death of the land trust

Death of the Land Trust ...in Short Sales 1

Death of the Land Trust...in Short Sales

by Jeff Watson, Esq.

Death of the Land Trust ...in Short Sales

NoticeThis publication is designed to provide accurate and authoritative information with regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. If legal advice or other expert professional assistance is required, the services of a competent professional person should be sought.

Purchaser assumes all responsibility for use of all materials contained herein and adherence to all applicable laws governing business practices, agency relationships, and any real estate transactions engaged in through the use of these materials.

© 2008 Jeffery S. Watson Esq. ® All Rights Reserved. All materials in this book are protected by United States Copyright law. This material in any form, or parts thereof, may not be published or reproduced in any manner without the express written permission of Jeffery S. Watson Esq. You may not alter or remove any trademark, copyright or other notice from copies of the content.


“Pre-foreclosure investors that continue to do short sales using Land Trusts are painting a bullseye on themselves and their wallets.

This is particularly true in States that have enacted legislation on foreclosure purchases because each of these States specifically targets Land Trusts.”

Jeffery S. Watson, Esq


CONTENTS

INTRODUCTION ...........................................................................................................Page 6

WHO IS WRITING THIS AND WHY IS HE WRITING IT? ........................................Page 7

CHAPTER ONE: ORIGINS OF THE LAND TRUST ...................................................Page 11

CHAPTER TWO: WHY REAL ESTATE INVESTORS USE LAND TRUST ..............Page 13

CHAPTER THREE: WHY SHORT SALE INVESTORS USE LAND TRUST ............Page 24

CHAPTER FOUR: COMMON LAND TRUST PROBLEMS .......................................Page 26

CHAPTER FIVE: DEEPER PROBLEMS ......................................................................Page 28

CHAPTER SIx: THE TRUSTEE’S FIDUCIARY DUTY ..............................................Page 34

CHAPTER SEVEN: TRUST BENEFICIARIES ............................................................Page 35

CHAPTER EIGHT: A BETTER WAY ExISTS ..............................................................Page 36

CONCLUSION ................................................................................................................Page 38

ABOUT THE AUTHOR ..................................................................................................Page 39


INTRODUCTION

For years, many real estate investors have been taught to use land trusts to facilitate their short sale either for privacy purposes or as a way of using it to assist in the quick-turn transaction. In recent months, increasing legislation and greater regulatory scrutiny from many state governments, various attorney general’s offices, title insurance companies, and lenders have caused land trusts to become difficult or impossible to use in short sales. The following information, while at times complicated and filled with references to various state codes and title insurance company information, is being set forth as informational material to inform the prudent real estate investor. This is not intended to be a comprehensive legal opinion. Always consult a local attorney if you have any specific questions.

TWO MAIN REASONSLand trusts are used in short sale transactions for these two specific reasons.

#1- Most investors are trying to set up a simultaneous purchase and resale of the property, otherwise known as a simultaneous closing. The problem created when trying to do a simultaneous closing is that most people buying the short sale from the investor are going to go get a loan to buy the property. Just about all lenders providing loans to buyers have a seasoning requirement. Seasoning requirements state that the lender will not loan money on the property unless the homeowner has been on title for at least 6, 12 or 24 months. Since the investor has not been on title this creates a problem. Land trusts have seemingly provided a perfect foil to this obstacle –– when in fact they are deeply flawed. In using land trusts investors are able to show that the homeowner or seller is still on title when in truth they are not. The homeowner initially is the beneficiary. As soon as the seller has assigned their beneficial interest in the property over to the investor they have broken the chain of title because the investor now has the interest in the property though the assignment. The issue here is that this assignment was never disclosed to the end buyer’s lender. The land trust, especially the assignment of beneficial interest, was a “smoke and mirrors” tactic used by the short sale investor that allows them to pull all the strings behind the scenes to gain the profits from the transaction when actually they are misrepresenting to the end lender the true nature of the transaction. Likewise, investors using the land trust as a method to conduct a simultaneous close are committing actions that border on bank fraud. Much more on that later (See Chapter 3).

#2- Many investors doing short sales have tried to create a “subject to” transaction in which they will take over payments on the 1st mortgage while attempting to short sale 2nd and 3rd mortgages


(thus creating the equity and future profit). The only way to complete a “subject to” transaction is through using a land trust. The investor would then “take over” the 1st mortgage “subject to” the existing mortgage (thus eliminating the need for the investor to use their own cash or credit to “buy” the property). The investor would then negotiate a short sale on the 2nd and 3rd mortgages. The problem occurs when the 1st mortgage is not promptly paid off. Laws have been enacted specifically to eliminate this practice in pre-foreclosure purchases (short sales).This makes the investor vulnerable to accusations of equity skimming. See Chapter 5 of this report for some state by state specifics.

WHO IS WRITING THIS AND WHY IS HE WRITING IT?The author is an attorney who is tired and frustrated of encountering real estate investor after real estate investor who has been given a little bit of information, a whole lot of misinformation, and out-of-date forms by so-called real estate “gurus.” The author has grown weary of seeing investors relieved of thousands of dollars and being sent on their merry way thinking that they know how to do short sale transactions –– particularly those using land trusts.

I am that attorney, Jeff Watson. I have done short sales with land trusts. I continue to hold residential real estate in land trusts. In fact, right now, I am struggling with my mortgage company about refinancing my principal residence because it is in a land trust rather than in mine and my wife’s names.

This report was created to save investors time, effort, aggravation and money and hopefully the agony of being embroiled in a legal controversy that they don’t quite understand. I want to provide the information necessary for investors to run their businesses correctly and stay out of trouble.

PAPERWORKHaving been called upon to represent more than one investor who got into a transaction with paperwork that they didn’t quite understand it has become a pet peeve of mine that investors are given “paperwork” by gurus who are not licensed attorneys, and the “paperwork” is a knock off of someone else’s version of still someone else’s “paperwork.” I recall sitting in more than one real estate seminar reading through the paperwork and documents being disseminated and catching the typographical errors that existed from one generation to the next of these forms. It was often a clue as to which “guru” had borrowed these forms from whom. Aside from lawyers, real estate investors are the worst plagiarists in the world –– particularly real estate gurus!

Many people famaliar with Realeflow LLC or Strategic Real Estate Coach Inc. have asked the


question “Who is Watson?” He is frequently referred to by last name by both Josh Cantwell and Greg Clement.

For me, real estate investing came about a completely different way. I grew up under less than ideal circumstances where the most often repeated financial advice in the home was “The rich get richer and the poor get poorer.” I did not accept that philosophy. I saw an uncle who had a learning disability and who never got past the 8th grade amass a couple of million dollars of net worth by investing in residential real estate in California. I knew he worked hard, I knew he worked smart, so I knew it could be done. After being the first member of my family to graduate from college, I went on to law school.

While in law school, I discovered that I had a good and quick grasp of real estate law and particularly Trust and Estate law. When taking the multi-state portion of the bar exam, I scored in the top one percent of the nation on the real estate portion. So, you would logically think that I would join a law firm and practice real estate law, right? Wrong. I went into the medical legal litigation arena. Why? Because I enjoyed medicine and trial work: I still enjoy it to this day.

As an attorney finally starting to make a decent living, I began thinking about doing some real estate investing. One day in reading over a recently enacted piece of Ohio legislation regarding Medicaid eligibility, I saw the opportunity for a fantastic loophole to negotiate the purchase of properties using a certain type of owner financing while still preserving the seller’s Medicaid eligibility (that loophole has since been closed by the State of Ohio). The first thing I did was pick up the phone and call the listing Realtor regarding several houses for sale. That Realtor crushed my idea; however, my dreams and aspirations of becoming a real estate investor did not die. It took a while before I called another Realtor about venturing into the real estate market. I continued paying down my student loans, living modestly, and my wife and I saved money.

Finally, I met the right Realtor. He was different than other agents because in his other job he was the type of guy who would run into burning buildings when other people were running out of them: He was a firefighter. I owe a debt of gratitude to Jim and I still own the house he sold me.

