Trust and Subject to Existing Loan Transaction

General Real Estate Investing
1

I have read that for the subject to existing loan process the following must be observed

  1. Create a trust
  2. have the seller sign the beneficial rights of the trust to your LLC
    Seller-grantor
    Your LLC-beneficiary
  3. Make the trustee someone you trust

I have the following questons:

  1. If the lawyer you select has a clean record in regards to his ethics and conduct in his profession, should there be any doubts in regards to trusting him as trustee of the trust ?

  2. Are there other issues to be aware of regardless of a lawyer having a clean record as it relates to appointing him as trustee in the subject to existing loan transaction?

3)Can you make another party (a friend or business partner that is not a member of your LLC) a trustee?

  1. Is a trust absolutely necessary when an investor performs a subject to existing loan transaction with a seller?
2

The question you raise about trusting a lawyer is a good one. That is why the NARS Trust uses the same non-profit corporation every time. They are bound by law to act at the direction of the Beneficiaries.

We also make sure the Seller retains at least a 10% beneficiary interest in the trust until termination to avoid any seller claims of mistreatment. Here’s the process:

  1. A (title-holding) land trust is created in the name of the current owner (the settlor) who holds a 100% beneficiary interest. No one else is involved, only the owner and his/her trustee.

  2. Escrow is opened to facilitate the assignment, in the existing land trust, of beneficiary interest to co-Beneficiary.

  3. A Beneficiary Agreement is created between beneficiaries wherein the property’s Mutually Agreed Value (MAV) is established in order to determine settlor beneficiary’s beginning Beneficiary Contribution (equity and/or any non-recurring closing costs, etc.). This documentation also reflects all co-beneficiary contributions (equity contribution and/or non-recurring costs).

  4. A Possession and Occupancy Agreement (triple net lease) is executed between the trust and the 2nd co-beneficiary (responsibility for collections and disbursement are then assigned to PAC Management).

TRUSTEE DUTIES

The following is a list of the duties of a Trustee. Upon Acceptance of a Trusteeship

* Administer in accordance with its terms and purposes
* Administer the trust in good faith.
* Administer in the interests of the beneficiaries.

Duty of Loyalty

* Administer the trust solely in the interest of the beneficiaries.

Impartiality

* Trustee shall act impartially while investing or managing or distributing the trust property giving regard to beneficiaries respective interests.

Prudent Administration

* Administer the trust as a prudent person would consider the purposes, terms, distributional requirements, and other circumstances of the trust.
* Exercise reasonable care, skill and caution.

Costs of Administration

* Incur only costs that are reasonable to the trust property.
* The purposes of the trust and skills of the trustee.

Trustee’s Skills

* A trustee who has special skills or expertise is named trustee in reliance upon the trustee’s representation, that the trustee has special skills or expertise and shall use those special skills or expertise.

Powers to Direct

* While a trust is revocable, the trustee may follow a direction of the settlor that is contrary to the terms of the trust.

Control and Protection of Trust Property

* A trustee shall take reasonable steps to take control to protect the trust property.
* Record Keeping and Identification of Trust Property
* A trustee shall keep adequate records of the administration of the trust.

Enforcement and Defense of Claims

* A trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust.

Collecting Trust Property

* A trustee shall take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee and to redress a breach of trust known to the trustee to have been committed by a former trustee.

Duty to Inform and Report

* Keep the qualified beneficiaries of the trust reasonably informed.
* Concerning administration of the trust and material facts necessary to protect their interests.

Discretionary Powers—Tax Savings

* Trustee shall exercise discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.

General Powers of Trustee

* A trustee, without authorization by the court, may exercise: powers conferred by the trust except as limited by terms of the trust other powers to achieve proper investment, management & distribution of trust property.

Distribution upon Termination

* Upon termination of a trust, the trustee sends to the beneficiaries a proposal for distribution.
* The right of any beneficiary to object to the distribution terminates if the beneficiary does not notify within 30 days after the proposal was sent.

