The following is a simplistic outline of the workings of a land trust from start to finish.
A land trust is a holding entity for two things, the deed to the property and the long term purchase contract. There are two closings. The first is the set up of the trust and revolves around the Non-Exclusive Option to Purchase (NEO). The second is the final sale closing out the trust upon completion of specific circumstances agreed to by all parties in a specific long term purchase contract.
The NEO is an agreement that is ONLY binding on the seller if the LT buyer is able to fulfill his obligations to come to the trust set up by a specific date or earlier. It does NOT tie the property up, take it out of the market or jeopardize it in any way. The seller has the full right to accept a different contract from a different buyer anytime before the LT buyer completes his obligation. If so, the LT buyer loses out. However, if the LT buyer completes his obligations, the NEO is exercised and the seller must go to first closing for the trust set up and follow through with the full trust process. This process allows the LT buyer and the seller to agree in writing to the terms of the actual set up and final sale of the property so that the LT buyer can work toward that end and the seller can continue to look for a better offer in the open market. It eliminates the need for what are often described as "escape clauses" and allows the seller to accept a better offer if it comes along.
The long term purchase contract details the actual sale that will take place by an agreed upon date in the future. It is the purchase contract that will be used when the proper circumstances are ready. The long term contract is often of shorter duration than the land trust since it can easily be changed, extended, etc. by agreement of all parties. The actual land trust is very difficult to change since it holds the deed. In most cases the land trust is 15 to 20 years long, which has no bearing on the actual purchase contract which may state that it must be completed in 5 years or the property is deeded back to the original seller and the trust will be dissolved .
| Negotiation: | |
| 1. | Understand how a land trust works, what it can, and what it can't do. |
| 2. | Understanding how it will benefit the seller. |
| 3. | Agreeing on the terms of the short term Non-Exclusive Option (first closing). |
| 4. | Agreeing on the terms of the long term final sale (second closing). |
| 5. | Submission and signing of all contracts. |
|
Trust Set Up (First Closing) |
|
| 1. | All necessary items are in the hands of a bonded closing or escrow company. |
| 2. | The Land Trust documents are completed and dated. |
| 3. | The beneficial interest is assigned. |
| 4. | The Beneficiary Agreement is completed and dated. |
| 5. | The seller deeds the property to the Land Trust. |
| 6. | Any associated documents are completed. |
|
7. |
Additional documents between individual beneficiaries and outside entities are completed. |
| 8. | Resident contracts are completed. |
| 9. | Possession (keys) are transferred to the receiving party. |
| 10. | The closing company completed their work and makes copies for all parties. |
| Interim Before Final Closing | |
|
1. |
Management of the property is handled by the prescribed party (Director, management company, etc.) |
| 2. | The Resident is responsible for all obligations of their lease. |
|
3. |
The trustee received monthly payment and make payments to mortgage(s), taxes, insurance, etc. as necessary. |
| 4. | If the minimum balance is breached the trustee sends notice to all beneficiaries. |
| 5. | Resident, Director, and Investor beneficiaries are responsible to cure the breach or |
| 5a. | . . . . The trustee deeds the property back to the original owner after 30 days. |
| 5b. | . . . . The trustee submits remainder of funds to the original seller after 30 days. |
| Final (Second) Closing | |
| 1. | This is at any time prior to the termination date of the long term purchase contract. |
|
2.
|
If the property has NOT appreciated sufficiently, the original seller, at his or her sole option, may elect to terminate the trust and receive the property back on the termination date or may elect to extend the long term purchase contract with an agreement of all beneficiaries to the length of extension, otherwise it is terminated. |
| 3. | If appreciation goal has been met, the sale is made on the terms of the long term purchase contract. |
|
4.
|
Proceeds from the sale are used to pay in the following
order. a. Underlying mortgages are retired, b. closing costs are paid, c. original equity of the seller is paid to the seller, d. additional funds paid by other beneficiaries to the trust are repaid, e. the net remaining appreciation is distributed according to the percentage . . . . of beneficial interest to each beneficiary. |
