LAND TRUSTS --- THE WAY THE WORKING STIFF WITH NO CREDIT CAN BUY PROPERTY by Emily Baehr http://pennypincherpersonalfinance.blogspot.com/
You can use a land trust to buy a house as an investor group, chumcluster or single person even if you have no credit, or even if you have bad credit, by paying on the seller's existing mortgage without having to qualify to assume the loan with his lender. If you can negotiate that with the home owner, you don't pay the seller a down payment. Then you have a house for no down payment with no credit. In fact, if the house needs any repairs, you might be able to get the seller to pay a few months' payments for you while you fix it. WHY WOULD HE BE INTERESTED IN THIS DEAL? Maybe he's about to be foreclosed on. He lost his job, he and the kids need cash monthly coming in. (Other reasons? I'm researching the writer on this point, now.)
You can also use a land trust to hide your identity from the land records.
You can also use it to dodge a lawsuit (for a little while anyway).
You can also use it to avoid probate when you die (on that property, anyway).
Here is basically how a land trust works: The first land trust was
invented by Julius Caesar. He was going away to fight a war and wanted
his friend to mind his property for him. So he drew up this document
that said his friend was holding the property "in trust" for him for the
time he was in the war. The friend had total control over the property,
but the property still belonged to Julius. The control was to revert
back to Julius when he got back.
So, that being said, the land trust is in the US also sometimes called
an Illinois land trust. There are 3 parties to a land trust. There is
the trustor, the trustee, and the beneficiary. The trustor is the guy
who owns the land at first. The trustee is the guy who the trustor
trusts to control the property. The beneficiary is the guy who
ultimately receives the benefits of the property.
These three can all be the same person! Or they could be different
For example, Pa Smith has a house he wants to leave to his kid but doesn't
want it going thru his estate. So Pa Smith puts the house in a trust. To do
this, he draws up a trust agreement and a deed from Pa Smith to the trust.
But in the trust agreement he makes Sonny Boy the beneficiary upon Pa Smith's
death. Maybe Pa Smith wants to retain complete control over the trust
himself, so he makes himself the trustee. Or maybe he wants Cousin
Cletus to be the trustee, because he has a different last name and he
doesn't want his own name on the house anymore. Since Pa Smith is still the
beneficiary until he dies, he controls Cousin Cletus. He can "fire" him
and get another trustee if he needs to at a moment's notice. Cousin
Cletus cannot dispose of the property in any way not specifically
granted to him by the trust agreement. If he did, he'd be in big
trouble. So Pa Smith can still live there, Cletus can't sell the house out
from under him, and Sonny Boy gets the house when Pa Smith dies and the
property doesn't need to go through Pa Smith's estate.
Pa Smith could also still sell the house if he wants to later. He would have
to get Cousin Cletus to come to the closing and sign the papers.
Or take the example of a real estate investor wanting to buy a house,
and control its ownership but not put it in his own name. Say Joe
Deadbeat owns the house and wants to sell it to Irving Investor. So
Irving (or his lawyer) prepares a land trust for Joe. He calls it the
Joe Deadbeat Land Trust, or he could call it anything really. Anyway, he
makes up this trust agreement for Joe to sign and a deed from Joe to the
trust. He also makes up a document transferring the beneficial interest
in the trust from Joe to Irving. Maybe because he doesn't want his name
on the property he makes his Cousin Cletus the trustee. (hey, this
Cletus is a busy guy!)
When the deed to the trust is recorded, in both cases the land records
show the property as being in the name of Cousin Cletus, Trustee. Maybe
Cletus is the trustee for a whole bunch of people's trusts. Cletus isn't
the actual owner of any of this property but his name appears on the
land records as trustee. If Irving's house has a crumbling front porch
and gets a building order from the building department, they have to
find Cletus and give it to him. But that doesn't make Cletus personally
responsible. He's just the trustee. But Cletus has a duty to tell Irving
about the building order.
Having property in a trust has other benefits for you if you might get
sued.If someone slips and falls on Irving's property, and they're going
to sue, he can quickly fire Cletus and get another trustee, say his
other cousin Jed from out of state, but not tell Cletus who the new guy
is, and the plaintiff looks in the land records and sees Cletus. So in
the deposition they ask Cletus if he is the trustee and he'll say no, I
was fired, and then they'll ask him who the new guy is and he'll say he
doesn't know. Then it'll take them a long time to find out who to serve.
It'll buy time for Irving to figure out what to do. They can't sue
Irving personally either, even if they know he's the beneficiary. It's
not his property. It's the trust's property. They have to sue the trust.
So even if they get a judgment, they can't put it on all of Irving's
properties, only on that one.
Buying property in a trust can let you take over someone else's mortgage
without bank approval. Now if Irving wants to take over Joe's mortgage
(i.e. buy the house SUBJECT TO the existing mortgage), he can. Banks
have a due-on-sale clause in most mortgages, where they can call the
mortgage due if someone sells the house. This was established in the
Gramm-Leach-Blyley Act in the 1980's that they can do this. The
exception to this law is when the owner of the house puts it into a
trust for estate planning purposes. The beauty of Irving's situation is
nobody can tell the difference between it and Pa Smith's situation.
The deed is a matter of public record, but the trust agreement is not,
nor is the transfer of beneficial interest. So Irving gets a bank
account in the name of the trust and has Cletus pay the mortgage with
it. He has Joe sign a letter he made up to the bank saying, I have put
this house in a trust, please send the mortgage statements to Cousin
Cletus, Trustee. The bank doesn't care, as long as they're getting paid.
Now if the bank finds out that the beneficial interest was transferred,
they might care. Just don't tell them. Don't lie if they ask, but don't
volunteer the info!
Buying subject-to keeps you from personal liability on the mortgage.
Now, if Irving screws up and doesn't pay Joe's mortgage, the bank will
come after Joe and the trust. Irving doesn't get sued personally. The
papers are served on Joe, who signed the note, and Cousin Cletus,
Trustee because that's who is in the land records. Cletus himself is not
personally liable, he's only the trustee. But poor Joe's credit gets
ruined. Irving has a karmic duty to pay that mortgage, but that's about it.
Unfortunately even if Irving keeps up the payments, if Joe wants to get
a new mortgage somewhere else, he may not qualify because the old loan
is still showing up in his credit report, and it whacks his
debt-to-income ratio. The way around this is for Irving to give Joe some
proof that the trust has income - from renting out the place, for
example. (like a copy of a lease). Joe can then show this to his lender
and it may make it so Joe can get that loan.
So there's land trusts and subject-to in a nutshell.
If there are any loan officers out there who know whether showing rental
income on a property you put into a trust will still boost your income
in the eyes of a lender, please comment here.
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