Sub2 - Is it legal?

General Real Estate Investing
41

Beggar Sue,

Welcome and thanks for the excellent input. It’s great to see someone who really does understand land trusts and how they operate. Rajah and BooBoo attack what they can’t comprehend.

The NC thing is hilarious. The AG might feel one way, but NC just passed SENATE BILL 679 AN ACT to adopt a revised version of the uniform trust code for NC. On top of that, NC Bill 725 that he quotes has a specific exemption for land trusts.

Your analysis is brilliant, especially about the “executory contract” part. Our type of conveying is not of realty but personalty, and does not pertain to the execution of a contract to purchase real estate. An analogy might be that of the leasing of a car wherein the lessee has virtually 100% of the benefits of ownership of the car without a title transfer; but does never own the vehicle until/unless he or she would decide to buy it for its Fair market value at the termination of the agreement. The lessee has the first right to purchase, but is under no obligation to do so, and receives no more of a contracted bargain price than would anyone else buying the same car if the lessee opted not to.

The “substance over form” argument should come into play only if the simultaneous contracts were fully dependent upon one another to accomplish a stated objective. In our case, the lease agreement and the trust document are independent of one another.

A right of first refusal means that if a seller receives a bona fide confirmed offer from a third party, the person holding the right has the opportunity to match that bona fide offer, however, there is no obligation by the seller to sell to the person holding the right for any amount other than the bona fide amount. An option is a contractual right held by the optionee that requires the seller to sell the property for a certain price dictated by the option.

In our scenario, the beneficiaries only have rights of first refusal, not options.

Da Wiz

42

One additional thing that I need to ask is how do you keep from being sued by your ultimate buyer (additional beneficiary if you wish) if the seller wishes his house back? We know by this type of setup that the seller is legally entitled to the return of his house through the trust because he can revoke the trust at any time. Remember that this MUST be a revocable trust to be legal under the act. So by YOUR definition the seller can get his house back at any time, especially if there is any appreciation made during the time you are paying the bills…so how does the investor not get sued?

Another thought, maybe as a seller this ain’t all that bad. Seller sets up the trust, have the investor/additional beneficiary pay the mortgage for 2yrs 11mths 29days and then seller revokes the trust, demand the house back and cash in on all the appreciation. Hmmmm.

43

You said, “We know by this type of setup that the seller is legally entitled to the return of his house through the trust because he can revoke the trust at any time. Remember that this MUST be a revocable trust to be legal under the act.”

YOU MAY KNOW THIS – IT’S NOT A FACT.

The seller can wish his house back all he wants but the lease agreement that he willingly signed has obligated him to allow his tenant to have first right of refusal to purchase the real property at FMV at the end of the lease term. If the tenant does so, Seller gets cashed out, his mortgage paid off, and he assigns his ownership of the Trust to the tenant. If not, Seller can repurchase the property from the Trust at FMV or it will be placed on the market for sale.

You also forget that the tenant has become a Beneficiary of the Trust making him also an owner. Now they both own a revocable trust. Get it? It’s still a revocable trust but the revocation MUST be unanimous. Trust documents clearly cover the scenario you raise and all parties are clearly protected. Show me one case where your fantasy has ever happened in thousands of trusts since 1984. Show me one. It never has.

Don’t you think our legal staff is smarter than you? Believe me, they are. Your arguments are creative but impotent and show a glaring lack of knowledge of landtrusts.

Da Wiz

44

So what you are telling me is that even though the settlor/grantor has his revocable trust, he really can’t revoke it without the permission of the other beneficiaries???

45

Before the Wiz attacks I will take a shot at it.

The homeowner who puts the property in a trust can remove the property from the trust at anytime as long as he/she is the sole beneficiary. Once beneficial interest is assigned, all beneficiaries must agree to remove the property from the trust. It is still revocable, it just takes more than one to agree to the revocation at that point.

Being a beneficiary in a land trust is like being a member of an LLC. Each member has a say in what goes on. Decisions made have to be voted on. On that note, the investor beneficiary and the resident beneficiary probably won’t agree to allow the seller to be able to remove the property from the trust. Case closed. The seller can refinance the property to pull out any equity he/she wants before putting the property into the trust.

The seller can sue if he/she wants to. The courts will see that the seller placed the property in the trust and assigned beneficial interest to others. The courts will also know that beneficiaries of a trust have to agree on what happens within the trust.

As you can see true asset protection. The seller’s initial equity is safe, the investor beneficiary’s equity is safe, and any appreciation that the resident beneficiary’s aquires is also safe from the actions of the other beneficiaries.

