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How to Safely Assume Non-Assumable Loans Without Down Payment or Credit qualifying and without Subterfuge or Due-On-Sale Clause Compromise.  

by Bill J. Gatten

Remember that TV ad of a few years back?  The one where a guy eating a chocolate bar rounds a blind corner and smacks into a lady munching a peanut butter sandwich… and Voilá, the Reese’s Peanut Butter Cup is born?  Well, something similar just happened within the world of creative real estate financing.  Grossly underrated, and too frequently misunderstood, the Title-holding Land Trust has collided with the “Net Residential Lease,” with astounding results. 

Land Trusts have been around for centuries, but only a select few folks know beans about trusts in general; much less what a land trust is.  Talk to 200 attorneys and you might find one with a clue as to what happens when an Assignment of Beneficiary Interest in a title-holding trust is integrated with a Net Lease  (i.e., a Lease wherein the lessee covers all contractual costs of possession).

Despite an almost universal ignorance of land trusts among lawyers, the fact is that anyone residing in, and making payments on, a property held in a title-holding (Illinois-type)  land trust, need do little more than acquire a co-beneficiary interest in the same trust, to enjoy all the benefits of homeownership.  Pride of Ownership, Use, Occupancy, Equity Build-Up, Appreciation and Income Tax benefits are immediately available to properly documented co-beneficiaries in land trusts [e.g., see IRC 163(h)4(D); Rev. Rul. 92-0105, Belden, 70 TCM 274, Dec. 50,802(M) re.  IRC Reg. §1.163-1(b) etc.].

At last, a legal Shield for the fun stuff…

•     Passive Seller-Carry’s without risk of attachment to the property by the other party’s creditors, tax liens, bankruptcies or marital dispute actions.  In other words… the objectives and benefits of Lease Options, Wraps, Contracts for Deed, or even Equity Sharing without their inherent dangers, subterfuge and slippery slopes.

•      Legitimate loan payment take-over of virtually any mortgage, irrespective of assume-ability… including VA, FHA, FNMA, GNMA and FHLMC (the only exception being “Land Sale Contracts (e.g., State sponsored Veteran loans).”

•      Safe Seller-Financing, that puts a stop to the potential for unscrupulous sellers quietly (purposefully or negligently) encumbering a property or clouding its title after an unrecorded transfer.

•      Airtight Seller Carry-backs and Options wherein defaulting parties can never claim “an equity interest” to thwart or forestall eviction.

•      And (...TA-DA!)—Income property for Nothing Down And Nothing Per-Month, without management, maintenance, vacancies or negative cash flow.  An investor need merely become a co-beneficiary with a seller willing to stay on his/her existing loan for a while.  The investor co-beneficiary then advertises for another [resident] co-beneficiary to live in the property and pay all costs, in exchange for ownership benefits and, say 50% of its appreciation potential (over the next 4 or 5 years).  In this scenario, the property is scheduled for re-fi or sale at termination, and at that time, the investor is paid any beginning equity he/she may have started with, plus a share of all appreciation and principal reduction (profit).

The recipe:

1.        First, a seller (Herkimer and Gertrude Jones) places its property into a land trust: i.e., vesting the property with “The Trustee for the Herkimer and Gertrude Jones Trust.”  In that the trust is an inter-vivos (i.e., living) trust; and because it is directed solely by Herkimer and Gertrude; and since no sale has taken place: there are no income tax consequences.  And, as well… the dreaded Due-on-Sale Clause is not violated.  As a matter-of-fact, holding one’s real property in this manner is a prudent estate-planning device, whether conveyance to another is the objective or not [e.g., see: Get That Property out of Your Name—Using Land Trusts for Privacy and Protection, by attorney, William. Bronchik].  Federal law emphatically prohibits lenders from taking exception to a borrower’s right to hold its property in this manner (re. FDIC, “Garn-St. Germain,” 1982)

2.         Next, a co-beneficiary interest in the trust (50%, 90%, etc.) is assigned to a second party (you?).

3.         Then an Agreement for Use and Possession between the trustee and the new co-beneficiary is structured, whereupon the IRS characterized the property as a Qualified Residence under IRC §163, even though ownership of realty by the parties has been effectively converted to ownership of personalty [See IRC §163(h)4(D)].  In that personalty, unlike realty, can not ordinarily be partitioned to satisfy a judgement, this re-characterization quite effectively serves to insulate the property from attachment by judgement creditors (even the IRS).

Where to begin?