So, in a short time, here I am, a lawyer with a growing and busy law practice at a small firm and a growing portfolio of rental properties. Everything was under control, right? Wrong. I was buying properties in Cleveland, Ohio. Most of the time, the market was stagnant and I had to count on paying down the debt to get any equity appreciation. Yes, I did see a couple of up-cycles in the market and did profit well in those situations. I also learned that there was a limit to which I could


reasonably go regarding my credit and finances in buying properties while allowing people who did not have a good financial track record to pay me rent. I am a landlord to this day and will probably be a landlord until the day I die –– and I may die a little bit earlier because I am a landlord!

After several months of having all my rental income go right back out to pay for maintenance and mortgage payments, my wife and I decided we should learn how to do other types of real estate investing. We were at a small event in Nashville, Tennessee when a fellow came in and started talking about investing in properties that were in pre-foreclosure and learning how to resell them the same day that you bought them. My wife told me that’s what we should do, and insisted that we learn more about it. As a result of learning more about it, I met Greg and Josh at another event in Nashville about a year later.

SUMMER 2004It was in the summer of 2004. The three of us met for the first time in a room with 40 other individuals all appearing to be committed to learning more about short sales. It didn’t take long for us to develop a mutual respect for each other since we were all young, aggressive professionals from Northeast Ohio. We knew that we were not each other’s competition, we knew that we could each help each other and make each other better and stronger in the business.

Did I dive headfirst into short sales like Greg and Josh did? No, I did several short sales and I watched Greg and Josh progress as they committed 100 percent of their time, effort and resources to that purpose. I commited my resources and energy into my law practice.

At the beginning of 2005, I left the law firm that had been “Home Sweet Office” for 15 years and set up my own practice. My assistant (Caroline) and I started by sharing one tiny office in a mixed used commercial building that I own in my hometown. After a year’s hard work, we generated enough income to rehab and refurbish an empty suite in that same building so we could each have our own office and more room for our files from our growing client list. Life was getting better. I was working less while making more money than when I was an employee. I stopped doing short sales and began to refer all those deals to Josh and Greg.

It wasn’t until Greg and Josh had me come with them to a meeting with a large number of title insurance representatives that I realized what they were doing to me. They were dragging me back in to the world of short sales whether I wanted to come back in or not.

During that meeting with a number of representatives from one of the nation’s largest title insurance


underwriters, it became clear to me that while short sales were an attractive transaction for this title insurance company they were also a dangerous transaction. Furthermore, I could see that the title insurance industry had a growing dislike for land trusts as a whole and for the assignment of beneficial interest in particular. Land trusts meant risk to them. Risk cost money. Even though we convinced the in house attorneys for this large title insurance underwritter to reverse their ban land trust deals, we knew had to come up with a better, more efficient, less risky way of doing short sales.

A STOP GAP WAS CREATEDOut of that meeting a stop-gap method was created. Specifically, the Trustee directed Land Trust. The Trustee directed Land Trust was available to certain investors through SREC. It is the only land trust agreement specifically written for short sales that is title insurance company approved.

As we worked to create a better way of doing and closing short sales, it became apparent that many people doing short sales were completely ignorant of the dangers and liabilities associated with using land trusts. I knew this from my own personal experience. I had practiced before members of the judiciary who did not understand what a land trust was. I had met numerous real estate investors who had never read a land trust document despite the fact that they were using them. I had been asked by a number of real estate investors to help them with problems because they didn’t understand the paperwork. I had many conversations with in-house counsel for title insurance underwriters talking about the problems associated with land trusts and short sales. I continued to read the growing onslaught of state by state legislation specifically targeting foreclosure investing and most of the time there were references to transfers to properties in trusts or beneficial interests. I knew that the end was coming quickly for using land trusts in short sales and investors needed to be warned.

Just educating and warning people is not enough. You have to show them a better, safer alternative. We at Strategic Real Estate Coach have found a better, safer alternative and have tested it and have verified that it works time and time again. Our method simplifies the short sale process while still allowing the investor to do a back-to-back closing. Moreover, title agents have a much higher degree of comfort with this method and it is easier to explain to other investors, real estate agents and lenders that are involved in the short sale transactions.

Before introducing this new approach, let’s turn our attention to land trusts and learn why the are not suited for short sales. If, while reading Death of Land Trusts in Short Sales, you do not understand something, please go back and read it again. At times I fail to speak and write in English –– I use


that other language called “Legalese.” If after two or three readings you still have questions, then please take advantage of the SREC blog. Post your question on the blog referencing the part that you don’t understand and someone may be able to answer it. www.strategicrealestatecoach.com.

CHAPTER ONE: ORIGINS OF THE LAND TRUST The trusts that we use today in the United States have their origin in common law developed in England during the Feudal Age. When English knights would leave on long journeys or on the Crusades they would entrust the legal title to their lands and other properties to a bishop of the Church. The bishop would then manage the estate until the knight’s return or until news of the knight’s death. Upon the knight’s return, the assets reverted to the knight. Likewise, upon news of his death the assets were transferred to his heirs and thus the trust would conclude.

The idea behind the use of trusts in Feudal England was to separate the responsibilities of ownership from the benefits of ownership. That idea is still with us. In today’s common law legal system a trust is an arrangement whereby money or real property is managed by one person for the benefit of another. A trust is established by a settlor or creator who entrusts some or all of his or her assets to a person of his choice, the trustee. The Trustees are the legal owners of the trust property (Res or Corpus) but they are obligated to hold the property for the benefit of one or more individuals who are the Beneficiaries of the Trust. Usually those beneficiaries are specified by the Trust Creator or Settlor. The Trustee owes a Fiduciary Duty to the Beneficiaries, who are the beneficial owners of the trust property. The trust is governed by the terms of the trust document which is usually written and in the case of a land trust requires a deed transferring the ownership of the land into the trust.

Property of any sort can be held in trust. The use of trusts is many and varied. Trusts can be created during a person’s lifetime usually by a written trust instrument or declaration of trust: these are called Inter Vivos Trusts. These types of trusts can be amended or revoked. Trusts can also be created after a person’s death in accordance with the terms of their will. This is called a Testamentary Trust. Trusts can be created either by written document or they can be created by implication, Implied Trusts. Typically, a trust is created by one of the following: a written trust document created by the Grantor or Settlor and signed by both the Settlor and the Trustee(s), an oral declaration of trust, the Last Will and Testament of the Settlor or a court order.

Usually a trust requires three key elements. First, there must be a clear intention to create a trust. Second, the trust must have specific content or Trust Corpus or Res - the property subject to the trust must be clearly identified. In the case of a land trust, it would require a specific legal description included in the deed conveying the land to the trust. The third element of a trust is


the object of the trust, i.e. the Beneficiaries of the Trust. These must be clearly identified or at least be ascertainable. The object of the trust can also be a charitable purpose rather than specific beneficiaries.

In understanding both the origins of trusts as well as the basic elements of trusts, the purpose of a trust becomes clear: it facilitates the wishes of the settlor (Grantor or Creator) and achieves the goals of protecting the settlor’s assets, managing the assets and transferring the assets to other intended beneficiaries.

Land TrustA land trust is a legal entity that has its own separate existence. It has been designed for the purpose of separating the legal responsibilities of ownership of a real property from the legal control, use and benefit of that property. For a land trust to exist, it must be in writing. The use of a deed that transfers real property into a trust may be adequate to create a trust, but such a land trust has even more hidden dangers for the investor and trustee. This is a bad practice. Many investors only get the deeds to trustee signed, therefore the trust exists but without any rules, guidelines or purposes. This exposes the trustee to greater fiduciary liability.

The parties to the Land Trust

1. Creator/Grantor/Settlor: The person also establishes the trust and puts assets into the trust. In short sales it is the homeowner who is currently in foreclosure.

2. Trustee/FiduciaryThe trustee can be a person or an entity (state laws vary) that takes control over the property and may appear to be the buyer of the property during the short sale process. The trustee will be a person or entity that follows the instructions of the investor.

3. BeneficiarySince a land trust splits the responsibilities of ownership from the benefits of ownership, a trustee takes on the responsibilities, the beneficiary receives the benefit. When the land trust is initially established, the homeowner/settlor will also be the beneficiary of the land trust. The homeowner will often be asked to assign the beneficial interest in the land trust to the investor or to an entity the investor


controls, when the trust is created.

