Utilizing Land Trusts for Asset Protection as a Real Estate Investor : Part 2

Here’s some more benefits:

1. Avoid the “Due on Sale” clause in a mortgage. In 1982, laws were passed with the help of the powerful banking industry to prohibit loans from being “assumable” in an attempt to make more money on the front end of every loan. The banking industry realized that people didn’t typically stay in the same house (or same loan) for 30 years. In most cases, they either sell or refinance their loan within 7 years of it’s origination. Since some genius banker figured out how to front load all the interest in every loan, it became highly beneficial for bankers to get cashed out after 7 years rather than let some other party assume their loan. Here came the “Due on Sale” clause stating that every time a property was sold that the underlying loan had to be cashed out or the bank could call the loan due and you would have to pay it off in full or get foreclosed on. With every rule there is an exception, and with this one it is the Garn St. Germain’s depository institutions act of 1982. This law states that banks do have the right to call a loan due upon its transfer UNLESS the property was transferred into an inter-vivos land trust for estate planning purposes. This is one of the biggest benefits to taking title to your properties in trust and the best way to protect yourself if you are buying properties subject-to.
2. Trusts help to avoid seasoning when you go to sell the property. There is nothing worse than doing the whole deal and then finding out the new buyer’s lender will not fund the deal because they are suspicious how you made so much money on the deal in such a small amount of time. They assume that there must be some kind of mortgage fraud going on, when in reality you just did a great deal and sold a great home to a deserving family. Passing the ownership of the property from the old seller to the trust to the new buyer helps to avoid looking like there is an investor in the middle making a bunch of money. It could look like the old seller passing their property into trust and then deciding to sell it because they got an offer on it.

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