LAND TRUSTS - THE CURRENT SHORT SALE GIMMICK

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY
https://activerain.com/droplet/4kWx

I have seen so many Land Trust Agreements and Declarations of Trust as a precursor to a Short Sale that I just have to write about it - again!

Previously I had written about property flips in SHORT SALE FLIP - QUESTIONABLE METHODS, but I want to touch on the latest "foolproof" craze - Land Trusts.

Here is how it works:

First you need the distressed homeowner.

Then you need the investor who wants to "control" the property so a buyer can be found for more than the investor has to pay for the property.

Next you have the investor convince the distressed homeowner to execute a quit claim from the distressed homeowner to the Trustee of the Land Trust.  The Trustee is the investor and the distressed homeowner is told that since the beneficiary of the trust is the real owner of the property, he can continue to live in the property and use it without making any payments to the bank.

The Trustee is insulated from any liability for the existing mortgage(s) and promissory note(s) on the property and is not required to make any payments on the mortgage(s).

A simple Contract for Purchase and Sale of Real Estate is usually signed between the Trustee of the Trust and the distressed homeowner, and there is also executed, usually for $100 of payment, an Assignment of Beneficial Interest which document assigns the interest of the beneficial owner of the trust (also known as the distressed homeowner).  This Assignment essentially puts full ownership of the home into the hands of the Trustee.

The Trustee then tries to sell the property to a new party and the Trustee pockets the difference between what is negotiated with the bank and what is paid by the new buyer.

Why these machinations?

Typically the course of events would be that the distressed homeowner finds a buyer who buys based on the short sale approved by the existing lender(s) and then resells the property to the new buyer and makes a profit.  But the problem there is that because of the recent sale by the distressed homeowner, new lenders are hesitant to accept an appraisal of the same home that recently sold for a lower price.  If there is no lender and it is a cash purchase, the new buyer is likely to balk at finding out from the public records that the house maybe weeks before had sold for considerably less money.

So the gimmick of the Land Trust is used to hide the real transaction.  This results in not only hiding disclosure of the real transaction values from the new lending bank and its appraiser, but it can have devastating results for the distressed homeowner.

The distressed homeowner jumps from the frying pan to the fire.

The last thing the distressed homeowner needs is to be worse position than when the Land Trust was first signed, but that is what typically happens.  Here is why:

            1.  The new "Trustee" is by the terms of the trust a fiduciary to the beneficiary.  But the Trustee acts every way but as a fiduciary is to act for its beneficiary.

            2.  The Trustee is not looking to protect the property or create income or profit for the beneficiary.  The Trustee is looking to make a profit for itself with no benefit to the beneficiary.

            3.  The Trustee is hiding behind the Assignment of Beneficial Interest in making those dealing with the Trustee to think they are dealing with a fiduciary - but indeed they are dealing with the principal.

            4.  The Trustee has no obligation to pay the mortgages that are now in arrears, or any other expenses, therefore keeping the property at risk of loss.

            5.  The Trustee will abandon the transaction by merely resigning if the Trustee finds that it cannot find a buyer to flip the property to at a profit worth its while after negotiating with the distressed homeowner's lender(s). 

            This leaves the distressed homeowner in a position where it has lost control of the house yet they are still fully obligated on the mortgage(s) and promissory notes and could have an imminent foreclosure judgment filed against them and be physically forced from their home.  Added to this is the financial liability that they will incur. (See Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios).

The lowdown

My belief is that there is simply no legitimate business reason (mutual to both the distressed homeowner and investor) for using a Land Trust to accomplish a Short Sale because the Trustee is always seeking to avoid certain disclosures while maintaining control of the property.  The same goes for Powers of Attorney, too.

No blog, article, human being with whom I have met in person or on the telephone, has explained a legitimate business purpose to the Land Trust as a precursor vehicle to a Short Sale.  My belief is on one can and it is one of the most popular scams going right now.

Insurance underwriters also concur with my opinion, (Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes) yet there are plenty of attorneys out there that swear that it is a great way to make money.  I do agree it is an easy way (although possibly an illegal way) to make money - but at the cost of further damaging the distressed homeowner.  That is what got this country into trouble in the first place and I would not condone the conduct of others to continuing this problem. 

