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The Land Trust debate – is it dead and did it ever help with seasoning
By mhobach | April 23, 2008
A couple of weeks ago a crafty Internet Marketer published a report where it was announced that Land Trusts were dead!
First let me state that I am not an Attorney, nor do I play one on TV. You should seek competent legal advice from a practicing Attorney in your area.
Basically it stated that the Land Trust could no longer be used to get around seasoning issues in a Real Estate Short Sale.
Excuse me… when did a Land Trust ever really get around the seasoning issue?!
Let it be known that what has become known simply as the ‘Land Trust’ really got started as the ‘Illinois Land Trust’ – and it’s sole purpose was to hide or mask the legal owners of Real Estate. For what purpose I will leave to your imagination. By it’s very design the “and Trust would cloud the Title at some point.
The Illinois Land Trust has not been a valid vehicle to hold Real Estate in several states for as long as I can remember! I’m here in Wisconsin, and I was shown the Land Trust and the associated documents back in 2004. Interesting documents – and I didn’t bother to have my Attorney review them at that time. But I did attempt 3 Short Sales using that paperwork with scary results… Lets just say that I am still unable to do business with two title companies here in my local area. I also had to move the properties out of the Land Trusts before I could flip them.
Keep in mind that here in Wisconsin a Trust is valid only if it is an ‘Active’ Trust. The Land Trust is not an ‘Active’ Trust. What is the difference? In simple terms an Active Trust requires that there be a tax number issued to the Trust by the IRS; The Trust must file a tax return; The Trust must have the ability to pay it’s expenses which means that there should be a bank account with money in it to pay expenses incurred by the Trust.
Let me state that the ‘Land Trust method’ of flipping Real Estate is something that some have been successful at getting away with in the past. It may or may not be valid where they report that they use it, and their belief is that the trust is in existence for such a short period of time that it doesn’t matter if it’s valid or not!
Ok – I need to state here that I have never encouraged anyone to use the Land Trust when doing a Short Sale. I am and have been totally against using a land trust in a Short Sale Flip!!! In all of my teachings I tell my students to do something other than a Land Trust!
Here is the issue – and the primary reason that the Title Insurance Companies are dead against those Investors trying to use the Land Trust…
The Illinois Land Trust and all of the variations that I’ve seen forbid the Trustee from disclosing who the actual beneficiaries are – it also forbids the Trustee from disclosing information about the Trust structure itself. This means that when the Title Company goes to underwrite the policy there are a lot of things that they can not determine and thus there are exceptions on the commitment. In the past these issues were not a problem because the policy life was so short that no one really cared. Today the title companies are realizing that these exceptions were never addressed and as a result the claims made against the policies written are costing them a fortune – the Land Trust has placed a cloud on the title that is difficult to remove or explain.
Now understanding how a Trust works and then how a Land Trust works, why would someone place a piece of Real Estate in a Land Trust to flip it? Someone answer this for me because the answer isn’t obvious to me!
So it’s not that the Land Trust is dead – it’s that the Title Insurance Companies are wise to what unscrupulous ‘Investors’ have done in the past. They now understand what is being done with these ‘Land Trusts’ and they are not going to insure them!
I think that some might believe that the Land Trust also protected the property from the bank. I’m not sure about this either. Since I haven’t use this method but a couple of times and got my hands slapped by my Attorney, I can’t say…
One thing that I would like to point out about Trusts… The Trust is a great way to hold Real Estate long-term. Real Property held by a trust provides protection for the property and it also allows the Investor to pass Real Estate to their family without taxation. Trusts are often used to hold Real Property and you can find out more about this online. I will agree that for long term holding of Real Estate the Family Trust is great!
Something that I want to mention here too – other ‘Investors’ believe that if they have the homeowner deed the property to them that it holds up the Foreclosure. There is the issue of the Sheriffs Deed which overrides the deed to the Investor. So it doesn’t matter what the Investor does regarding the deed – if the Foreclosure proceeds, the Sheriffs Deed will get the property to the rightful owner without any problem whatsoever.
I teach these basics as I have since 2004 through my books and now through the REI Learning Center. Have you gone long enough wanting to know the basics and the truth? http://REILearningCenter.com
Topics: Editorial Comments, News! | 3 Comments »
April 23rd, 2008 at 12:25 pm
Michael, well put! When I 1st started in 2004 I put together a land trust (hybrid), Never once did I have a client that could understand what the trust was for, I couldn’t explain it and nether could their attorney’s and somehow I was able to fumble and get deals done, however it was very expensive, cumbersome and several extra steps were required to get my paycheck. At some point I wondered if there was an easier way to build the docs and explain the process to the client. That was about the time that I got your 1st email, your material helped me break the code. When I could better educate and explain the process to a client, they want to sign up and get the party started 100% of the time! Thanks again for all your support and your excellent material. Anyone considering working with short sales can save themselves a lot of time and money and just get your “Big Bundle”, I have spent thousand of dollars for some very nice 3-ring binders, tape and CD’s on my office shelves, however there is nothing that compares to what you have put together at a fraction of the price, keep up the great work.
Happy hunting,
Carl
May 23rd, 2008 at 7:19 pm
[...] with scary results?? … property to the rightful owner without any problem whatsoever. …http://mhobach.com/2008/04/23/the-land-trust-debate-is-it-dead-and-did-it-ever-help-with-seasoning/Amazon.com: FLIP: How to Find, Fix, and Sell Houses for Profit: Rick …… it is without question [...]
September 28th, 2009 at 10:02 pm
I just want to clear up a few misconceptions here:
1. Active v. Passive Trusts: An Active Trust is a Trust in which the Trustee has active powers and duties. If the trustee has no active powers/duties, it is a Passive Trust and in many jurisdictions, the Trust would fail. It has absolutely nothing to do with tax id numbers.
2. Seasoning: Depending on how the Trust is created and when the Settlor purchased the subject premises, transferring title to a trustee with (1) no consideration and (2) settlor retaining 100% of the beneficial interest in said trust would not reset the clock for seasoning purposes. See my legal analysis of FHA’s seasoning rules: http://realestatelaw.typepad.com/where_is_blackacre_anyway/2009/04/seasoning-.html
There are many ways to move properties and make a living – if you are going to work with trusts, my suggestion is to work with a lawyer who is well versed in that area – this is definitely not an area for a layperson.