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 a 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 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.
There are many benefits for doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases the transaction is "Win/Win" for both ...