Once the settlor has executed the deed conveying title of the property into the land trust and signed the land trust document and the assignment of the beneficial interest, the settlors/homeowners’ control over the trust property is minimal and the trustee has complete control. Hence the trustee’s great peril. While owing a fiduciary relationship to the settlor/original beneficiary, the trustee is following the instructions of the investor(s). The Settlor still has some power that we will discuss later.

If the trustee and the beneficiary are the same entity or person then it is not a valid trust. Therefore, the recipient or the assignee of the assignment of the beneficial interest cannot be the Trustee. The Trustee should not be an employee of or member of the investor’s business entity. This causes great potential for actual or percieved conflicts of interest on multiple levels.

CHAPTER TWO: WHY REAL ESTATE INVESTORS USE LAND TRUSTSA land trust is an agreement whereby one party, the trustee, agrees to hold ownership of real property for the benefit of another party, the beneficiary. Land trusts are used by individuals as well as corporations and non-profit organizations for a variety of different reasons. Investment groups once used land trusts to compile large tracts of land for investment and development and do so in privacy. Individuals use land trusts today to keep their real estate ownership private and to avoid probate and speed up the passing of assets from one generation to the next.

Land trusts are perceived by many to possess distinct advantages over other methods of ownership of real property. See, e.g., The Land Trust, Young Lawyers Network, PROBATE & PROPERTY, January/February 2007, at Pg. 6, which contains the following summary of the creation of a land trust and its advantages:

Often, trustee action is limited to the conveyance of the property when the trust terminates. Land trusts are unique because the duties and powers of the trustee are so limited, but it is still considered a trust and generally governed by the principles that are otherwise applicable to all other trusts.

The land trust is created through two documents -- a deed into land trust and the trust agreement. The deed into land trust typically establishes the rights and responsibilities of the trustee. It usually states that the beneficiary’s interest is a personal property interest and that the beneficiary does not hold title of any kind to the real property. The land trust usually provides that the beneficial interest holders are able to direct the trustee in all matters of title and management of the real estate.


The land trust has attained its popularity and wide use because of the practical elements that the beneficial interest provides:

• the interests of the beneficiaries will not be disclosed without order of court;• the interests are not subject to partition;• the beneficial interest is personal property and, therefore, avoids ancillary probate

requirements;• transferability of beneficial interest is simple• the beneficial interest can be used as collateral; and testamentary dispositions can

be set out within the trust agreement, thereby avoiding probate.

See also George Gleason Bogert, George Taylor Bogert, and Amy Morris Hess, THE LAW OF TRUSTS AND TRUSTEES § 249 (Trusts used primarily for business purposes — Trusts used in the purchase, operation and sale of real estate) (Rev. 2d ed. 2006), where the authors describe the benefits of land trusts as follows:

The advantages from the use of a land trust, particularly where there is to be multiple ownership of real estate, have been described by many writers. For example, record title in the trustee is not affected by the death or incapacity of a beneficiary. Conveyancing is simplified since the beneficiary’s interest is not subject to dower and personal judgments against the beneficiary do not become liens on the trust’s real estate. Financing is facilitated, either by the trustee obtaining mortgage loans secured solely by the trust property, or by the beneficiary pledging his beneficial interest treated as personal property, and both trustee and beneficiary can be exonerated from personal liability. Privacy of ownership is provided since the sole document recorded is the trust deed showing only the number of the confidential trust agreement in which the identities of the beneficiaries are disclosed. Where carefully drafted, the land trust will avoid the tax disadvantage of a corporation whereby both the corporation and the shareholders receiving distributions are subject to federal income tax.

In addition there are estate plan advantages to ownership of beneficial interests in real estate held in a land trust rather than the real estate itself. The beneficiary may dispose of his interest by a gift, sale or by testamentary disposition without affecting trust title to the real estate or causing termination of the trust or partition of the real estate.


A partial sample Agreement and Declaration of Trust follows:

AGREEMENT AND DECLARATION OF TRUST

THIS AGREEMENT AND DECLARATION OF TRUST Is made and entered into this 13th day of March, 2006, by and between, ______________ as Grantors and Beneficiaries, (hereinafter referred to as the “Beneficiaries”, whether one or more, which designation shall include all successors in interest of any Beneficiary), and ____________________ as Trustee, of the ____________________ whose address is ___________________________________, (hereinafter referred to as the “Trustee”, which designation shall include all successor trustees). IT IS MUTUALLY AGREED AS FOLLOWS:

1. Trust Property. The Beneficiaries are about to convey or cause to be conveyed to the Trustee by deed, absolute in form, the property described in the attached Exhibits “A” & “B”, which said property shall be held by the Trustee, in trust, for the following uses and purposes, under the terms of this Agreement and shall be hereinafter referred to as the “Trust Property”.

2. Consideration. No consideration was paid by Trustee for such conveyance. The conveyance will be accepted and will be held by Trustee subject to all existing encumbrances, easements, restrictions or other clouds or claims against the title thereto, whether the same are of record or otherwise. The property will be held on the trusts, terms and conditions and for the purposes hereinafter set forth, until the whole of the trust estate is conveyed, free of this trust, as hereinafter provided.

3. Beneficiaries. The persons named in the attached Exhibit “C” are the Beneficiaries of this Trust, and as such, shall be entitled to all of the earnings, avails and proceeds of the Trust Property according to their interests set opposite their respective names.

4. Interests. The interests of the Beneficiaries shall consist solely of the following rights respecting the Trust Property:

a. The right to direct the Trustee to convey or otherwise deal with the title to the Trust Property as hereinafter set out.

b. The right to manage and control the Trust Property.c. The right to receive the proceeds and avails from the rental, sale, mortgage, or other

disposition of the Trust Property.

The foregoing rights shall be deemed to be personal property and may be assigned and otherwise transferred as such. No Beneficiary shall have any legal or equitable right, title or interest, as realty, in or to any real estate held in trust under this Agreement, or the right to require partition of that real estate, but shall have only the rights, as personally, set out above, and the death of a Beneficiary shall not terminate this Trust or in any manner affect the powers of the Trustee.



5. Powers of Trustee.a. With the consent of the Beneficiary, the Trustee shall have authority to issue notes or

bonds and to secure the payment of the same by mortgaging the whole or any part of the Trust Property; to borrow money, giving notes therefore signed by him in his capacity as Trustee; to invest such part of the capital and the profits therefrom and the proceeds of the sale of bonds and notes in such real estate, equities in real estate, and mortgages in real estate in the United States of America, as he may deem advisable.

b. With the consent of the Beneficiary, the Trustee shall have the authority to hold the legal title to all of the Trust Property, and shall have the exclusive management and control of the property as if he were the absolute owner thereof, and the Trustee is hereby given full power to do all things and perform all acts which in his judgment are necessary and proper for the protection of the Trust Property and for the interest of the Beneficiaries in the property of the Trust, subject to the restrictions, terms, and conditions herein set forth.

c. Without prejudice to the general powers conferred on the Trustee hereunder, it is hereby declared that the Trustee shall have the following powers, with the consent of the Beneficiaries:

(1) To purchase any real property for the Trust at such times and on such terms as may seem advisable; to assume mortgages upon the property.

(2) To sell at public auction or private sale, to barter, to exchange, or to dispose of otherwise, any part, or the whole of the Trust Property which may, from time to time form part of the Trust estate, subject to such restrictions and for such consideration for cash and for credit, and generally upon such terms and conditions as may seem judicious, to secure payment upon any loan or loans of the Trust, by mortgage with or without power of sale, and to include such provisions, terms, and conditions as may seem desirable.

(3) To rent or lease the whole or any part of the Trust Property for long or short terms, but not for terms exceeding the term of the Trust then remaining.

(4) To repair, alter, tear down, add to, or erect any building or buildings upon land belonging to the Trust; to fill, grade, drain, improve, and otherwise develop any land belonging to the Trust; to carry on, operate, or manage any building, apartment house, or hotel belonging to the Trust.