Boo Boo you seem like a very smart guy. I had those very same questions when I was first learning about the NARS trust.

Beggar Sue

46

Exactly. There is no law that says a revocable trust can only have one owner! There are two owners of the trust (three if an investor is involved). If they both agree, the trust can be revoked, but it never happens because they both are getting a great deal. There are only winners if the transaction is properly and fairly structured, such as a 50/50 split.

And, why would a seller want to take a house back in which he is sharing the future appreciation over and above his original sales price 50/50? . . . AND has a tenant making the mortgage payments, being responsible for maintenance and repairs, and a Trustee collecting the rent, paying the mortgage, and sending his cash flow in the mail?

Beggar Sue: You go girl!

Da Wiz

47

Hey, I am not a girl. Lol

Wiz I can tell you don’t watch martial arts movies. Beggar Sue is the name of a Drunken Master. He was the master of the 8 drunken immortals. I collect martial arts movies and own thousands of them.

48

I guess I just dated myself. My most humble apologies and I’ll drink to that.

Da Embarassed Wiz

49

Why do you think the only reason the trust is used is to benefit the investor?

That’s not what I said. I said that the purpose of the trust is to conceal the transfer of rights to the investor and at a later date, to the tenant. Call it what you want to make you feel better, but to most people’s eyes (including the initial homeowner/seller) that would be considered a sale. So, the purpose of the land trust is to conceal a sale.

Answer this: If that was not the reason for it, why would the seller have to put it into a trust BEFORE the investor would mess with it? If the seller wouldn’t agree to putting their property into your trust as you, the investor, directed them to do, would you still buy the property?

Hey, don’t feel bad. It’s not the NARS system that I have a problem with. It’s the reason for the trust in the first place. I don’t like it any better from the Sub2 gurus that promote the use of trusts in the same fashion.

The purpose of the trust is to sale the property. That, in it’s simplest form, is loan fraud.

Is it likely that you’ll get caught? Probably not, as long as everybody stays happy in the deal. But if they don’t and the seller decides to sue, would it come up then?

As it been caught before? Yep. The case that prompted NC HB725, the investor was using land trusts in the same fashion. The land trusts were deemed fraudalent, revoked by the courts, and all properties were returned to the original owner.

Are you saying the only way you can lease a property without violating the DOS is if the property is not in a trust?

Nope. Didn’t say that at all. What you guys are saying is that your system DOESN’T violate the DOS when, in fact, it does. Hiding behind smoke and mirrors using multiple forms/contracts doesn’t change that fact.

And just to be clear, the NC AG doesn’t consider ALL land trusts fraudalent, just those created in the way described.

Raj

50

Rajah,

To answer your astonishing quotes:

The purpose of the trust is to sale the property. That, in it’s simplest form, is loan fraud. THERE IS NO SALE (THE WORD YOU WERE LOOKING FOR WAS “SELL”) . THE PURPOSE OF THE TRUST IS TO PROVIDE THE BEST ASSET MANAGEMENT FOR THE SELLER AND IT DOES BY FAR.

to most people’s eyes (including the initial homeowner/seller) that would be considered a sale. WHAT WOULD BE A SALE – A LEASE TO THE BENEFICIARY? TO THE LAW, FEDERAL LAW AT THAT, IT IS NOT A SALE.

Is it likely that you’ll get caught? Probably not, as long as everybody stays happy in the deal. But if they don’t and the seller decides to sue, would it come up then? GET CAUGHT DOING WHAT/ LEGAL TRANSACTIONS? YOU HAVE NO CLUE WHAT YOU ARE SAYING! YOUR LACK OF KNOWLEDGE OF TRUSTS IS MONUMENTAL.

As it been caught before? Yep. The case that prompted NC HB725, the investor was using land trusts in the same fashion. WRONG. THE CASE IN NC THE TWO PARTNERS MADE THEMSELVES TRUSTEES (A NO-NO) AND DEFRAUDED THEIR CLIENT. HAD NOTHING TO DO WITH THE PROPER WAY TO USE A LAND TRUST. THESE GUYS WERE JUST CROOKS.

What you guys are saying is that your system DOESN’T violate the DOS when, in fact, it does. Hiding behind smoke and mirrors using multiple forms/contracts doesn’t change that fact. SHOW ME ONE CASE WHERE THE NARS TRUST HAS EVER VIOLATED THE DOSC. ONE CASE!!! YOU ARE REALLY FUNNY. MULTIPLE FORMS/CONTRACTS??

