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Business Development

Land Trust Essentials: The Ins and Outs of Borrowing and Lending Money with Land Trusts

pessimistHey Moguls, Mr. Land Trust is back again with another installment in his awesome series.

Randy Hughes is the Land Trust expert. Period. And we know this because he’s been giving lesson after lesson of awesome info throughout this series. Mr. Land Trust breaks down what can be really confusing stuff and explains it to us in easy-to-understand lessons. Hooray! If you want to start from the beginning, here’s Part 1.

Last time, Randy talked about creative strategies when it comes to Land Trusts. Today, he’s gonna cover the the ins and outs of borrowing money when property is held in a Land Trust AND how to lend money to a Land Trust using the property in the trust for collateral.

From Randy Hughes…

First, it is important to understand that if you are buying property and financing it through a conventional loan that must be qualified using secondary market guidelines – you will generally NOT be able to close directly into your Land Trust. The only exception to this rule (that I am aware of as of this writing) is Bank of America (BOA). If you are buying property in Illinois AND using an Illinois Land Trust Agreement, BOA will let you close directly into a Land Trust.

This leaves 99% of the rest of us out in the cold.

However, BOA (and many other conventional lenders) will only allow you to obtain 4 secondary market loans and then they cut you off! So, if you are very active in the real estate game, you will be forced to obtain your loans via a Portfolio Lender (where the loan is NOT qualified in the secondary market) or Private Lenders.

Most Portfolio Lenders will let you close directly into your Land Trust (with your Trustee signing the mortgage on the property held in trust as collateral for your loan).

Loving Private Lenders                         

It’s much easier to use a Private Lender when borrowing money using a Land Trust. And you can be much more creative using a Land Trust (especially when there are multiple Private Lenders involved).

Case in point…

borrowBob needed $50,000 to fund his next real estate deal but didn’t want to go to a bank to borrow the money. Not only do banks charge high interest rates, but they want full collateral no matter how much money you want to borrow. Bob had $100,000 of equity in one of his properties, but only needed $50,000. If Bob borrowed from a bank they would require Bob’s entire equity to be used as collateral for a $50,000 loan (50% Loan-to-Value).

Since Bob’s property was held in a Land Trust, he could assign varying percentages of the Beneficial Interest to multiple Private Lenders. For example, he could borrow $10,000 from 5 different Private Lenders and give them each an Assignment of Beneficial Interest equal to the percentage of ownership in the Trust (equity = $100,000 / 10 = 10% ownership per Private Lender).

Some of the other advantages of borrowing this way are:

  • no credit check
  • no public knowledge of the transaction
  • no reporting to the credit agencies
  • the remaining equity is still available for additional borrowing, if needed

The Lender’s POV

Let’s turn the tables on this scenario and look at this from the lender’s viewpoint…

friendsIf I were the lender, I would want to have the title checked to make sure the property being borrowed against was in fact in the Land Trust that I was lending to. I would also want to make sure there were no other loans against the property (other than what might have been represented by the borrower). And, I would demand the filing of a UCC-1 form that would secure my position against the Beneficial Interest (which is personal property NOT real estate). I would also want a statement from the Trustee of the Land Trust confirming their knowledge of my loan and security interest given.

Lemme Get All Legal on You For a Second…

In Ferraro V. Parker 229 So.2d 621 (1969), the court ruled that a collateral assignment of a beneficial interest in a Land Trust would not be treated as a mortgage, nor require foreclosure nor entitle any party to any redemptive rights.

However, Illinois case law indicates that, where a trust is created simultaneously with a financing arrangement, it might be deemed a mortgage.

The bottom line to all of this legal talk is that if the Trust Agreement is created prior to a financing arrangement, the Beneficial Interest can be secured by a UCC-1 and repossessed without going to court. This process works really well when selling to long-term tenants that you want to convert to buyers of the property they live in.

The Takeaways

This lesson has discussed the methods of borrowing and lending on property that is held in a Land Trust…

We learned that using a Land Trust to hold title to investment real estate provides many ways to creatively finance property. We also learned that borrowing money on property held in a Land Trust gives the borrower many more options than conventional lenders provide. And, we learned that selling property held in Trust to current tenants is more secure and less risky than conventional contract sales.

Until next time…

Randy Hughes, aka Mr. Land Trust™

Got a Q?

I love answering your questions and seeing your comments… talk to me in the comments section below.


Do It To It! Immediate Action Steps

Research creative financing techniques.

Know that it’s much easier to use a Private Lender when borrowing money using a Land Trust.

Remember that holding title to your property in a Land Trust is not only smart from a privacy and asset-protection standpoint, but it allows you more creative financing opportunities.

Understand that selling property held in Trust to current tenants is more secure and less risky than conventional contract sales.

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