There are many websites devoted to the topic of land trusts. Some of these sites provide solid information while others make blatant misrepresentations. Unfortunately for the investor, separating fact from fiction is difficult. However, keep in mind that a land trust is a simple tool that has been around since King Henry VIII ruled England. Its purpose then, to hide ownership of land is the same today and a major part of this tools allure for real estate investors.
In addition to the privacy of ownership and “due on sale” clause avoidance, when coupling encumbered real estate with a land trust and LLC, the tool has several other uses not typically recognized by the average investor. The following is five not so common uses of land trusts that should not be missed.
Avoid Churning of Title
When a property is transferred several times between multiple parties in a relatively short period, lenders may be reluctant to lend against the property. From the lender’s perspective, it might appear as if the subsequent transfers were made to inflate the true value of the property. In these situations, a cautious lender can require the property be seasoned for six months to a year before it will loan against the property thus, preventing a buyer from purchasing the property.
This problem can be faced by flippers who buy at auction with no intent to rehab the property. The auction buyer is just looking to pick up a great deal then flip the property to a rehabber for a tidy profit. Consider the following scenario. Alan Auction purchases a property at auction for $80,000. One week later he flips the property to Robby Rehabber for $100,000. Robby spends one month and $20,000 making the property marketable and finding Ben and Betty Buyer, who are excited to purchase the house for a $160,000. Unfortunately, Ben and Betty’s lender refuses to loan against the property out of a perceived concern the property is being churned having doubled in value within two months.
A land trust can minimize this problem. Alan should have taken title in the name of a land trust. When he met Freddy a sale of the trust as opposed to the property would not appear in the county record. From the general public’s perspective, the trust is the owner of the property. Know one knows who owns the trust because this information is not recorded. When Freddy meets with Ben and Betty, he will offer to sell them the property held by the trust. Ben and Betty’s lender will only see Alan’s original auction purchase and not the intervening transfer to Freddy thus, reduce the title churning concern.
Protection from Judgments
Most people are not aware personal judgments can attach to their real estate and possibly force its sale. A creditor with a judgment has two options, apply for a Writ of Execution to force a sale of the debtor’s real property, or record the judgment in the county where the real property is located. The first option leads to an obvious conclusion the second less so. If a creditor merely records the judgment, it will be paid whenever the property owner refinances or sells the property. The judgment is like a lien against all property title in the individual name of the debtor.
An easy way to avoid personal attachments is to keep title out of your personal name. The land trust is the ideal tool for holding title to real estate. When property is transferred into a land trust, it is taken out of the property owner’s individual name and held in the name of a trust in the care of a trustee. Recorded judgments against the property owner will not attach to trust property. This method only works if the property is transferred into the trust prior to a judgment being recorded. Transfers after a recorded judgment carry the judgment into the trust.
Thus, real property held in a land trust can be refinanced or conveyed free and clear of personal judgments provided the transactions take place in the trust name. Note: an aggressive creditor can enforce a Writ of Execution against your beneficial interest in the land trust therefore for full protection consider using an LLC to hold the interest.
Facilitation of Property Transfers
Many investors will group several properties within one LLC when their overall equity exposure is minimal. However, their risk exposure will grow in proportion to the increase in the value of the real property and its debt reduction. There will come a point when the grouping of several properties in one LLC is unwise and additional LLCs are warranted to reduce overall exposure.
Consider Ian Investor, who owns four rentals in LLC #1. If Ian wanted to move two of his rentals to a new LLC, e.g., LLC #2, it would require the recording of two deeds for each property. One deed from LLC #1 to Ian and a second from Ian to LLC#2. Such a transaction results in multiple recording fees, possible loss of title insurance, loss of casualty and liability insurance coverage, and potential transfer taxes.
The land trust solution avoids the problems mentioned above. If Ian owned each property in a separate land trust, he need only assign the land trust from LLC #1 to himself and subsequently assign his interest to LLC #2. Additionally, this approach offers a veil of privacy because the assignments are not recorded thus, no one knows who owns the trust.
Wholesales Made Easy
Wholesale transaction can be tricky when dealing with bank or HUD owned properties. In the typical wholesale transaction, an investor will tie up a property under a purchase and sale agreement without the intent to purchase the property. The investor, in turn, looks for an investor to whom he can sell the purchase and sale agreement. The acquiring investor acquires the right to close on the property. This transfer of rights is often referred to as an “and or assigns” clause.
Banks and HUD are not comfortable with these types of transactions and require the original party to the contract close on the property and will not accept an assignee. As a result, the wholesale investor is forced into a double close scenario with all of the added costs incurred therein.
Some commentators recommend the use of an LLC to enter into the purchase and sale agreement. The LLC can then be assigned to another investor without alerting the seller because the purchase and sale agreement is with the LLC and not the investor. The LLC scenario is a viable, yet complicated and expensive strategy. A less costly and simpler alternative is the use of a Wholesale Land Trust agreement that offers the same benefits as the LLC scenario but without state filing fees, EIN numbers, change of tax status, and restated operation agreements.
Protection from Restrictive Home Owner Associations
Some HOA’s restrict who may be owner typically limiting ownership to individuals or trusts. For the real estate investor who owns a property in such location asset protection for the investment may appear elusive. Any attempt to use a business entity to hold title to real estate will result in fines and liens against the property.
A work around exists by using a land trust to hold title to the property. The trust is exempt for HOA restrictions and, therefore, does not trigger the HOA’s ire. After the property is deeded into the land trust, the investors beneficial interest is quietly assigned to an LLC for asset protection.
The uses of land trusts cannot be overstated as they are considered an important tool in the investor’s arsenal. If wielded properly, the trust can minimize title issues, limit liability exposure, facilitate future transfers, and shield ownership. The key is in understanding its benefits and limits.