And just to be clear, the NC AG doesn’t consider ALL land trusts fraudalent, just those created in the way described. HE IS RIGHT – THE LAND TRUST CREATED BY THOSE CROOKS WAS NOT PROPERLY DONE. NORTH CAROLINA HAS EXEMPTED LAND TRUSTS FROM HB 725 AND HAS ALSO PASSED A LAND TRUST BILL THAT ESTABLISHES THEIR LEGALITY IN THE STATE. THE FACT IS THAT SUBJECT TO TRANSACTIONS WILL BE ILLEGAL IN NC. – NOT LAND TRUST TRANSACTIONS.

Good luck to you and have a nice peaceful day.

Da Wiz

51

No, Doc, Sub2 becoming illegal in NC doesn’t “eat at me” at all. I don’t do sub2 transactions, so it doesn’t affect me.

What eats at me, if anything at all, is the fact that you can’t honestly admit why you have the sellers do a land trust. Whatever marketing methods you use to find your properties, a seller calls you wanting to sell, not establish a land trust for “asset management.” You’ll only help them with their problem IF they setup a land trust as you request. You completely ignored this part of my last post, as you usually do when you can’t or won’t answer.

What eats at me, if anything, is the fact that you cannot speak about your great system without resorting to name-calling, bad-mouthing, and now, trying to discredit, simply because you’re offended because I disagree with your system.

I’m not going to even get into the NC things again. In the NC case, the land trusts were deemed fraudalent because the investors had the sellers set them up prior to taking control. Sound familar?

What eats at me, if anything, is that you’re trying to paint myself and anybody else that disagrees with you as some sadistic anti-landtrust, commie-loving psycho. Simply isn’t true. I’ve just pointed out some flaws in your system. Sorry if that offends you so much. It’s a shame that an educated man such as yourself can’t carry on a reasonable conversation about the topic.

Good luck to you, too, sir.

Raj

52

Do you really think the system is loan fraud? If it was, why would it be taught to realtors in California as continuing education?

I said that the purpose of the trust is to conceal the transfer of rights to the investor and at a later date, to the tenant. Call it what you want to make you feel better, but to most people’s eyes (including the initial homeowner/seller) that would be considered a sale. So, the purpose of the land trust is to conceal a sale.

What rights are being transferred to the investor? The only right the investor has is to be able to make decisions about the property with the other beneficiaries as per the beneficiary agreement. The names of the beneficiaries are being concealed from the public. PRIVACY is the whole purpose of it.

Doesn’t a sale require equitable and/or marketable title to be transfered to the buyer? The trustee has both and the beneficiaries would have to buy the property from the trustee. Then and only then would there be a sale of ther property.

Answer this: If that was not the reason for it, why would the seller have to put it into a trust BEFORE the investor would mess with it? If the seller wouldn’t agree to putting their property into your trust as you, the investor, directed them to do, would you still buy the property?

You do know that when you aquire a property subject-to, that income tax liens and tort judgements against the original homeowner can attach to the property. Since the trustee owns the property in a land trust, the attachments can’t happen. Would you put money and time into a subject to deal only to have an IRS lien or a child support lien show up a title search later on because of the original homeowner’s financial malice?

53

i never thought i’d see the day the wiz makes a friend on here :wink:

54

beggar sue,

are u talking about in or out of a trust? if the sub to is done right from the beginin, i would record the deed as ASAP so, if the deed is in the new owner’s name (mine) how do judgements and other liens in the orig owner’s name attatch?

55

This was brought up in a previous thread and because of it’s importance and the fact that Gary was may not have understood this change, I feel it should be brought up again.

Here is a link to the change I am referring to:

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=8c18fde8427d6394f4855ba333bdfb24;rgn=div5;view=text;node=12%3A5.0.1.1.54;idno=12;cc=ecfr

This has to do with the amendment/change to Title 12.

§ 591.5 Limitation on exercise of due-on-sale clauses.

(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.

I do not know if this change/amendment came about because of the “creative” use of these trusts or not.

Gary will say that this isn’t law, but some clerk’s idea of reality, but in doing some additional checking I found that is not quite right.

http://www.gpoaccess.gov/statutes/index.html

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Because of this change “the borrower is and remains the beneficiary and occupant of the property” there is no advantage of using a trust to transfer the property and the lenders can treat a trust violation of the DOSC the same way as if there was no trust.

56

Boring!

Title 12 of the CFR is specifically NOT the law and HAS NEVER BEEN enacted as such, or even proposed to be law. Title 1 of the CFR will show any reader which codes are law and which are not, and Title 12 itself is NOT.