Delegation by Trustee

* Trustee may properly delegate under certain circumstances, duties & powers to a prudent trustee of comparable skills.

Wishing you success.

3

Thanks alot mtnwizard for your response to my inquiries. In addition, I appreciate you discussing in detail the dynamics of the trust as it relates to the entire transaction. Your response is definitely appreciated. Have an excellent day.

4

We have had a lot of posts regarding land trusts and the NARS land trust. The main difference I see between the two is that in traditional land trusts, a friend or associate is usually named as Trustee, whereas all NARS trusts use a non-profit corporation named Equity Holding Corporation as Trustee. Why?

While almost anyone can be named the “trustee” of a land trust, there are definite benefits to use a Corporate Trustee as the trustee of your land trust. Appointing a trustee other than a corporation would allow the property to fall into the trustee’s probate and other legal problems: but a corporate trustee (in virtually all states) must be a trust company only (bank and trust, title and trust, XYZ trust company) … or a non-profit corporation acting only for the benefit of its certified members.

The non-profit corporation that I use with the benefit of “unlimited life” was founded and established exactly for this purpose. The Corporation is Bonded against fraud and dishonesty. They serve as Trustee for hundreds of Trusts Nationwide.

Our Trustee attended the University of California at San Diego and is a graduate of the FBI National Academy. He holds a lifetime teaching credential and has a background of over 20 years in Law Enforcement both in Command and Administrative Positions, retiring in 1979 as an Area Commander.

His experience and integrity have been confirmed by the Court as an appointed Referee and Receiver by the Superior Court. Tom is a man of vision with enormous entrepreneurial skill and ability. He has been involved in the Real Estate and Mortgage Industry since 1976.

You have the right to name anyone you want as Trustee. As to your other question re an attorney, I have not found that to be necessary as all NARS trust documents are reviewed by their legal staff before signing.

Best of luck to you and thanks for the kind words. They are very refreshing.

5

http://www.happylandlords.com/

Gary, under the “fee schedule”, could you give an example of the total costs of setting up one of these trusts, with a brief explanation of each cost…especially the trustee part at the top of the section. What does “1% of the MAV” mean?

Here, a typical bread and butter house goes for around $150K. Make any adjustments that you may need for the example. Just “pretend” that there is a deal being made and use any numbers that will allow a brief explanation.

The costs seems really high, unless I am misunderstanding. This is for educational purposes. Thanks for any explanation.

Regards, Tony.

6

O.K. Tony. I’ll explain a deal step by step for you and for newbies and others who are confused by land trusts.

You are TONY SELLER. You have a house you need to get out of yesterday. You owe $130K with monthly payments of $1000 PITI, and the house may need $5K in repairs. You want $155K, but are willing to leave the equity in for 3 years, and would like $1500 to move out. Comps substantiate the current value of the house.

I, JOE BUYER, come along and offer to take over complete responsiblility for the payments, insurance, taxes, maintenance and repairs, everything – under a triple net lease, if you will first place the property in a trust in your name, with Equity Holding Corp. (non-profit corp) as Trustee. I offer to pay the cost of setting up your trust and I ask only that you allow me to sublet to a worthy buyer who cannot afford to buy under normal circumstances either due to a lack of downpayment or imperfect credit. You agree and sign a Non-Exclusive Option for me to purchase a 90% Beneficiary Interest in your trust.

I pay your trust setup fee of $500, and a (title-holding) land trust is created in YOUR NAME (the settlor) and you hold a 100% beneficiary interest. No one else is involved, only you and your trustee. The deed is recorded and the Trustee is now the legal and equitable owner of the property. It is now legally considered Personal Property by the Feds and IRS and everything that happens after this point is legally unrecorded.

Escrow is opened to facilitate the assignment, in the existing land trust, of a 90% beneficiary interest to co-Beneficiary (ME). A Beneficiary Agreement is created between beneficiaries (YOU and I) wherein the property’s Mutually Agreed Value (MAV) $150K is formally established in order to determine settlor beneficiary’s (YOUR) beginning Beneficiary Contribution (equity and/or any non-recurring closing costs, etc.). This documentation also reflects all co-beneficiary contributions (equity contribution and/or non-recurring costs).

