuss options and solutions.

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