Here are some interesting topics I’ve found in which other investors find L/O’s to be risky.
Having that said, how do we as investors protect ourselves and handle situations where the seller has a judgment against the home or files for BK while we are in the middle of a sandwhich lease?
all thoughts welcome.
ryan
Nobody has answered so I’ll give it a try. If you believe that you have a questionable Seller then run their credit profile. Possibly have them enter into a Performance Mortgage where in you place a lein on the title. This next one might not apply but get permission to access their Mortgage online so you can make sure payments are being made and finally its time to get a Lawyer. My 2 cents worth. Herbster
This is one of the reasons I don’t do sandwich L/Os.
However, if I were to, I would be the one making the payments directly to the bank.
Also, disclose to the seller that it’s best for all parties involved
for them not to incur any judgments against the property.
Them keeping the payments current is crucial, but like I said,
I would be the one doing that.
Too risky otherwise.
It’s up to the BK judge. He can void the contract and require you to return the option fee you paid the seller. You are also now in breach of contract with the tenant buyer because you can’t deliver the home.
You can’t do anything about liens on the property other than pay them if your TB actually buys.
Well, there’s not much more anyone could do now. lol However, if I was going to do a lease/option… I think I would want the seller to put the house into a land trust… so judgments against him won’t attach.
What makes you think a land trust would prevent a judgment lien? They are revocable trusts subject to the grantor’s creditors. If the beneficial interest does not change at arms left, the transfer can be attacked as a fraudulent transfer.
Well, if the loans are kept current on THAT house, then those creditors will not attach anything. If someone sues him, that house will not be brought into court because the plaintiff doesn’t know that he owns it. His name isn’t on public record.
I’m not really sure what your talking about BLL with fraudulent transfer. The great thing about land trusts is that it keeps each house inoculated against other houses. If someone get’s killed in a house you own on Mulberry St. They can only sue you in relation to that ONE house which you don’t own… the trust owns it.
Creditors can attach a lien to real estate regardless of the mortgage. Maybe they don’t get paid right away, but they will get paid in order to remove the lien and the property can’t be sold until then.
Basic discovery will reveal the property and all the trusts. If the owner lies and doesn’t disclose, he is all done if he gets caught. Attorneys have access to PIs that can find assets. It is very difficult to hide assets in today’s world.
Who owns the trust? Who controls the trust assets? With land trusts, it’s the grantor and they are revocable. That means anyone who has control of the assets can be held personally liable for any problems with the trust and there is no inoculation. The only trusts that provide creditor protection are irrevocable trusts with spendthrift provisions, but you have to give up control of the assets.
Well, creditors can attach liens to the house that he lives in even if it’s in a trust. But if he doesn’t live in the house and it’s in a trust… nobody knows that he is the beneficiary of a multitude of trusts.
The plaintiff would have to get a court order to reveal the properties in trust or the trustee would have to have a BIG MOUTH.
There is no justifiable reason not to use land trusts.
That is the purpose of discovery. Do you really want to risk getting caught in a lie? Maybe you can get away with it, but you are all done if caught. The judge will give the creditor whatever he wants. Private investigators are able to get all kinds of documents they shouldn’t. Some can even get tax returns and filings. It is not worth the risk IMO. It is better to rely on solid structuring rather than secrecy.
The trustee will spill his guts if someone comes after him, especially if the land trust is beneficiary directed. There is no trustee/beneficiary privilege, just like there is no cpa/client privilege. Both will turn over documents to a creditor when implicated in a civil fraud claim. That is the new tactic. Accuse the cpa and trustee of engaging in fraud with the investor, which isn’t covered by there E&O insurance, and they will turn over everything they have in order to be dropped from the suit. Only attorneys are legally prevented from turning over work product and confidential client information.
What I meant was having a big mouth when it wasn’t necessary… like outside of a court order. Like the trustee name implies… have someone you trust be the trustee. Besides, you can always fire the trustee if someone is hassling him and hire a new one.
I’m fine with corps and llc’s… it’s just that you would have to create a new one for each house you buy, and if you don’t, your putting all your eggs in one basket which is susceptible to seizure.
The trustee has an obligation to follow the trust agreement and that includes keeping confidential information confidential. Otherwise, you have a claim against him.
What am I missing? Why won’t the new trustee get hassled as well? What prevents the judge from ordering you to hire a trustee to liquidate the trust? That is why beneficiary-directed trusts have no asset protection value what soever.Real property can’t be moved and it is subject to the laws of its jurisdiction. Changing the trustee won’t change anything.
You can protect property with equity stripping and you don’t need an entity for every property. That is just guru nonsense to push material.
How does a revocable trust provide more protection than a corp or LLC? I have been doing this stuff for a while and I really don’t understand where you are coming from.