(5) To make, execute, acknowledge, and deliver all deeds, releases, mortgages, leases, contracts, agreements, instruments, and other obligations of whatsoever nature relating to the Trust Property, and generally to have full power to do all things and perform all acts necessary to make the instruments proper and legal.

(6) To collect notes, obligations, dividends, and all other payments that may be due and payable to the Trust; to deposit the proceeds thereof, as well as any other moneys from whatsoever source they may be derived, in any suitable bank or depository, and to draw the same from time to time for the purposes herein provided.



11. Objects and Purposes of Trust. The objects and purposes of this Trust shall be to hold title to the Trust Property and to protect and conserve it until its sale or other disposition or liquidation. The Trustee shall not undertake any activity not strictly necessary to the attainment of the foregoing objects and purposes, nor shall the Trustee transact business within the meaning of applicable state law, or any other law, nor shall this Agreement be deemed to be, or create or evidence the existence of a corporation, de facto or de jure, or a Massachusetts Trust, or any other type of business trust, or an association in the nature of a corporation, or a co-partnership or joint venture by or between the Trustee and the Beneficiaries, or by or between the Beneficiaries.

12. Exculpation. The Trustee shall have no power to bind the Beneficiaries personally and, in every written contract he may enter into, reference shall be made to this declaration; and any person or corporation contracting with the Trustee, as well as any beneficiary, shall look to the funds and the Trust Property for payment under such contract, or for the payment of any debt, mortgage, judgment, or decree, or for any money that may otherwise become due or payable, whether by reason or failure of the Trustee to perform the contract, or for any other reason, and neither the Trustee nor the Beneficiaries shall be liable personally therefore.

13. Dealings with Trustee. No party dealing with the Trustee in relation to the Trust Property in any manner whatsoever, and, without limiting the foregoing, no party to whom the property or any part of it or any interest in it shall be conveyed, contracted to be sold, leased or mortgaged by the Trustee, shall be obliged to see to the application of any purchase money, rent or money borrowed or otherwise advanced on the property; to see that the terms of this Trust Agreement have been complied with; to inquire into the authority, necessity or expediency of any act of the Trustee; or be privileged to inquire into any of the terms of this Trust Agreement. Every deed, mortgage, lease or other instrument executed by the Trustee in relation to the Trust Property shall be conclusive evidence in favor of every person claiming any right, title or interest under the Trust that at the time of its delivery the Trust created under this Agreement was in full force and effect; and that instrument was executed in accordance with the terms and conditions of this Agreement and all its amendments, if any, and is binding upon all Beneficiaries under it; that the Trustee was duly authorized and empowered to execute and deliver every such instrument; if a conveyance has been made to a successor or successors in trust, that the successor or successors have been appointed properly and are vested fully with all the title, estate, rights, powers, duties and obligations of its, his or their predecessor in Trust.



ACKNOWLEDGEMENTS

STATE OF ___________________

COUNTY OF ___________________

Before me personally appeared _______________________________ (trustee) to me well known and known to me to be the person described in and who executed the foregoing instrument, and acknowledged to and before me that he executed said instrument for the purposes therein expressed.

WITNESS my hand and official seal in the State and County aforesaid, this _____ day of___________________, 20___.

______________________________(SEAL)Notary Public

My Commission Expires: ________________________

STATE OF ___________________

COUNTY OF ___________________

Before me personally appeared ___________________________________________ to me well known and known to me to be the person described in and who executed the foregoing instrument, and acknowledged to and before me that he executed said instrument for the purposes therein expressed.

WITNESS my hand and official seal in the State and County aforesaid, this _____ day of ________________, 20___.

______________________________(SEAL)Notary Public

My Commission Expires: ____________________


Privacy and Land TrustsPrivacy protection is of growing importance. That “there are no secrets when it comes to real estate” is an idiom that often proves true; however, nobody knows another person’s bank balance or stock investments unless they have access to the private and confidential information, hence the idea behind land trusts. Individuals and investors use land trusts mainly for privacy purposes and for avoiding probate, since anyone with an Internet connection can research a person’s real estate holdings from anywhere in the world. Before the Internet, one had to go to the county courthouse(s) for the same information. Investors buy their properties in land trusts so their names will not appear on the public records. Land trusts also allow the property to be immediately passed to heirs at the moment of death rather than going through a cumbersome, expensive, confusing and time consuming probate process. Land trusts became popular for real estate investors as a tool to serve the purpose of those individuals who sought privacy. In essence, the purpose of the land trust is to hide property ownership. During the late nineteenth century in Chicago, land trusts became useful to those individuals who sought to obfuscate their involvement in the purchase of property –– namely, politicians. Land next to large projects like the building of skyscrapers was bought using land trusts by politicians who understood that in hiding their ownership they would be able to vote on future or current projects that would influence the value of their real estate holdings –– something they would otherwise be forbidden to do. Ultimately, the Illinois Supreme Court ruled that a land trust was a valid legal entity as long as there was some minor duty or responsibility placed upon the trustee so that the trustee or the trust could not just be considered to be a passive holding device. Thus, sometimes land trusts are referred to as an “Illinois Land Trust.”

Trusts can be created by either a recorded deed or by a written declaration of trust. Since land trusts do involve real estate, some document must be made to satisfy the requirements of the Statute of Frauds. One of the advantages of the land trust is that the actual trust document identifying the beneficiaries and their percentage of ownership is kept private and only cursory documents are provided to the public identifying the trustee and the land trust asset(s). A sample deed follows:

___________________________________________________________________Do not write above this line - Recording information only


This document prepared by: _________________________Mail after recording to: _________________________ as trustee, ___________________________________

Warranty Deed to TrusteeThe Grantor(s) _________________________ of the County of and the State of ____________

for and in consideration of $10.00, and other good and valuable considerations in hand paid, conveys, grants, bargains, sells, aliens, remises, releases, confirms and warrants:

Unto ____________________ as Trustee and not personally under the provisions of a trust agreement dated the _________________________, known as Trust ____________________, State of ____________ to wit: as per plat thereof recorded in the Office of the Recorder of ____________, ____________.

Together with all the tenements, hereditaments and appurtenances thereto, belonging or in anywise appertaining.

To Have and to Hold the said premises in fee simple forever, with the appurtenances attached thereto upon the trust and for the uses and purposes herein and in said Trust Agreement set forth.

Full power and authority granted to said Trustee, with respect to the said premises or any part of it, and at any time or times, to subdivide said premises or any part thereof, to dedicate parks, streets, highways or alleys and to vacate any subdivision or part thereof, and to resubdivide said property as often as desired, to contract to sell, to grant options to purchase, to sell on any terms, to convey either with or without consideration, to donate, to mortgage, pledge or otherwise encumber said property, or any part thereof, to lease said property or any part thereof, from time to time, in possession or reversion by leases to commence now or later, and upon any terms and for any period or periods of time and to renew or extend leases upon any terms and for any period or periods of time and to amend, change, or modify leases and the terms and provisions thereof at any time hereafter, to contract to make leases and to grant options to lease and options to renew or extend leases upon any terms and for any period or periods of time and to amend, change, or modify leases and the terms and provisions thereof at any time hereafter, to contract to make leases and to grant options to lease and options to renew leases and options to purchase the whole or any part of the reversion and to contract respecting the manner of fixing the amount of present or future renters, to partition or to exchange said property or any part thereof for other real or personal property, to grant easements changes of any kind, to release, convey or assign any right, title or interest in or about or easement appurtenant to said premises or any part thereof, and to deal with said property and every part thereof in all other ways and for such other considerations as it would


be lawful for any person owning the same to deal with the same, whether similar to or different from the ways above specified, at any time or times hereafter.

In No Case shall any party dealing with the said trustee in relation to said premises, to whom said premises or any part thereof shall be conveyed, contracted to be sold, leased or mortgaged by said trustee, be obliged to see to the application of any purchase money, rent, or money borrowed or advanced on said premises, or be obliged to see that the terms of this trust have been complied with, or be obliged to inquire into the necessity or expediency of any act of said trustee, or be obliged or privileged to inquire into any of the terms of said trust agreement; and every deed, mortgage, lease or other instrument executed by said trustee in relation to said real estate shall be conclusive evidence in favor of every person relying upon or claiming under such conveyance, lease or other instrument, (a) that at the time of delivery thereof, the trust created by this Indenture and by said trust agreement was in full force and effect, (b) that such conveyance or other instrument was executed in full accordance of the trust’s conditions and limitation contained herein and in said trust agreement or in some amendment thereof and binding upon all beneficiaries thereunder and (c) that said trustee was duly authorized and empowered to execute and deliver every such deed, trust deed, lease, mortgage or other instrument.

