Today’s REI Classroom Lesson

Clint Coons speaks to us today about a few of the uncommon uses and benefits of land trusts.

REI Classroom Summary

From protecting your privacy to issues with a restrictive HOA, land trusts can be an asset for you to use in your deals.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Clint: Hi, everyone, this is Clint Coons host of the REI Classroom and Managing Partner of Anderson Business Advisers and Law Group. And today I want to talk to you about five uncommon uses of land trusts.

Mike: This REI Classroom Real Estate Lesson is sponsored by

Clint: You know, you’re probably experienced somewhat with the use of the land trust for your real estate investing. Most people who set up land trusts do so to avoid the due-on-sale clause. That is, if you have real estate and you want to move it into a limited liability company and avoid the lender calling your note due, you’ve probably learned by now that what you do is you put it first into a land trust and then you assign the beneficial interest over to your LLC. And your lender will not discover the fact that now you have asset protection.

Believe me, this strategy works. I’ve had clients whose trusts have been sued before and the attorney thought they could get to the individual investor themselves, only to find out that the investor did not own the property. That the trust owned the property and the trust was held by a limited liability company so liability stopped right then and there and my client was protected.

But those are the common reasons why, or one of the common reasons why people use land trusts. As well as anonymity, to hide their ownership. But what about the other uncommon reasons why you might want to consider this trust?

Well, I run into investors throughout the country who buy and sell and rehab real estate and flip it to other investors and so you may have several title transfers within a relatively short period of time. Oftentimes, this is referred to as churning of title.

I mean, think of it this way. If you bought a property at auction and you decided you weren’t going to do the rehab work yourself and you flip it to another investor who’s going to rehab the property. That person turns around and rehabs it, gets it ready for sale within 30 days and they turn around and find a first-time homeowner that wants to come in and buy it.

Well on title, what you could see is that within a relatively short period of time, say 45 days, the property went from being bought at auction for $85,000 and is now being sold for $200,000 to a new homeowner. The problem for the new homeowner is that when they go to their lender, their lender looks at it and said, “Wow, this property jumped in value in 45 days from $85,000 to $200,000. This makes us a little nervous. There have been a few deed transfers along the way. We think that the property may be churned. So we’re refusing to loan against it.” They want it to season for six months to a year before they’ll extend that type of credit against a property when there’s been a rapid appreciation in value.

The way you solve this issue if you’re buying property at auction and you may be flipping it to another person to do the rehab work, and then they’re going to flip it to another homeowner, is take title in a land trust. That way you flip the land trust to the rehabber, no one sees that transfer because that takes place between you and the rehabber, and then the rehabber can sell the property out of the trust to the homeowner.

By doing it in this way, the lender does not see multiple transfers along the way. They only see initial transfer into the land trust, and they don’t know how many times that land trust has changed hands because that assignment of beneficial interest does not get recorded.

Another benefit of land trusts that people don’t necessarily realize is protection from judgments. Now it doesn’t give you asset protection, but if you own property in a trust, and especially if you use a nominee trustee like myself, I’m on probably a 1,000 or 2,000 land trusts across this country where it says, “Clint Coons Trustee of The 732 Trust” or whatever name they’re using for it. Well, if one of my clients ever has a judgment entered against them, one common way in which somebody will recover is they’ll go down to the country recorder’s database, figure out where you own property and record that judgment in that county.

Now, what happens is whenever you sell the property or try to refinance that property, your creditor is going to get paid. And the easy way to prevent that from occurring is to keep your property in trusts where your name doesn’t appear on the trust. Then if they record that judgment in the county, it won’t attach to the property held in that trust. I know how devastating this can be to individuals who are not aware of this.

Recently I was vacationing with an attorney friend of mine and he got notice from his office that one of his clients just received a check for $140,000 because they had filed a judgment in the county against the debtor. And when the debtor went to sell their property, that’s when they got paid. That’s how it works. The reason it attaches is because it was in their own name.

Other benefits of land trusts. They facilitate property transfers. You know one of the problems you have is that if you put your property in LLCs or corporations and then you want to pull it back out, some counties will hit you with a transfer tax. I know, I invest in Clark County and Shelby County in Tennessee and this has been a problem for me. So the way I avoid these transfer taxes is I put my properties into land trusts so the county never knows that you’re putting the property back into your own name from the entity which holds it. Because you don’t record anything. It’s recorded into the trust, you assign the ownership of the trust to your entity, and then you assign the ownership back to yourself. That doesn’t get recorded anywhere so it doesn’t trigger a transfer tax. So land trusts are great for that.

If you’re a wholesaler, okay, I think trusts are great from a wholesaling perspective. Because what you’re able to do as a wholesaler is you put your contract together in the name of the trust and then you assign the trust to the ultimate purchaser. So you don’t have to do a double closing. This is especially a concern for people who invest in HUD-owned properties. I mean, if you take that contract with HUD and you put it in your name and then you want to flip that contract to another investor and get a wholesaling fee on it or an assignment fee, you’re probably not going to be able to do that because HUD will require that you close in your own name. And so what you find is that you’re having to come to the table with a double closing. Make it simple. Put that property, that contract into a trust, a land trust, and then assign the land trust to the individual investor who wants to buy the property. And you collect your assignment fee just by assigning the trust.

And then the last thing I want to mention is that if you’re investing in areas where they have restrictive homeowner associations, you know down in Florida is a classic example of this. A client that I met, she transferred her property into an LLC. It was in violation of the HOAs. She didn’t realize this. Now she got called up in front of the HOA and they told her she had to take her property out or suffer fines.

Well, she pulled the property back out of the LLC, but she still wanted asset protection. I explained to her, it’s real simple, put that property into a land trust. That will be acceptable to the homeowner’s association, then dump your land trust into the LLC. In that manner, you pass title with the homeowner’s association, but then you get the asset protection of the LLC should something happen.

My name’s Clint Coons. These are very important topics if you’re a real estate investor and I hope to see you next time.

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Mr. Coons is a founding partner of Anderson Law Group and current manager of Anderson’s Tacoma office. After graduating from the University of Washington with a business degree, Mr. Coons began his career in construction. Giving up the hammer for a gavel, he graduated from Seattle University School of Law in 1997.

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