by Attorney William Bronchick
People
often confuse the land trust and the land contract, using the terms
interchangeably as if they were the same thing. This article explains
the difference between the two and how they are used by investors for
creative financing.
A
land trust is a revocable, living trust primarily used for privacy
purposes in estate planning and asset protection. It is used to take
title to real estate to provide anonymity for the owner. It can also
be used with a trust assignment wherein the seller deeds the property
to the trust, making himself the beneficiary. The beneficial interest
(ownership) of the trust is then assigned to a third party, such as an
investor/buyer. This is known as a "land trust assignment".
A
land contract is financing tool whereby the seller and buyer agree upon
the sale of a property under installment payments. The property
remains titled in the seller's name until the buyer completes all
payments under the contract. This arrangement is also known as a
"contract for deed" or "installment land contract".
In
today's "subprime mess" mortgage market, investor financing has become
very difficult, particularly if the investor wants to buy with just a
small down payment. Jumbo loans for investors have become so
expensive they are almost prohibitive.
Both
the land contract and land trust can be effective tools for acquiring a
property with owner financing to preserve the existing financing. If a
seller of a property has a low, fixed-interest rate loan, a transfer of
the ownership subject to the existing loan can allow the buyer to take
advantage of this favorable financing without having to get new
financing or qualify for the existing loan.
The
only pitfall with this kind of transaction is that the underlying loan
can be called due by the lender under the "due on sale" provision of
the mortgage. While not a likely scenario if the loan is being paid on
time, investors want to make this transaction as "stealth" as possible
so as not to raise any red flags. Using the land trust and/or and the
land contract can be very effective ways to quietly transfer ownership
and preserve the low-interest rate loan. Thus, the land contract and
land trust are extremely effective tools for the investor to learn
about and implement to increase their profitability in today's market.