The Interest of each and every beneficiary hereunder and of all persons claiming under them or any of them shall be only in the earnings, avails, and proceeds arising from the sale or other disposition of said real estate, and such interest is hereby declared to be personal property. No beneficiary hereunder shall have any title or interest legal or equitable, in or to said real estate as such, but only an interest in the earnings, avails and proceeds thereof as aforesaid.

And the grantor hereby covenants with said grantee that the grantor is lawfully seized of said land in fee simple; that the grantor has good right and lawful authority to sell and convey said land; that the grantor hereby fully warrants the title to said land and will defend the same against the lawful claims of all persons whomsoever; and that said land is free of all encumbrances, except taxes accruing subsequent ___________________________________.

In Witness Whereof, the said grantor(s) has(have) hereunto set his(their) hands and seals this _________________________, AD. Signed Sealed and Delivered in our Presence:

_________________________ ___________________________(Seal)Printed Name Signature

_________________________ ___________________________(Seal)Printed Name Signature


State of ___________________,County of ___________________,

I Hereby Certify that on this day, before me, an officer duly authorized in the State of ______________, to take acknowledgments, personally appeared _____________________________________________________________ to me known as the person(s) described in and who executed the foregoing instrument and Acknowledged before me that (he/she/they) executed the same.

__________________________________ _____________________________My Commission Expires Notary Signature

__________________________________ _____________________________My County of Residence Printed Notary

__________________________________ ___________Witness Date

__________________________________ ___________Witness Date

Warranty Deed to TrusteeThe foregoing sample of a deed is a version of deed frequently used by short sale investors. Let me comment on the specifics of this particular deed. First, it clearly identifies only two people, the trustee and the grantor. The grantor(s) could be a husband and wife so it is going to be a married couple or a single individual and the trustee. Those are the only people who are identified. The only asset being identified is the real property that is described in the legal description. Everything else is kept private. So much for the good things regarding this particular deed.

Now for the bad news. This particular deed is wrong and inadequate for a short sale situation. Go back and read the deed again. Do you see where there is a warranty and representation made by the grantor that is inconsistent with the property being in a short sale situation? If you didn’t catch it on the first or second reading, then don’t panic. Go back and look at the last covenant made by the grantor just before their signature. Please note that the grantor fully warrants that the title to said land and will defend the same against all lawful claims of all persons whomsoever and that said land is free of all encumbrances except taxes.


This is obviously not the case if this property is in foreclosure or pre-foreclosure. It is not free off all encumbrances: It is heavily mortgaged. It is in foreclosure. It probably over-leveraged. So you say what’s the big issue here? The problem is the inception of the land trust via the warranty deed contains an erroneous assertion that the investor is having the homeowner to make. Remember, the homeowner is the grantor on the deed and creator or settlor on the land trust. So you say no big deal because the grantor is only making that representation to the investor and trustee who are trying to do the short sale on the property. Not true. This deed is put on public notice, so “everybody” is being told this representation. Furthermore, your transaction is off to a bad start when the investor is causing the homeowner to make a false statement. That opens the door to the horrible question of, “What other false statements, Mr. Investor, did you induce the homeowner to make?”

The other big problem with the land trust method for short sales is a second misrepresentation made by the homeowner at the investor’s urging. The Warranty Deed to the Trustee is really not prepared by the the homeowner; yet that statement is made to avoid the unauthorized practice of law. Deeds can only be prepared by owners of the property or an attorney.

So, do you want to keep doing short sales in a way that is very problematic? No, you don’t do you, so keep reading to learn about a better way.

Other ReasonsIn addition to privacy, real estate investors have been drawn to the use of land trusts by the following beliefs:

1) That managing a rental property can be easier when a trustee or some other unknown third party can be blamed for the decisions;

2) That the interest can be transferred quickly without recording a deed; 3) That the subsequent sales price of the property can be kept off the public records; 4) That property taxes can be kept lower if the subsequent purchase price is kept private; and5) That judgment liens and IRS liens against an individual cannot be liens against the

trust property.

While this last of belief may be theoretically accurate, in the practical world it no longer makes any commercial sense. Title insurers want the lien paid and released so as to issue an Owner’s and Lender’s Policies. An investor may dispute that the lien has attached to the real property. The title insurer or closing agent will then ask the investor for a court order showing that the lien did not


attach. Absent a court order the title to the property is not insurable; the deal is dead.

It may take several months or longer for a declaratory judgment action to provide a court order stating that the lien filed after the homeowner put the real estate into a land trust did not attach to the land trust and the transfer to the trust did not constitute a fraudulent conveyance. In that period of time much could have happened with the property and the potential buyers, current owners, foreclosure case and short sale. So, instead of months of a lawsuit to get a court order, the deal being lost and so on , the lien needs to be paid so that title can be insured.

Many people mistakenly believe that a land trust protects them in some way, as beneficiaries, from disclosure or liability with respect to creditors, judgments, taxes, etc. This is not always true. See, e.g., 765 ILCS 405/2, which requires that:

Whenever any trustee of a land trust, or any beneficiary or beneficiaries of a land trust, make application to the State of Illinois or to any of its agencies or political subdivisions for any benefit, authorization, license or permit, relating to the land which is the subject of such trust, any interest therein, improvements thereto, or use thereof, such application shall identify each beneficiary of such land trust by name and address and define his interest therein. Each beneficiary shall be identified, regardless of the size of the beneficiary’s interest in the land trust.

Governments and creditors have a growing desire for greater information and money. The government’s power to tax makes it the strongest creditor out there, thus a land trust may not provide much meaningful asset protection.

CHAPTER THREE: WHY SHORT SALE INVESTORS USE LAND TRUSTSWithin a few years of real estate investors beginning to use land trusts for privacy purposes, several investors began to understand that the beneficial interests and trustee ownership of land trusts could be changed without having to record a new deed. A successor trustee could be appointed to replace a previous trustee who had either died or resigned.

The ability to change the ownership of the beneficial interest without requiring a new deed greatly appealed to short sale investors who were trying to quickly resell property and extract the profit from the middle of the transaction, all while attempting to preserve or protect something known as the “chain of title” or “seasoning.”


The basic idea went as follows. A homeowner who was in distress or foreclosure would be approached by a short sale investor. The short sale investor would have the homeowner sign a Warranty Deed to Trustee transferring the property into a land trust and possibly have the homeowner also sign a Declaration of Trust statement. The investor would then record the deed, putting the title of the property from the homeowner into a land trust usually naming the trust after the homeowner’s last name and/or address.

This type of naming of the land trust was frequently done to try to preserve the appearance that the transfer to the land trust was done for estate planning purposes and not to facilitate a short sale.

After the investor had negotiated a short sale discount with the foreclosing lender and had found a new buyer, the investor completed the purchase of the property through the land trust which the investor controlled. At closing the beneficial interest of the land trust would be switched from the homeowner of record to the investor so that the investor could realize the profits from the second transaction. The second transaction is when the land trust sold to the new buyer.

CHAIN OF TITLEWhen this was done, additional events also occurred: The title commitment to the end buyer’s lender contained information showing that the title was vested in the name of the land trust, but did not disclose that the beneficial ownership of the land trust changed just before the second closing. The second thing that occurred was that the transfer of the beneficial interest from the homeowner of record to the investor completed an arms length transaction but there was no real estate transfer tax paid because it was believed that personal property was being transferred rather than the actual real estate. More on this tax issue just below.

In summary, the three primary reasons why short sale investors began using land trusts were 1) privacy, 2) the facilitation of their deals while apparently satisfying end buyer’s seasoning requirements as to the chain of title, and finally, 3) avoiding one set of transfer tax or doc stamps by claiming that the transfer to the land trust was an exempt conveyance.

