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).
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