Protecting Your Number 1 Asset

There are over 80 million lawsuits filed every year in the United States. Landlords and real estate investors are especially susceptible to liability. Are you a target? Are your assets easy to locate? Is your real estate titled in your name?

You wouldn't walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder's office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button! Any mortgages on your property will be recorded as well. Most recorded mortgages will state the amount of the original principal balance and the date the mortgage payments began. All one has to do is figure out the balance of your mortgage and subtract that amount from the market value of your house. Bingo! Now they know how much equity you have and hence whether suing you is worthwhile.

If a tenant or creditor is contemplating suing you, he will make an appointment with a lawyer. Unless he can afford an attorney by the hour ($150 and up), he will likely seek a "contingency-fee" lawyer. A contingency-fee lawyer does not charge by the hour; he charges a percentage of whatever he collects. Most contingency-fee lawyers will not take a case unless there is something upon which to collect. If you have no real estate in your name, then finding out your ownership interest will not be easy for a typical lawyer. It's not that lawyers are lazy. It's simply a matter of allocation of resources; lawyers focus on cases they can win and collect. If they don't find any assets in your name (and there is no other apparent "deep pocket"), they probably won't take the case. As you can see, appearing "broke" is the best lawsuit-repellent money can buy!

There is another problem with owning real estate in your own name. If a judgment is obtained against you and filed in any county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in that county, since no title insurance company will guarantee a clean title. You're stuck until you pay off the lien.

Some people use a corporation or limited liability company to hold title to their real estate. While these entities will protect you, they will not protect your property. If you own all of your properties in one corporation, a judgment against the corporation will create a lien on all property owned by the corporation. Furthermore, the directors and officers of a corporation are public record, so a corporation will not hide your ownership.

The solution for holding title to real estate is a land trust. A land trust is a revocable, living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The beneficial owner or "beneficiary" can be an individual, corporation or other entity for further protection. Land trusts were first used in Illinois, hence the nickname, "Illinois Land Trust." In nine states (AL, FL, GA, HI, IL, IN, ND and VA), land trusts are specifically recognized by statute. In most other states the validity of land trusts are supported by common law and general trust principles (land trusts are not recognized in TN & LA).

A land trust, if properly setup and implemented, will hide your name from the public records. No one will know who owns the property but you, your attorney and the trustee. If a judgment is entered against you, a lien will not automatically attach to the property, since title is not in your name.

A transfer of realty into a land trust virtually no income tax consequences. A land trust is considered a revocable "grantor" trust under the Internal Revenue Code, so it does not require a separate tax identification number or income tax return. Thus, you continue report the property for income tax purposes as though you still own it. Furthermore, a transfer of property into a land trust will not usually trigger the "due on sale" clause of your mortgage.

A land trust will allow you to assume an FHA or VA loan without recourse. Anyone can assume an old FHA or VA loan without qualifying, but few investors realize that such an assumption is with recourse. If the investor sells the property and the buyer assumes then defaults on the loan, the investor (and anyone else who previously assumed the loan) may be held liable. If a land trust is established to take title to the property and assume the loan, there is no recourse against the beneficiary. Furthermore, the loan will not appear on the beneficiary's credit report as a liability. So what are your waiting for?

Get that Property Out of Your Name!

One should consult with a qualified mortgage planning professional prior to implementing any mortgage planning strategies. If you are a financial planning, insurance, tax or mortgage professional receiving this newsletter, please call our office and introduce yourself to us. We are always seeking to grow our referral network and expose more service professionals to our client base. 

The purpose of this newsletter is not to give advice. The purpose is to stimulate thought for our clients and professionals within our network.  If you are a professional receiving this newsletter or know of one, please contact our office to introduce yourself and your services to us. We are always seeking to grow our referral network and expose professional services to our client base.  The loan professional that has made this information available specializes in equity repositioning solutions for those buying, selling or refinancing real estate.

"There's a lot of competition trying to figure out when things are going to bottom," says Morningstar analyst Eric Landry. "But it's unlikely that you're going to figure that out before any one else does."

In the last week of June, at the very end of what are traditionally the strongest three months for home sales, we learned that both existing- and new-home sales remained sluggish in May. On June 25, the National Association of Realtors said the rate of existing-home sales slipped 0.3% in May, to an annual pace of 5.99 million units, while supply climbed to 8.7 months, the highest reading since June, 1992. The next day, the U.S. Census Bureau said sales of new single-family homes fell 1.6% in May, to a seasonally-adjusted annual rate of 915,000 units. New-home supply edged up to 7.1 months from 7 months in April.

Price Cuts Aren't Cutting It

The May home sales news, combined with homebuilder Lennar's weaker-than-expected earnings announcement on May 26, dashed any remaining hopes of an imminent end to troubles in the housing market. Spirits had been higher in April, when sales of new homes jumped 13%, as builders whittled away at huge inventories with aggressive pricing. The median price of a new home dropped 11% in April from the previous month, to $229,100, the biggest decline since 1970.

But for homebuilders, price cuts just aren't cutting it anymore. Lennar, the second-biggest builder in the country, reported a second-quarter loss of $1.55 per share, down from a profit of $2 one year ago, and much lower than analysts' forecast of a 5-cent-per-share profit. The Miami builder said lower prices helped move inventory, but backfired on profit margins. "As we look to our third quarter and the remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions," Chief Executive Stuart Miller said in a statement.

Landry still likes the troubled builder. "It was a very, very, very bad quarter for Lennar," he says. "But there are a lot of things happening below the surface that longer-term investors will appreciate." Lennar has taken the steps to prepare itself for a housing correction by maintaining a strong balance sheet and cutting land inventory before other builders, Landry notes. And at its current price, it's a good deal, he says, and it's well-positioned to make a comeback after the market picks up.

Buyers on the Sidelines

Of course investors are still wondering when that might happen. "Write it off: '07 is going to be a bad year," Landry says. "It [the housing bottom] could be a 2008 event, it could be a 2009 event." To make matters even more confusing, it may be difficult to draw any strong conclusion from May home-sales data, given the very small month-over-month declines. This is especially true for new-home sales, which have a margin of error of 10.8%. "The housing market data, especially new-home sales, is historically extremely volatile, " says Wachovia analyst Adam York. "If you get a lot of sales one month, there's an extremely good chance you won't get as many the next month."

As mortgage rates creep up, subprime problems proliferate, and buyers stay on the sidelines, the outlook for housing is bound to become more and more uncertain. In addition to new-home sales, housing starts increased in April, and both declined in May. "Perhaps people had been hoping that the bottom had come and gone last month," says York. "We're still pretty much saying that the bottom is going to be this year, but we may not have seen it yet."