You and I are now co-Beneficiaries of the Trust. A Possession and Occupancy Agreement (triple net lease) is executed between the trust and the 2nd co-beneficiary (ME) Responsibility for collections and disbursement are then assigned to PAC Management.

I then sublet the property under a triple net lease to JOE TENANT who can get in with no down payment. I only ask the tenant to pay closing costs, plus 3 monthly lease payments, 2 of which are held in reserve in the event a default should occur. To obtain a nice positive cash flow, the tenant’s monthly lease payments are $1300, giving me a $300 positive cash flow for 36 months (minus a $40 per month trustee fee, for a net profit of $260 per month).

Now, this is how I recoup my expenses for establishing the trust. What are the closing costs? I paid $500 to setup the trust, and paid you $1500 in moving costs.

The cost of the trust is 1% of the MAV or $1,500, plus $150 for legal review and $100 for accounting. Total cost is $1,750. Add that to the $2,000 I paid above and the total closing costs are $3,750. I want a $1,250 profit for doing the deal. Total closing costs = $5,000.

Thus, my tenant moves in for $5,000, plus 3 monthly payments of $1300, with no bank qualifying. Total move in costs for my tenant = $8,900. I immediately grant him a 50% beneficiary interest allowing him to enjoy the benefits of home ownership including tax and interest writeoffs, and 50% of future appreciation. The MAV I agree to with my Tenant is $160K.

Let’s summarize what the trust actually cost me:

I paid out $1,750, plus $500 = $2,250
I paid $1,500 for You to move out.
Total outlay = $3750.
I receive from Tenant: $5000
Profit: $1,250 at close of escrow

In three years the Tenant/RB decides to refi and buy out the trust at FMV, which is now $190K. Your mortgage is paid off and you get everything up to your guaranteed $150K. Your property was never at risk and you only transfer title when all your money is in your pocket. You are happy as your mortgage was paid on time for 36 months improving your credit and you receive your $20K+ equity at termination.

I get $10K, the difference between my MAV with you, and my MAV with my Tenant. Then the tenant and I split the appreciation between $160K and $190K on a 50/50 basis.

To summarize, for an initial investment of only $3,750, I receive a $260 positive cash flow for 36 months = $9,360. I also received a $1,250 profit at the first close of escrow. I make $10K with the MAV bump, and $15K when we terminate the trust. Total profit on a $3,750 investment = $35,610.

Unlike a traditional “subject 2”, I was never on title, and had no responsibility for payments, maintenance or anything else as that was accepted by my Tenant the minute he signed the Triple Net Lease.

Tenant is happy because he/she got into a home with no bank qualifying and a minimum cash outlay. Tenant enjoyed homeownership benefits from the inception and gets $15K cash out in 3 years. Sorry for the length of this post but I wanted to paint a picture of how it is a WIN/WIN/WIN.

Da Wiz

7

Sounds like a lot of paperwork and headache to me.

My latest Subject To deal.

Got the deed for $10.00

Made two back payments $3,100.00 and I normally don’t purchase houses with back payments, however I had the below reasons for this one.

Purchased the house including the existing mortgage and out of pocket for $209,100.00

Had a certified appraisal done, which I normally don’t do when I am selling on Contract for Deed where the buyer is responsible for all repairs, taxes, etc. and normally improve the property because they feel true home ownership, including them deducting the interest on the loan on their taxes.

Back to the apparaisal, it came in at $302,300.00 and I will sell the house on Feb 18th, 2006 using what I call my Exact Day program without using a Contract For Deed this time and will pocket around $70,000.00.

Just the way I do things.

John $Cash$ Locke

PS: Did not use a Land Trust, just my Corporate Entity, total amount of paperwork envolved on my part about 6 pages.

