Land Trusts - Misunderstood,Misapplied
One of the most common questions I receive after a person views my video training called Subject-To 101: The Basics Of Subject-To Investing is: “Do you use or recommend the use of land trusts with subject-to transactions?”
Frankly, that question is a bit out of sequence, as there’s a lot more to know about Subject-To investing before land trusts become relevant in any way. But I’ll go ahead and answer that question now since it’s so common.
First you should know that a “Land Trust” is nothing but a legal document. Basically, the land trust is a way to hide who the real owner of the property is. The general public thinks that some person (the “trustee”) owns the property, but in reality, the trustee has a “boss” who controls everything the trustee does.
Don’t misunderstand: I’m 100% for financial privacy, and I am a proponent of using land trusts. But don’t let any of the guru’s make this more complicated than it really is. Land trusts hide property ownership, and that’s really about it. (Yes, there can be some estate planning value as well, but that is rarely the motivation for using a land trust.)
This is relevant because subject-to transactions always trigger the lender’s right to foreclose per the Due-On-Sale clause. For a quick primer on the Due-on-Sale clause, watch this (then continue reading below it):
So the idea of using a land trust in a Subject-To transaction is really for two reasons:
1. Land trusts serve to hide who the real owner of the property actually is, giving lenders a plausible reason to believe that the borrower to whom they lent money may actually still own the property
2. Many investors think that the Garn-St. Germain Depository Institutions Act gives them the right to use Subject-To transactions without repurcussions, so long as the property is placed into a land trust. (By the way, this is false.)
Having said all of that, I am a big fan of land trusts, regardless of whether the context is Subject-To deals or any other deal. They are very inexpensive to set up and make it truly easy to maintain your financial privacy, which can not be understated in our litigious society.
But don’t make the mistake of thinking that land trusts offer any asset protection in the event of lawsuits. They don’t. But they may well keep you from ever facing a lawsuit in the first place.
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