Bagen 42,
http://www.reiclub.com/articles/nc-commission-answers
North Carolina is not the only state that looks at Land Trusts the same way.
John $Cash$ Locke
“What am I missing? Why won’t the new trustee get hassled as well?”
What I meant is that if your trustee is weak enough to talk when they don’t have to… you can always get a different one, an attorney perhaps.
“What prevents the judge from ordering you to hire a trustee to liquidate the trust?”
In a lawsuit… say someone dies in a fire in one of your investment properties, the plaintiff can only sue the owner of THAT property. The owner is the land trust. So the only thing they can go after is that ONE house, because that is the ONLY asset in the trust.
There is no full proof asset protection, but in my mind… there are only benefits in relation to land trusts.
“You can protect property with equity stripping and you don’t need an entity for every property.”
Equity stripping is a dangerous game in my opinion, especially if your personally liable on these loans.
“That is just guru nonsense to push material.”
If you don’t have an entity for every property… then that means some of your entities have more than one property. If someone comes after that entity, they can seize all of those assets.
“How does a revocable trust provide more protection than a corp or LLC? I have been doing this stuff for a while and I really don’t understand where you are coming from.”
Individually, it probably doesn’t… but it’s a whole lot easier.
John,
Of course, land trusts can be misused. But it’s federal law, it can be used everywhere. Anyways, those were the opinions of the AG of one state… it wasn’t law or anything.
Besides, banks don’t give a rat’s ass that you bought the house in a trust.
If the cause of the fire is related to a person’s actions or inaction, then that person is personally liable for any damages and all of his personal assets are available to satisfy the judgment. Even failure to properly supervise can create a liability. In the case of a trust, that is the trustee, and in the case of a typical land trust, it will be the beneficiary since he is directing the trustee. The trust does not absolve one from personal liability and since it is a revocable trust, there is no limited liability as you imply. What is your legal basis for this conclusion? Do you have any statute or case law to cite? Is there something in the common law?
Entities do not protect from personal actions. If you do something or fail to do something that causes an injury, you are personally responsible. An entity (LLC, trust, etc.) merely shields you from the actions of others. As an LLC member I am not personally liable for the actions of other members, unlike a general partnership where general partners are personally responsible. If I do something that causes an injury, then I am personally responsible and my personal assets can be used to satisfy the judgment. It doesn’t matter if a land trust holds title or I own everything in LLCs and corporations. Proper structuring can isolate assets, but it’s going to take more more than a land trust.
Don’t forget one very important fact. Most liability results from someone’s action since a trust or entity is not a real person that can act. A person acts on behalf of the entity and is personally liable for his own personal actions. The entity becomes liable since the individual is action on its behalf. The key to asset protection is to separate ownership from control. If you don’t own it, they can’t take it.
Who said these are 3rd party loans? It is very easy to set up a series of loans between related companies. It is common for one entity to hold title to real property, another to operate the business, and a third to own and lease the equipment used in the business. Some people even set up liens against receivables so that income stream is protected. These loans can even be secured with UCC liens against the entity ownership for an added level of protection. The best part is the lender (who is friendly and sympathetic to your case) can foreclose on the property and wipe out the judgment lien if it ever gets that far.
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The AG has a variety of tools like consumer protection laws and unfair trade practices to go after anything he doesn’t like. Not only will you have to pay to defend yourself, you will have to explain the business logic behind what you did. If you have ever spent time in a courtroom, you will know that judges and juries don’t like what they don’t understand. If it looks shady or they can’t figure it out, then they just assume you are up to no good and rule accordingly. There’s nothing wrong with a land trust, but never use it in a place where there is public policy against it.
If the cause of the fire is related to a person's actions or inaction, then that person is personally liable for any damages and all of his personal assets are available to satisfy the judgment. Even failure to properly supervise can create a liability. In the case of a trust, that is the trustee, and in the case of a typical land trust, it will be the beneficiary since he is directing the trustee. The trust does not absolve one from personal liability and since it is a revocable trust, there is no limited liability as you imply. What is your legal basis for this conclusion? Do you have any statute or case law to cite? Is there something in the common law?
That’s the whole point of why people created land trusts. So someone can’t seize all of your assets if the problem property with a fire was owned by ONE trust. The trustee has no personal liability in this… unless he is an active property manager or something which I would never do.
The origin of entities and trusts is to separate personal liability from business dealings. I don’t know where you got this idea that we’re always personally liable.
Of course, nothing is full proof… but it’s a lot better than nothing.
Are you trying to tell me if you own a property in an entity… and something happens, that ALL of your personal assets that have nothing to do with the entity can and will be seized?
That’s doesn’t make sense.
If you are personally liable for the injury, then yes, all of your personal assets can be seized to pay the judgment. If not, then only the entity assets are available to pay any judgment. That makes most entities useless for the typical investor who does everything himself.