8

Cash,

Simple paperwork prepared by attorneys – 6-page trust – everyone wins – seller, investor, buyer.

This forum was specifically about how to do a subject to using a trust. Your post is not pertinent to this topic since you have said many times that you know nothing about trusts.

Da Wiz

9

Gary,

I know enough that you don’t need to use one so I related to the poster that he does not need one either, unless someone is a glutton for punishment using some trust methods I have heard about.

By the way how many “total” pages do you go over with with a seller using your method?

So are you now telling posters where they can and cannot post, one minute…just checked, do not see your name as a Moderator so stick to posting and leave the moderating job to the ones that are.

John $Cash$ Locke

10

Wealthinvestigator,

To answer a question you asked “Is a trust absolutely necessary when an investor performs a subject to existing loan transaction with a seller?”

No it is not, however I do say if you believe you need to use one by all means do. Some folks think that trying to hide the DOS clause and ownership is Fraud and even some of the Guru’s are stating do not use a trust, because of this after what happened in North Carolina.

Keep your deals open and above board and you will do just fine in Subject To investing. I should link you to a site where they feel that it is equity skimming to use one and many states are using this article to change their laws making it harder do to creative real estate investing deals. However I will hold this link for a better time.

John $Cash$ Locke

11

The main reason I asked was because the cost of doing that seemed very high to me. It is a lot more than I am willing to spend to do a deal like that. I can do it legally and for a lot less. I only asked for educational purposes. I think the cost to set it up is insane, especially handing over 1% of the MAV right off the top. By the way, I understand regular land trusts, and I have a decent understanding of the NARs now. But the main thing I was wanting to know about is the cost.

Personally, if I can do this ethically and legally without outlaying the $3750, I will. I am not knowledgeable enough to get into the use a NARS or not use it, but I personally think the cost to set it us is much too high. I don’t necessarily think it is bad, but the cost is much too high in my opinion. Part of being in business is to make a profit. If I can do the business in an honest, legal and ethical way, and do it for less, that is exactly what I will do.

Thanks for the detailed explanation. One more thing, I am not at all concerned about the DOS. As a new investor, I am mainly concerned with running an ethical and profitable business. I don’t know enough to say whether a NARS is good or bad or in between. I believe I can do sub 2’s without a trust. As long as I make sure my paperwork is state specific and legal, and as long as my attorney and the rest of my professional team says it is ok, then that is good enough for me. The main thing for me is to maintain and run a profitable business, in an ethical, legal and professional way.

By the way, the trust itself seems ok, but the 1% of the MAV and $40 per month trustee fee seems rather pricy. The setup seems ok, but I don’t personally think it is worth that high price.

Regards, Tony

12

By the way, I expect the high majority of my deals to have relatively low equity. I would not dream of trying to get a seller with 50% equity to just deed me their house. I would not have a problem giving a seller part of their equity, if they had enough to really matter. Like I said, I want to run a business that would make anyone proud…which means everything will always be above board. I am not about money unless I can earn it the right way. If I think I have to hide a deal, or details, or don’t want everyone to know, then it is a deal I just won’t do. Any FMV determined by comps in the MLS includes a commisiion, which I certainly am not going to pay for out of my profits. That is part of the perceived equity of houses sold by realtors.

13

Thank you for the additional information pertaining to the subject to existing loan transactions.John $Cash$ Locke. I sincerely appreciate the feedback provided by all the individuals that have responded and contributed to this post. May all your investments be lucrative.

14

Hi John,

I am new to all of this, but I have been reading yours and gary’s post, and you keep stating that you do not hind any thing and imply that gary is hiding some thing by placing it in a land trust. I have a question are you and gary putting the insurance in your names or keeping it in the name of the seller? I guess this question is for both of you, and if you are kepping the insurance in the sellers name than aren’t you both hiding facts from the morgage company? If not can you please explain what I am missing.

I am not trying to dish any one just trying to understand this process so I don’t make a vital mistake on my first sub-2 deal.

