How Difficult is it to Negotiate a Short Sale on Property Held in a Land Trust?

One of the novel questions we received in the new year concerns short selling a property held by a Trust.

Many a well intended realtor has done their job only to miss the pay day (and reimbursement of advertising fees) when attempting to sell a property when they  find that the person for whom they are working does not have the authority to sell the property!

So to make sure we really have the owner’s authority to do anything with the title we need to stay very alert when we hear that there may be any sort of trust involved in the ownership of the property.     Our firm deals with a multitude of different types of trusts:

Living Trusts or Revocable Trusts (RLT’s) used for simplification of estate planning and administration and avoidance of probate;

Irrevocable Trusts used similarly to RLT’s but with additional strict requirements that the Trustee must meet;

Lead Trusts, Charitable Trusts, Remainder Trusts, Crummy Trusts, Generation Skipping Trusts, Medicaid Trusts and a plethora of RLTS or Irrevocable Trusts that often have additional tax or asset preservation benefits; and

Land Trusts or Land Contracts as were the  subject of today’s inquiry.

There are many purposes for creating a Land Trust, but one significant reason is to avoid default or foreclosure on a property on which the mortgage balance may be higher than the value of the property.   In the majority of these “upside down” or “underwater” properties, the owners opt to short sell.    But for those homeowners who don’t like the short sale due to perceived credit impact, security clearance impact, or for whatever reason, we do see a steady number of “Land Trust” closings.

Suffice it to say that the main challenges for a property held in a land trust should not be that different from  a “normal” short sale,  but here are the nuances:

1.   The short sale lender is not a party to the Land Trust!    Don’t expect them to necessarily honor it.
2.  The “legal title” and the “equitable title” interests in the property are divided in a Land Trust.    The Trustee has legal title.  The Beneficial owner of the Trust has equitable and beneficial title to the property.
3. Most short sale lenders demand assurance that they are dealing with:  (a)   the maker(s)  of the note;   (b)  the legal title owner; and if they are aware that there is one, (c) the equitable title owner.  This may mean that a Seller or Short Sale Negotiator needs the cooperation of several different parties to assure the short sale lender that it is legally safe for them to even speak with the short sale negotiator!
4. Job one is to figure out who is the real and current  “BENEFICIAL OWNER” under the terms of the Trust.  The Land Trust and ancillary documents will determine who has the power to elect to do a short sale.  But the very choice to do a short sale may well mean that the current beneficial owner is technically “in default” under the Land Trust.   The choice to go into a  voluntary default status under the Trust may require one or more notices to previous Beneficiaries and/or the original maker of the underlying promissory note.   Each notice may have a mandatory response period, typically from 10 to 45 days each.

So for example, If  Peter took out the original VA mortgage on the property, but then put the property into a land trust and sold it to Paul, the lender might not recognize Paul’s unapproved attempt to assume the seller’s loan obligations.   Whether there is a land trust or  just a  “subject to” arrangement, the lender would still see Peter as the borrower and owner.   Then Paul might further sell it under a new Land Trust or “subject to” arrangement to Mary, who struggles to stay current and wants to do a short sale.   We may need POAs or Authorizations from Peter, Paul and Mary to satisfy the lender that they have all the parties before them and are not violating anyone’s right of privacy by speaking with us as the Short Sale Negotiator.  We could disregard Paul OR he might also have the right to receive  notice of Mary’s intentions to short sell.   Peter and Paul may need to waive the default under the loan by Mary in order for Mary to have the full power and authority to hire someone to list and sell the property by a short sale.

All these nuances are ascertainable with time and few notices.   But proceed at your own risk if you do not make sure exactly where beneficial title is vested .    We may still pursue the short sale or VA (veteran’s administration) “offer in compromise” successfully but  don’t under-estimate your time tables required for valid notices under the Land Trust agreement!