The Land Trust and the Short Sale

The Trustee is the owner of the property, not the Trust itself.

The Beneficiary has the power to direct the Trustee to deal with the title and proceeds of the property.  They also have the right to manage, possess, use, control, sell, rent or mortgage the property.  The beneficiary has an economic interest in the property.

When a homeowner puts a property into a land trust they convey fee simple absolute ownership to the Trustee.  The land trust will state that legal and equitable title is vested soley in the Trustee with the homeowner named as the beneficiary.

The beneficiary can direct the Trustee to manage the property.  Any liens remain in place but do not get paid off at this time.  The land trust protects the property from other creditors by making sure no more liens are placed; this is good information for the short sale lender to know.

The homeowner will also sign a purchase agreement with the investor’s company as the buyer.  The trustee is not named as the buyer.  Once the trustee owns the property, a purchase agreement can be signed with the Trustee as Seller.  Once the contract is accepted, the buyer’s lender will order a title search and find that the Trustee is the owner of the property and has the right to sell.  This is the part of the process that typically stops the transaction.  It all boils down to how the underwriter interprets the FHA guidelines.

Lenders (notably FHA and nonconforming) instituted an underwriting requirement that title must be seasoned for varying lengths of time (3 months etc). The rationale is based upon an observation that where properties were sold multiple times, within a short period of time, the loans had a higher default rate and tended to have artificially inflated appraisals and various other forms of loan fraud. Thus, the seasoning requirement was born. Note the key term "sold", not transferred. The transfer of the property from the Seller to the Trustee is without consideration and constitutes a mere change of identity and therefore, does not reset the title seasoning clock.

Transferring the ownership of the Land Trust is akin to a corporation selling its shares to someone else, while selling some property that it holds title to - it has no bearing on the transaction contemplated between the Trust itself and the bona fide purchaser for value. Nor is there any reason why a personal transaction, that does not affect title to the premises, would be presented to the purchaser's Lender. Again, it is the Trustee who holds legal and equitable title and is empowered to convey the premises not the beneficiaries who merely have a beneficial interest in the land trust - personally not realty. New York State, for instance, considered such interest to be an economic interest in real property thereby creating a blend of the two interests - a quasi real estate interest that does not rise to a fee simple interest - so that it may collect transfer taxes upon the transfer of such interest.

Once financing is in place, a qualified real estate attorney can help you proceed to purchase the beneficial interest in the property.  Beneficiaries have economic interest in real property; therefore, transfer tax returns must be filed and transfer taxes paid when the interest is transferred to a new beneficiary.

The process can vary slightly from state to state and should only be done with a qualified real estate attorney who is familiar with the process.  Proper structure with attention to the treatment of the beneficial ownership of the land trust is critical.

Due to the increase in real estate fraud and scams, many states have enacted stringent legislation concerning distressed assets.  A qualified real estate attorney who has experience with short sales and land trusts will know what you can and cannot do concerning pre-foreclosed homes.

Jodi Funke is the founder of http://www.cashforshortsales.com a company who specializes in short sale transactions.  Jodi is a transactional lender who provides funding for the investor to purchase a property on a short sale and sell the property for a profit the same day.  Their team of real estate professionals, attorneys and title companies are experienced at handling these transactions while working at the highest level of integrity.