Local and state governments were not ignorant for long. Recent legislation has changed the definition of what is an exempt conveyance. See the 2007 Florida Statutes Chapter 201 Section 02 (201.02) paras 1 and 4:2007 Florida Statute


201.02 (1) On deeds, instruments, or writings whereby any lands, tenements, or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or any other person by his or her direction, on each $100 of the consideration therefor the tax shalt be 70 cents. When the full amount of the consideration for the execution, assignment, transfer, or conveyance is not shown in the face of such deed, instrument, document, or writing, the tax shalt be at the rate of 70 cents for each $100 or fractional part thereof of the consideration therefor. For purposes of this section, consideration includes, but is not Limited to, the money paid or agreed to be paid; the discharge of an obligation; and the amount of any mortgage, purchase money mortgage lien, or other encumbrance, whether or not the underlying indebtedness is assumed, If the consideration paid or given in exchange for real property or any interest therein includes property other than money, it is presumed that the consideration is equal to the fair market value of the real property or interest therein.

(4) The tax imposed by subsection (1) shall also be payable upon documents which convey or transfer, pursuant to s. 689.071, any beneficial interest in lands, tenements, or other real property, or any interest therein, even though such interest may be designated as personal property, notwithstanding the provisions of s. 689.071(6). The tax shall be paid upon execution of any such document.

CHAPTER FOUR: COMMON LAND TRUST PROBLEMSConfusionInvestors that use land trusts to facilitate short sales, particularly quick-turns, are doing so at their growing peril. Risks include deals falling apart at the last moment due to confusion and misunderstanding of who is selling what to whom. Deals can be problematic when the end buyer or their real estate agent compares the name on the purchase and sales agreement with the current public records and they do not see the land trust on record, or they fail to understand how a trustee can be selling the property. It seems I hear about this problem every week.

Recording the DeedMany investors have been failing to record the Warranty Deed to Land Trust because of issues regarding the cost and/or hassles of recording the deed and some states’ requirement of payment of past due real estate taxes and/or transfer taxes. Not recording the deed defeats the entire idea of using land trusts to protect the chain of title and creates a whole new set of problems.

When investors contact me about problems related to when a deed has not been recorded on a deal they are having trouble selling, I’ll ask them why they were using a land trust if they weren’t


planning on recording the deed? Responses typically are that this is the only way that they knew or they thought that the title company would record the deeds back-to-back. If that is what the title company is doing then the title commitment probably is a fiction! That is potentially bank fraud.

Fortunately there is a better quick-turn way of conducting a short sale transaction.

Some do not record the Warranty Deed to Land Trust because they do not want to have to go through the cost of recording or bringing the real estate taxes current or paying the transfer taxes. While such thinking may make sense initially, they are not sound ideas for an investor who understands the process and the purpose of the land trust in a short sale transaction.

LawsuitsSome investors do not record the deed to the land trust for fear of being named a party to the foreclosure lawsuit. Trustees that were “recruited” to just go along with the investor really don’t like to be sued. More than once I have been contacted by investors asking how to get the trustee who happens to be an individual (a close family member or relative) removed as a party defendant from the foreclosure lawsuit that got filed in the short sale that they were working. What the investor may not have understood is that when they recorded the deed they put that trustee on title and put them right into the path of the oncoming foreclosure lawsuit. Many investors say then, “Well I’ll wait to file my deed after the judicial foreclosure action has already been started.” Well, that may work unless the foreclosing attorney does an update on the title work, as many courts require them to do prior to issuing the order of sale. The updated title work would show the new deed and voila! The need to amend the lawsuit to add the new party defendant would come forward. This reality is particularly brutal for those investors who use individuals as trustees.

MistrustMistrust frequently develops as a result of confusion. When someone is confused and does not understand what is taking place, they quickly develop, almost naturally, a distrust for the other parties that are involved because they feel like they might be at a disadvantage. This mistrust can grow in a real estate transaction where it’s common to have a seller represented by an agent, an investor or buyer represented by an agent, and an end buyer who may also be represented by a third agent or broker. In addition, “old” lenders are being discounted, “new” lenders are being approached for new loans and a title company is trying to keep track of everything taking place. Moreover, when investors explain the process they make the mistake of providing too much information to the wrong people, which then can easily result in a cascade of accusations


concerning perceived improprieties. This is all so needless when a method exists, common to commercial real estate, that is simple to explain, easy to accept, and entirely transparent for all parties to observe and understand. Keep reading and learning, I will tell you about it, I promise.

Internal Self Destruct ButtonThe vast majority of short sale investors that are using land trusts today have no clue that each land trust has within it an internal self destruct button. That button can be pushed by one or more people and blow up the deal just hours before the closings. Imagine this scenario, you are hours away from closing a back-to-back simultaneous land trust transaction on a short sale. Your profit check is going to be measured in the tens of thousands of dollars. Success is at hand, right? Not so fast ... the homeowner with whom you have not communicated all that well has been growing increasingly frustrated over the fact that now they have to move out and they don’t understand what you have been doing with the property.

All that that homeowner has to do is notify the title company handling this transaction that they are revoking or canceling the land trust. Remember, the homeowner created the land trust, therefore since it is a revocable land trust (an Inter Vivos Trust) it can be revoked or amended at any time. That means the homeowner could, within hours of closing, tell the title company that they are revoking it.. No land trust... no short sale .... no money for you, just upset buyers, disheartened real estate agents and your loss of credibility with the loss mitigator.

In this disaster, it doesn’t matter if you are holding onto the Assignment of Beneficial Interest or not, the homeowner was the grantor of the trust, the creator, the settlor, they have the right to revoke or amend the trust. You can wave goodbye to your money in that situation.

CHAPTER FIVE: DEEPER PROBLEMSThe land trust contains additional issues that are deleterious to short sale investors that many fail to recognize. A common root for this ignorance is that most investors are hard pressed to explain the legal operation and consequences of a land trust. The commonly given answer or explanation of dividing the benefit (equitable ownership) from the responsibility of ownership goes only so far. What that explanation fails to state is that each land trust, depending upon how it is written, imposes certain obligations and fiduciary responsibilities on the trustee while reserving certain rights and benefits for the settlors and beneficiaries of the land trust. Also, primary or original beneficiaries may be treated differently than secondary beneficiaries.


Investors are not alone in their ignorance – numerous attorneys could join them. In the next few paragraphs I am going to share with you excerpts (italicized) from a brief submitted by attorneys from the Kentucky Attorney General’s office wherein they are attempting to prosecute a real estate investor for selling real estate without a license. The argument according to the Kentucky Attorney General’s office is that the investor is using the land trust as a shell or a sham to get around the fact that they do not have a real estate license.

In some jurisdictions, a land trust is a form of trust in which the beneficiary’s interest is an interest in personal property and not an interest in real property. In this type of land trust, both the legal and equitable title to the trust property lie with the trustee, while the duties, rights, and responsibilities tending upon real-property owners continue to reside in the beneficiaries. Such a land trust thus differs from a conventional trust under which the trustee holds legal title, and the beneficiary hold equitable title. This type of land trust, by its very nature is characteristically different from common-law land trusts. Numerous authors have referred to the fictional nature of such trusts.

76 AM. JUR. 2D. TRUSTS 8 (2007)

The status and nature of a particular land trust is both a factual and legal issue. In the present case, it is unclear what type of rights defendant ____________ may have or have not established with regard to the land trusts he entered into with various owners. These involve factual issues that are yet to be determined and make is appear as though Defendant ______________ is utilizing alternative methods to circumvent the real estate licensing laws and to broker real estate in KY without a license.

That this argument is being raised is troubling in two aspects: One, because every investor that has ever used a land trust to facilitate the quick-turn of a transaction now faces that potential charge; and second, regardless of how land trusts are supposed to operate, there is widespread confusion even among attorneys as to their true nature and operation. These attorneys even got the basics of trust law wrong and confused.

Did you the reader even catch the mistakes?

If not, then go back and read again the first two sentences from the KY Attorney General’s brief. Did you see that they got the duties and ownership of the land trust wrong? Good job, you are learning.