Here in Florida recent legislation has tried to reign in or control transactions where the distressed homeowner gives up equity or property ownership in similar situations - but some will say that the Land Trust also insulates the investor from the controls of that law. FLORIDA FORECLOSURE FRAUD BILL - UPDATE

Distressed homeowners have plenty of solutions available to them and they are getting easier to implement.  But distressed homeowners need to understand that they are in a painful situation and there is no magic pill, no extra strength Excedrin, and no person that can eliminate their pain.  There are solutions and these solutions when properly applied will considerably ease the pain - but not eliminate it.  Only time can heal these painful events.  Land Trusts and Powers of Attorney to accomplish Short Sales will only increase the pain.

Copyright 2008 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 11/04/2008 09:49 AM
Topic:
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Tags:
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Rainer
31,144
Loren Johnson
White Bear Lake, MN
CMPS

THANK YOU for sharing this......I agree that it seems to be a 'big thing' right now. Just another way to give all of us legitimate people a bad name.

Nov 02, 2008 12:46 PM #1
Rainmaker
1,142,260
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Richard, There are many issues with this tactic. The biggest one being.....what happens if they don't find another buyer? Well of course the homeowner just gets foreclosed on and the "wholesaler" is out of there. It's also fraud because the lender is approving a "short" for a lessor amount than the property will sell for on the open market. They are not going to be happy to find out the "owner(wholesaler)" did indeed pocket money at closing.

 

Nov 02, 2008 10:53 PM #2
Rainmaker
1,028,521
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

I know a few people that do this.  If they can't find a buyer or work out a deal with the bank, then they simply deed the property back to the homeowner.  It is just a matter of time before these people get caught. 

Nov 02, 2008 11:36 PM #3
Anonymous
Michael Belgeri

Counselor,

How about a Florida land Trust to protect the seller's credit score? 

I don't know the answer because I'm not an attorney.  You are.  Since you are writing about the Florida Land Trust Act can I, (or should I) assume that you have had both continuing education coursework in Land Trust Law, attended law school in Illinois where they teach Land Trust Law and understand that the origins of Land Trust law goes back 500 years to the Crusaders and the Canon Lawyers who dubbed it cestui que res when it was issued, as it should be today, to protect the privacy, ownership and negotiating options of land owners in Florida.

I've read with great interest your explanation of the land trust scheme run against distress home owners.  I've even studied their documents like I've studied the FARBAR. I understand the argument against a rogue Trustee in the circumstance you presented and I find it untenable that anyone would do such a thing.  But, living in the heart of real property scams-Greater Miami-- I have no doubt that what you say is true.  And I think you are dealing with a criminal act that should be prosecuted to the full extent of the law.  I also think that there may be significant defensive value for distressed home owners and i'd love for you to respond:

You issued a challenge to show any good reason for a Florida Land Trust in conjunction with a Short Sale.  I don't know if this is a good reason, but I believe it is a proper question that I can't answer as a Realtor and I hope you could as an experienced trust attorney. 

First, let's presuppose that a Trustee can be found who is a disinterested party--you, for example, or the Land Trust Service Corporation or any of half a dozen professional Trustee organizations who provide proper service as Land Trustees.
Second, Take a distressed home owner and move their property and the mortgage into a Land Trust naming the homeowner as the beneficial interest holders.  As you know Florida's Land Trust Act, FS689.071 is unique in that it allows mortgages in a Land Trust.  As you are also aware, there are no doc stamps required when the owner is the beneficial interest holder, and, as I'm sure you are aware, the lender does NOT have to be informed of the transfer.

Third, Place the property for sale through a licensed, disclaimed, disinterested and legitimate Realtor.  The property sells.

If the bank is going to issue a 1099 for the shortage and loss, which they will do,  isn't that 1099 issued to the Land Trust?  According to FS 689.071 the beneficial interest holder is not liable right?  Wouldn't that be enough legal structure to prevent the Credit Report hit on the seller?  And wouldn't that be a great use in these times for the Florida Land Trust?  I look forward to your reply.

Jan 10, 2012 08:45 AM #4
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Thank you Belgeri - I am old, but not crusader old!

IF and that is a big IF, the lender would make a loan to a trustee of a Land Trust, then the beneficial owners, not having signed the promissory note, would not be liable and their credit would not be an issue to be adversely affected.  The credit will only impinge the persons who signed the promissory note or guarantee.

The 1099 may be to the land trust if such a mortgage was made, but like a partnership, the beneficial owners get the pass thru of the income and losses associated with the business of the Land Trust. 

The problem with your scenario is that the original undertaking is not with the Land Trust but with the borrower - who remains liable for the promissory note.  There is no shifting of liability in your example, only a shifting of ownership of the fee simple title to the real estate.

Jan 10, 2012 09:07 AM #5
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Rainmaker
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Richard Zaretsky

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