And do not let any uninformed attorney or nay-sayer ever tell you that the CFR is law in every title. Some titles are, and some are not: and Title 12 is not, and would always be subordinate to Title 12 of the U.S. Code (12USC 1701j3, etal).

Their article is “A” not “THE” and any prohibition against leasing the property would fly in the face of 1701j3 (ok to lease for up to 3 years, and without a lease option).

Land trusts are and will be exempt from the DOSC. The federal regulation that you say was enacted was the right for these guys to print or codify the law – not any law in and of itself. The Code of Federal Regulations (CFR) is the codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the Federal Government. It is divided into 50 titles that represent broad areas subject to Federal regulation. Each volume of the CFR is updated once each calendar year and is issued on a quarterly basis.

YOU MUST KNOW THAT TITLE 12 OF THE CFR IS ABSOLUTELY ‘NOT’ LAW: THOUGH SEVERAL OTHER TITLES ARE LAW. IF YOU’D TAKE THE TIME TO READ THE CFR, YOU’D LEARN THAT TITLE 12 IS SPECIFICALLY EXCLUDED AND HAS NOT BEEN PROPOSED, PASSED OR APPROVED IN ANY MANNER AS LAW. IT IS (ACCORDING THE U.S. HOUSE OF REPRESENTATIVES’ OFFICE OF THE LAW REVISION COUNCIL) NO MORE THAN “… PRIMA FASCIE EVIDENCE OF THE EXISTENCE OF USC 1701-J-3. PERIOD!!

It is a book, an interpretation – a guide – NOT THE LAW. In this case, it does not meet the “reasonable interpretation” criteria in that any prohibition against leasing the property would fly in the face of 1701j3 (ok to lease for up to 3 years, and without a lease option) - Garn-St.Germain.

The fact that Bill Gatten has two recent letters from lenders who could not invoke the DOSC is proof enough. Perhaps I should start charging you for this education.

Da Wiz

57

Hello Tony, hope your day is going well. Since you recorded the deed I am taking it that you have marketable and equitable title to the property just as a trustee does in a land trust. So the seller’s tort judgements would not affect the title. But now the property is not protected from actions that could resort from judgements against you from your creditors. Who knows what the lender would do if they found out there was a cloud in the title because the subject to title transfer. How do you protect the seller from that?

By the way Tony. The Wiz has plenty of friends. I Hope

Beggar Sue

58

i think the worse that they would do is call the loan due, if they were alerted of the title change. the way most lenders are alerted is when the orig homeowners insurance pol is cxld. that is why we can’t let that happen. however why would a lender call a loan due that is making them money? if it’s current and there are no other issues, then they have no real reason to call it.

59

Tony like you, I am not worried about the DOSC. That is not a concern of mine. Even if it came down to the fact that using any type of land trust is a violation of the DOSC there are still other reasons to use it. The property, and any equity is protected from the actions of the beneficiaries. And the beneficiaries identities are private. Just to name a few.

I just thought of something. Lets say that I own a property and the mortgage is in my name. The financing in place is for investment property. Lets say that I place my property into a land trust. Then I can assign beneficial interest to the tenant who will be leasing the property. I do this to give the tenant my tax breaks and in return, the tenant will be taking care of all maintenance and taxes.

According to Title 12, I would not be able to do that. Even if I just placed the property in the landtrust and remained the sole beneficiary, I would still have to live in the property just because I placed it a trust. It is clearly evident that the financing in place is for non owner occupied. That doesn’t make any sense. I am sure there are many investors who use use simple land trusts to hold title to their investment property. As Wiz said Title 12 is not law. If it were, half of the real estate investment population would be in violation of the DOSC by just having their investment property in a land trust in not living in it.

Beggar Sue

60

Gary

You wrote…
“He ASSIGNS a beneficiary interest in the trust (PERSONAL PROPERTY) and continues to benefit from his ownership and that is good asset management.”

The Garn St. Germaine Act says;

i a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
[/i]

How does your trust holder remain a beneficiary if he assigns it to someone else.

If he does not transfer rights of occupancy, how does he sell it and allow someone else to occupy. Does this mean that at any time your seller can now evict your tenant/buyer when ever he feels like it? He would have to have this right if he retains occupancy rights. If he does that what happens to you and the tenant or buyer?

Also how do you go about convincing people to set up this trust? Surely you can not be telling them about it? That would be acting as a lawyer, and dispensing legal advice on how to get around the DOSC?

They must already have this in place, and then go looking for you to handle the details of finding a tenant for them? If they were smart enough to do a trust by themselves what would they need you for?