Title Insurance ConsiderationsAs a result of the confusion and mistrust caused by land trusts, another deeper problem has manifested itself with the largest title insurance underwriters recently issuing underwriting bulletins to their agents and offices indicating that transactions involving land trusts are to be avoided, or carefully handled.

Please reference First American’s web site and online library and you will see the following:

Assuming a title insurer is willing to consider insuring a transaction where title is purportedly vested in a land trust, the following questions might be raised:

1. Compliance with state statutes, including requiring notice to beneficiaries of transfer of the trust assets.

2. Written evidence of the identities of all parties holding any beneficial or other interest in the trust, including spouses.

3. Copies of any assignment of any interest, including the beneficial interests, under the trust.

Written consent to the proposed transaction by all parties holding any 4. beneficial or other interest in the trust, including spouses.

5. Written consent to the proposed transaction by the borrower on any existing mortgage or deed of trust (who probably made the transfer into the land trust) unless that party confirms in writing that the deed into the land trust was an absolute conveyance and that the grantor has no further interest in the property or in the trust.

6. Possible lien of the real estate excise (transfer) tax and interest and penalties, if any, arising from the deed into the land trust or arising from any assignment of any beneficial interest under the trust.

Did you read item number three? Go read it again. Your end buyer’s lender must now be told about the existence of an Assignment of Beneficial Interest. Why? For title insurance to be issued the closing agent or attorney must ask about the assignment if a land trust is the seller. If they learn about it they must tell the lender that is ordering the title search and lender’s policy. It is part of the closing instructions sent by the lender to the title agent. To not disclose the existence of the Assignment of Beneficial Interest is a material misrepresentation.


The current buzzword today is disclosure, disclosure, disclosure. To make sure that as many people as possible know everything that is potentially material and relevant to a transaction, investors need to use documents and a methodology that will allow the maximum amount of disclosure while preserving profits. Land trusts are not well suited for such use in short sale quick-turns in today’s environment requiring openness and transparency.

State LegislationThere is an increasing trend of state-by-state regulation of foreclosure investing. Using land trusts, particularly the Warranty Deed to Trustee (transferring ownership of the property from the homeowner in default to a trustee who is closely aligned with the investor seeking to make a profit) can become problematic or often illegal in some states. Read the excerpts of the following various state laws on foreclosure. Taking title to a house in foreclosure is a dangerous thing: Homeowners may claim that they were misled, taken advantage of, or defrauded.

CaliforniaSection 1695 of the California Civil Codes specifically mentions Trusts as do many other statutes.

California CodesCalifornia Civil Code

CIVIL CODE SECTION 1695-1695.171695. (a) The Legislature finds and declares that homeowners whose residences are in foreclosure have been subjected to fraud, deception, and unfair dealing by home equity purchasers. The recent rapid escalation of home values, particularly in the urban areas, has resulted in a significant increase in home equities which are usually the greatest financial asset held by the homeowners of this state. During the time period between the commencement of foreclosure proceedings and the scheduled foreclosure sale date, homeowners in financial distress, especially the poor, elderly, and financially unsophisticated, are vulnerable to the importunities of equity purchasers who induce homeowners to sell their homes for a small fraction of their fair market values through the use of schemes which often involve oral and written misrepresentations, deceit, intimidation, and other unreasonable commercial practices.

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1695.1. The following definitions apply to this chapter: (a) “Equity purchaser means any person who acquires title to any residence in foreclosure...”


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Colorado

SECTION. Article 1 of title 6, Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW PART to read:

PART IICOLORADO FORECLOSURE PROTECTION ACT

SUBPART 1GENERAL PROVISIONS

Short title.1-1-1101. This part II shall be known and may be cited as the “Colorado Foreclosure Protection Act”

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Definitions1-1-1103 . As used in the Par II, unless the context otherwise requires:

“Equity Purchaser” means a person who, in the course of the person’s (2) business, vocation, or occupation, acquires title to a residence in foreclosure; except that the term does not include a person who acquires such title;

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IndianaIC 24-5.5-5-5Foreclosure purchasers; unfair conduct; prohibitedrepresentations and acts

Sec. 5. A foreclosure purchaser may not:(1) enter into repurchase or lease terms as part of the foreclosure reconveyance that are unfair or commercially unreasonable or engage in any other unfair conduct;(2) represent, directly or indirectly, that the:

(A) foreclosure purchaser is acting:(i) as an adviser or a consultant; or(ii) in any other manner on behalf of the homeowner;

(B) foreclosure purchaser is assisting the homeowner to savethe residence; or(C) foreclosure purchaser is assisting the homeowner in preventing a foreclosure if the result of the transaction is that the homeowner will not complete a redemption of the property; or


(3) until the homeowners right to rescind or cancel theforeclosure reconveyance agreement has expired:

(A) record any document, including an instrument or conveyance, signed by the homeowner; or(B) transfer to a third party or encumber, or purport to transfer to a third party or encumber, any interest in the residential real property in foreclosure.As added by P.L.209-2007, SEC.2.

New HampshireOne of the toughest laws in the nation is New Hampshire, look at these relevant parts:

In the Year of Our Lord Two Thousand SevenAn ACT regulating the practice of foreclosure consultants and pre-foreclosure

conveyancesBe it Enacted by the Senate and House of Representative in General Court

convened:322.1 New Chapter; Foreclosure Consultation. Amend RSA by inserting after

chapter 479-A the following new chapter:

CHAPTER 479-BFORECLOSURE CONSULTANTS AND PRE-FORECLOSURE CONVEYANCES

IV. “Pre-foreclosure purchaser” means any person or any person acting in concert with such person, who acquires title or possession of a deed or other interest in a residence in foreclosure as a result of a pre-foreclosure conveyance, or any person who participates in a joint venture or joint enterprise involving a pre-foreclosure conveyance.

“Pre -foreclosure conveyance” means a transaction involving:V.

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VII. “Person” means an individual, corporation, governmental subdivision or agency, business trust, estate, trustee for a trust, partnership, association, limited liability company, joint venture, government, or any other legal or commercial entity or agent.

“Residence in foreclosure” means residential real property consisting of VIII. not more than 4 dwelling units, one of which the owner occupies as his or her principal place of residence, where a loan secured by the home is in default, or where real property taxes are delinquent.

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Anyone who is skeptical of these warnings should take the time to read these entire statutes, not just the little snippets I included here. Read them all, read them carefully, then decide whether you want to still use land trusts to do short sales or if you might be interested in a better idea.

CHAPTER SIX: THE TRUSTEE’S FIDUCIARY DUTYThe obligations and responsibilities placed on a trustee is called a fiduciary duty.

A fiduciary duty is the highest duty of care and responsibility that one person or entity can owe to another person or entity. It calls upon the person in the fiduciary capacity to act with the same amount or greater diligence, prudence, wisdom and carefulness as well as promptness as they would for their own personal matters and affairs. As more than one lawyer has said, the easiest way to explain a fiduciary duty is assume that you only have time to complete one of two tasks: one of those tasks is for you and one of those tasks is for someone to whom you owe a fiduciary duty. You take care of the other person and let your own stuff go. To do otherwise is to invite trouble or a lawsuit.

The trustee who is buying the property via a land trust and short sale and then reselling it to a third party has a fiduciary duty to the homeowner who is in foreclosure. The homeowner is the original or primary beneficiary of the land trust. This fiduciary duty requires them to do the best possible short sale that they can while preserving this homeowner’s financial status in the best way possible as it relates to potential deficiency judgments, tax liabilities, bankruptcies and future credit rating.

This means that if an investor makes a profit on a short sale, then due to the fiduciary relationship imposed by the land trust, the trustee should make sure that homeowner has no worse a deficiency judgment, and tax consequence, and credit rating than if no short sale was done. Such a thing could be difficult to prove and the burden of proof could easily fall on the trustee not the aggrieved homeowner.

