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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. 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 party’s identity with legal control over the property from the public record. 

What Are Land Trust Benefits?  

Land trust benefits include asset protection from 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 legal action against the trust title owner of one property doesn’t put other assets at risk. Therefore, it is an excellent strategy to have one trust per property. 

What Is a Municipal Lien?  

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 land trust. Thus, that lien problem is avoided.  

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

Property tax re-assessment may be avoided by selling the trust’s underlying beneficial interests instead of title to the property itself. However, 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 buyer 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. The buyer will profit 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. If the seller has fallen behind with the mortgage, the resumption of payments by someone else will help repair their credit. 

What Is the Subject-to-Deal Investor Strategy? 

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

It is critical to understand that the buyer doesn’t assume the debt as far as the lender is concerned and the seller remains liable to the lender. 

In a typical subject-to-deal, no one requests the lender’s approval. The lender often doesn’t realize that title has been conveyed and someone else is now paying. When representing 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.   

A serious risk associated with the subject-to-deal involves the common “due on sale” clause 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 the 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 to ease regulatory pressures on banks.  

This 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 directly conveying title to a land trust instead of to the buyer or their entity, the Act protects both sides of the deal from the lender’s acceleration.   

Garn-St. Germain Act: Protection  

The Garn-St. Germain Act includes a vital 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. 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 the trust’s Director to have authority over the trustee.  

Ideally, the trustee should be a neutral third party appointed to follow the terms of the deal. 

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. Still, 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 discussions and contracts. For example, they shouldn’t call it a “subject-to” deal. Instead, the buyer will “take over payments.” 

Establishing trust while explaining the terms and overcoming misconceptions can be a significant challenge, 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 paying off a mortgage. There is an effective way to protect the seller and help convince them to agree to a subject-to-deal.   

Trust Agreement: How Does It Work?  

The trust agreement should have language empowering the seller/beneficiary to remove the Director and extinguish the buyer’s rights if they default on the mortgage payments. The best practice requires 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 agreement, which makes it easier to sell the deal to them. 

What Should I 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 empires. Not all homeowners and their properties are suitable 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 Charles Castellon 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 Charles to discuss options and solutions. 

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