Ted

15

Hi,

You posted to a thread that’s older than I am. Any time I acquire a property subject to and place it into a land trust, once I have secured my tenant, I acquire a landlord policy and require my tenant to purchase a renter’s policy.

Knowing I’m exempted from the DOSC, I usually make it a habit to notify the lender as to exactly what I am doing. I know of two recent cases where lenders did try to exercise the DOSC (Washington Mutual and Countrywide), one because of learning of the assumption, the other they learned via notification of a change in insurance, but in both cases they were rebuffed when they learned the property had been placed in a land trust.

Here’s a personal story. When I notified the Loan Officer at Countrywide he told me it was a DOSC violation. I suggested he discuss it with his legal department, gave him the citation for Garn-St. Germain and told him that the land trust was exempt under that law (the same Federal Law that lenders fought so hard to get so they could make their DOSC legal) and waited for his return call. After a few days and no call, I called him and learned that he was told by his legal department that there was nothing they could do.

Da Wiz

16

Hi Gary,

Thanks for the responce, I am hopeing that John will respond also as to how he handles the insurance issue aswell. I am new to the sub -2 but thank you for your help. so you primarly rent them out or LO them after you take the over would you do a sub-2 for a flip as well?
Ted

17

Unless you have a ton of equity, the DOS clause is a non issue 99.9% of the time. As long as they get the payments, they don’t care…that’s if they even notice title transfered. If you try to invest worried about every little thing, you will never make any money. Something that happens about as often as pigs fly isn’t worth being concerned about. The DOS being called is a very rare occurence.

18

Hi Ted,

I never flip – I hold. Once I acquire my property “subject to”, I triple net lease the property to my tenant/beneficiary and include an equity share whereby I share future appreciation 50/50.

As to ignoring the DOSC, I firmly believe that is reckless advice, especially since interest rates are continuing to rise. Many people weren’t around in the '70’s when banks fought so hard for the Garn-St. Germain Act of 1982, the law that allows them to invoke the DOSC. They called loans often back then, haven’t lately due to the low interest rates, but will resume once it becomes financially feasible for them to do so. Good luck.

Da Wiz

19

Hi Bo,

I am not woried about the due on sale clause, THe question is are you transfering the insurance in to your name or are you leaving it in the sellers name? If you are leaving it in the sellers name, than I see some problems with that.

  1. it is no longer occupied by the seller there for if there was a problem ie: fire the insurance company would not cover this loss due to breach in the insurance contract.

  2. you are not being totaly up front with the morgage company. In my view if you are trying deceive them I beleive that you have a higher chance of the dosc being exicuted.

I am just trying to get some of this strait in my mind.

Thanks for the responce may be you can elaberate on this more for me.
Ted

20

I will not leave insurance in the sellers name, mainly because I have heard of people having problems getting insurance money if a claim was filed. Some have not had this problem, but I’m not taking any chances personally.

With regards to the DOS, I am not concerned about it enough to stop me from doing deals, but at the same time, you have to be aware of it. These little rate increases aren’t going to be a factor…it’s not like they have skyrocketed. If they go up 4-5%, then I might be concerned. But I plan on being out of my deals in 2 years so I am not concerned at all. If they decided to call it, it won’t happen for a while. They arent the sharpest tools in the shed. The DOS is a non issue 99.9% of the time. If the .1% happens, then I will have a backup plan.

All you have to do is to work out any worst case scenario, and try to use your creative mind to solve any potential problem. I can guarantee if they called it due, and I wanted to keep it, I would find a way to refinance it. But the chances are so slim, I’m not concerned at all. Just be aware it can happen, and be aware of the reasons they might call it. Rates are not going up fast enough or high enough right now to be a concern. They arent expected to go up drastically enough to affect a 2 year deal.

Now if you are in an area with high short term appreciation, you have to be prepared in case the slim chance happens. If it does, the extra equity from the appreciation will allow most people to refinance, or if not, find someone to help you.

If you are creative and can solve problems, and be prepared, you will do fine.