Does an investor who makes a profit on a short sale using a land trust while causing the homeowner or debtor to receive a deficiency judgment expose the trustee to liability for breach of fiduciary duty? Quite possibly, yes. The homeowner could sue the trustee who could then claim against the investor. Fiduciary duty is not an ethical concept, it is a legal obligation when agency is declared. The acronym for the seven duties is OLDCARS and the obligations are as follows:


Obedience: always within the law and ethical. Trustees don’t have to lie, cheat or steal on behalf of a beneficiary. Loyalty: putting the beneficiary’s interest above your own. Disclosure: of known material facts. Confidentiality: keeping confidential information just that way. This is the only obligation that does not have an expiration date. Accounting: for money and to keep the performance of duties within the specified dates or extend the dates in writing, if necessary. Reasonable skill and care: just that, and usually determined in court. Seek expert advice: trustees may have to seek outside expert advice, as in tax matters or the legal area.

CHAPTER SEVEN: TRUST BENEFICIARIES; WHO IS IT AND WHEN?Looking at the other half of the land trust equation concerns the beneficial interest – an area that is fraught with more misunderstanding and confusion. Every trust must have a beneficiary. The beneficiary has to be separate from the trustee. A separation must exist between the entities and the powers and responsibilities. In a short sale environment, land trusts are structured so that the homeowner is the beneficiary – a common practice to create a smokescreen to preserve the “chain of title.”

It is clearly set forth that the trustee who is seeking to buy the property and resell it has a fiduciary duty to the homeowner or beneficiary. The responsibilities of fiduciary duty are further muddied when at some point, with one simple document, the beneficial interest changes hands and goes from the homeowner who is in financial distress to an investor seeking to profit.

For such an assignment to be valid, there has to be distinction between the trustee and the assignee of the beneficial interest.

Obtaining that distinction in identity between the trustee and the investor has been problematic for many investors, particularly beginning or new investors who have not yet developed a


comprehensive team or reliable assistants to help them. Even in situations where the investor who is seeking to make a profit is a limited liability company and one of their agents or employees becomes a trustee, you then have the potential for allegations of mishandling, knowing that the assignment of the beneficial interest has been executed by the homeowner at the time when all the paperwork was initially completed.

Furthermore, there is the theoretical idea that an assignment of beneficial interest, while executed by a homeowner, is not valid until accepted by the assignee and the transfer acknowledged by the trustee. While this may be good theory it really does not hold up under scrutiny. The investor’s actual knowledge of the assignment and the trustee’s constructive or actual knowledge of the same sets the stage for the argument that the land trust was sham to begin with. Such dealings cause many title insurance companies and their attorneys to say NO THANKS when a transaction using an assignment of beneficial interest is brought to them.

One proposed solution that was accepted by a title insurer was the creation of a trustee directed land trust for short sale situations. This eliminated the assignment of beneficial interest. Although the title insurers approved this method for a while, it was not a long term answer to the need for open and transparent disclosure of what was happening in the short sale transaction.

CHAPTER EIGHT: A BETTER WAY EXISTSIt has often been said that “simpler is better” and that is the case in what I am going to discuss in the next few pages. Rather than using the complexity of a Warranty Deed to Trustee in a land trust, I recommend that real estate investors instead use an Option Contract and a Notice of Option Contract. On behalf of Strategic Real Estate Coach I have worked with title agents and others to develop a comprehensive contract and forms that includes the Option Contract for Purchase and Sale, a Notice of Option Contract, and when appropriate, a Release of the Notice of Option Contract and other important short sale related documents. Each of the documents will be explained briefly as follows.

The Option Contract is exactly what it says it is: a contract for the sale and purchase of real estate contingent upon the operation of a certain fact. Parties to this option contract are the seller/homeowner (who is probably in default or foreclosure) and the buyer, usually a business entity by which the investor is choosing to do business.

Instead of earnest money in this Option Contract there can be a small option deposit. The option deposit is non-refundable and is basically a small sum of money that you are giving for the


opportunity to buy the property in the future. The mutual consideration between seller and buyer should also be set forth in the Option Contract. The opportunity to buy the property in the future is contingent upon the successful negotiation of a short sale. That is the option.

The Option Contract should go on to clearly spell out the terms and conditions of the short sale. It should also state that the buyer has an opportunity inspect the property, and then it should cover matters related to with the title, escrow and closing.

This Option Contract will be part of the short sale package that is submitted to the loss mitigator so it needs to be neat, easy to read and complete with all the appropriate real estate disclosure forms and addendums such as the lead-based paint disclosure.

NOTICE OF OPTION CONTRACTThe second document in this process is the Notice of the Option Contract. This is an important document. The Notice (Memorandum) of Option Contact, a simple but powerful document, lets the whole world know that you have an equitable interest in the property. You have an option to buy the house. You are not committed to buy the house, but you have a choice that if certain things come to pass you will then buy the house. You are now on part of the title chain for this house.

This document needs to be properly and completely filled out by the investor/buyer and needs to be witnessed and notarized and then needs to be promptly recorded at the appropriate County Recorder’s Office. Please be mindful of any state laws that may exist in your jurisdiction regarding the recording of documents regarding pre-foreclosure sales or foreclosure purchases. Various states like the statutes set forth earlier have timelines regarding when documents can be filed. Please pay careful attention.

As a result of recording the Notice of the Option Contract (which is based upon the Option Contract for Purchase and Sales) you have also now become part of the chain of title on the property. When you negotiate a discount that is acceptable to you, you can then choose to exercise your option and go ahead and complete the purchase of the property.

EQUITABLE INTERESTThe fact that you have an equitable interest in the property via the Option Contract and recorded Notice of Option also puts you in a position where you have the legal right to relist, market and sell the property. This can then put you in the situation of where you able to negotiate the short sale in one transaction while seeking a buyer for the second transaction, schedule these transactions to


happen back to back and proceed towards a double closing.

THE SECRETNow, the secret of how the Option Contract works with the Notice of the Option Contract is as follows. You have two transactions set up: A to B, you are B the buyer; then B to C, you are B the seller. The transactions are scheduled to happen on the same day at about the same time. The end buyer, C, is getting a loan to buy the property. Their lender orders a title commitment. The title commitment is prepared and sent to them showing that you as the option holder are an exception on the title which means that your option needs to be removed or satisfied in order for the their buyer to have clear, marketable, insurable title. Your option can be removed in one of two ways. Number one, by releasing your option, or number two by satisfying your option. The easiest way to satisfy your option is by having a deed from the homeowner in foreclosure transferring title to you recorded and then you deed the property to the end buyer. The back to back recording of deeds, that is disclosed to the parties in the B-C transaction, is the way your option is completed. You get paid and resell the property.

Depending upon the end buyer’s criteria and their closing instructions, there may be various subtle changes to this scenario but that is the general idea of how a transaction would look.

Please note that the end buyer’s lender is being told that it is a short sale and also being told who is the current vested owner (which is not you) but the homeowner who is in foreclosure. They are also being told of the fact that you have an option on the property which is consistent with the contract that you have used for the B to C transaction. All of this makes sense, it is open and transparent to everyone and the transactions can go forward.

CONCLUSIONIf this publication has caused you to stop and think and consider what you are doing and how you are doing it then it will have achieved its purpose. You may choose to not change anything that you are doing in your business, you may to choose to not do short sales at all or you may choose to want to learn more about how we at Strategic Real Estate Coach do short sales.

The choice is up to you. Govern yourself accordingly.

© 2008 Jeffery S. Watson, Esq.

All rights reserved.


All materials contained in this publication are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Jeffery S. Watson, Esq. You may not alter or remove any trademark, copyright or other notice from copies of the content.

JEFFERY S. WATSON, ESQ.Jeff has been a full time practicing attorney in Ohio for the last 17 years, and has an active trial and hearing practice. He and his wife Lorri have been real estate investors since 1994. Their real estate investing experience includes: rehabbing, creative buying, long term holding of numerous rental properties and apartment buildings and handling short sales. Jeff advises and represents qualified and established investors in their deals, negotiations and some litigation. He prepares deeds and other documents for an area title company and real estate brokerage.

Jeff has responsibilities and involvement with Realeflow LLC, Loss Mitigation Solution, LLC and Strategic Real Estate Coach Inc. as legal counsel and part owner. He is a frequent guest speaker at various real estate investor meetings.

Jeff & Lorri and their five children live near Cleveland, Ohio. You may contact him at [email protected].

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