Are Land Trusts A Loop Hole Around Due On Sale Clauses? Nope.

Ya’ll know me, I like to get straight to the point and answer the question. Those of you wishing for a little more detail can read the entire article for my mundane analysis as to the why. 

Warning: The “why” for this particular post is especially boring.

Question:

Does placing a property in a land trust prevent a lender from calling a loan due under the due on sale clause per Garn-St. Germain?

Answer:

No, the use of a land trust (as used by real estate investors) will not prevent a lender from calling a loan due when there is a change in title via a land trust. The key to this answer is the part where I said, “as used by real estate investors”.

Investors like the idea of purchasing property “subject to” the loan due to the deal structure requiring little to no money down, no big down payment, no loan qualification, no financing costs, etc. I get it. The problem with this investment strategy is that once title is transferred without the loan being paid off the lender can call the whole loan payable in full due to a provision found in most loans called a due on sale clause. A due on sale clause works exactly how it sounds like it does – the loan is due if you sale the house. (To learn more about subject to deals go to Subject To vs. Assumption)

I don’t know where it came from or who started the idea, but I can tell you that when people start throwing around big, HUGE, GINORMOUS  pieces of legislation like the Garn–St Germain Depository Institutions Act of 1982  (The “Act”) to explain their investment strategy one of my eyebrows involuntary starts to raise, and my BS meter starts spinning.   The last time this happened, instead of just sitting their impressed and assuming this person knew way more about investing in real estate than I do, I decided to actually look it up and see what investment opportunities I’ve been missing out on all these years.  

The whole idea that transferring a property into a land trusts prevents lenders from calling a loan due per the due on sale clause is rooted in an exception found in The Act which states "... a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property[.]”

First, a land trust is not the same thing as an inter vivos trust. Simply, in Florida, an inter vivos trust is administered under Chapter 737 of the Florida Statutes whereas a Land Trust falls under 689. Completely different beasts.

Second, the very context under which investors want to use land trusts to avoid a due on sale clause is the downfall of the whole plan. First you need an inter vivos trust; then the other requirement for a transfer in title to be protected from triggering the due on sale clause is that the borrower must remain a beneficiary of the trust and continue to occupy the property.  I hear great ideas on how to use land  trusts for investing every day, but I have yet to hear of an investment deal where the investor is going to let the seller continue to both retain an ownership interest ( be beneficiary) and live in the house.  

I also understand all the counter arguments: 1. The lender doesn’t care as long as they are getting paid every month 2. Land trusts are not recorded in public record so nobody will know who the beneficiary really is, etc. To these counter arguments and the countless others, I say, “to each their own”. Personally, I’m just not in the business of fixing up someone's house for them only to have it taken away by their lender, a bankruptcy court, a family member liquidating the estate upon seller's passing... the list goes on and on.