North Carolina R E Commission Answers
This is the copy from an email I received from TCI on 8/20/04.
“While not mentioned by name, some of my activities have been commented upon in "NC AG Troubles" and another thread posted below that.
Due to ethical considerations on commenting about pending litigation and investigations, I am unable to fully respond and address both the misconceptions and valid concerns expressed in some of the communications posted.
I would welcome a call from Mr. Locke to discuss the legal principles involved, what is clearly recognized as legitimate activity on one's own account, and how many practitioners of one or another of the discussed methods take themselves into trouble.
Both the Real Estate Commission and the Attorney General's Office have no problem with legitimate business persons engaged in the purchase, rental or sale of their own real estate.
B. M. Brogden, Jr.
Chief Deputy Legal Counsel
NC Real Estate Commission”
I emailed Mr. Brogden and requested his phone number so that we could discuss Subject To investing in North Carolina. He graciously responded with his phone number.
I called Mr. Brogden in the afternoon of August 24, 2004.
Here is a synopsis of our conversation and was reviewed by Mr. Brogden:
North Carolina has no problem with Subject To investing as long as the following guidelines are adhered to:
The problem with the use of a "Land Trust" as a means of concealing a violation of the "due-on-sale" (DOS) clause is that even where the designated trustee is a real person or entity, the identity of the actual beneficiary is concealed or obscured.
This can constitute a deceptive, misleading or unfair trade practice in violation of Chapter 75, N.C.G.S, and, in the opinion of the Commission legal staff, is a circumstance tending to show the person actually controlling the trust is attempting to act as a real estate broker without a license.
Much the same is true for agreements, such as installment land sale contracts or lease/option or lease/purchase arrangements that are not properly recorded in a timely manner in the chain of title.
No reasonable person or prudent investor would fail to immediately and properly record a document transferring an interest in title due to the risk of loss associated with the failure to timely and properly record.
A person or firm truly dealing on their own account would typically obtain a deed, option or contract, properly notarized and recorded, in order to protect their investment.
Failure to do so is very convincing evidence that there is no real investment and that such person or firm is no more than an agent without a license.
The Subject To transaction is a matter of public record. The deed between the seller and buyer must be recorded in a person’s name or corporate entity.
As most of you are aware, I have not been a proponent of Land Trusts, however I have not advised anyone not to use them if they felt they needed to do so.
Subject To investors who are under scrutiny from the Attorney Generals office, as far as I gleaned are those who used Land Trusts or did not adhere to the following excerpts from:
Deceptive Acts or Practices
Article from Attorney General's Office
Consumer Protection Section
North Carolina law provides that unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are unlawful and are subject to a civil injunction by the Attorney General.
So that you will have a better understanding of how this law applies the following is a brief, and by no means conclusive, checklist you should keep in mind.
(1) Intent to deceive, or the seller's good faith or honest belief is not relevant or material to a determination of illegality.
(2) Opinions which are misleading or deceptive are unlawful.
(3) Any false inducement is a violation if it is likely to mislead a substantial segment of the purchasing public, or that portion of the public to whom the representations is directed.
(4) Failure to disclose a material fact is unlawful.
(5) Advertisements or representations which have a tendency or capacity to mislead are unlawful.
(6) Misrepresenting the' nature of or the extent of a guarantee or warranty is unlawful.
(7) Any person who engages in a transaction which in whole or in part is in violation of an already declared statute may have in fact engaged in an unfair or deceptive act or practice.
Finally, in judging the likelihood that an act or practice is likely to deceive, the measure is whether it is likely to deceive the unlearned and gullible.
In determining this, courts generally are concerned with the impression a statement or representation is likely to create upon prospective purchaser, which arises not only from the sum total of what is said but also of all that is reasonably implied.
If you as an investor makes a full disclosure to your seller and buyer in your paperwork and I am not referring to CYA letters, but paperwork that adheres to the state statutes, this will go along way in resolving you of any wrong doing should a complaint be filed against you.
We also covered “equity skimming” whereas an investor collects the payments from the buyer and does not make the payments on the existing loan.
This is an excellent reason to use a licensed and bonded Loan Servicing Company to collect the payments from your buyer and the LSC makes the payments to the lender.
Sometimes it is too convenient when someone gets into financial problems to “borrow” from the buyers payment, thinking they can make up the payment at a later time.
This is a federal offense, however a great concern of the Attorney General’s office.
Of course, last but not least, the DOS (acceleration clause). As most everyone is aware this is an option the lender has and is not in the realm of criminal activity, but would leave open certain civil court liabilities.
However, I have found no case law that would suggest the lender calling the loan due pressing any other issue.
This I consider part of the risk versus reward in doing Subject To deals. My personal belief is if the loan is kept current, the lender is not out looking to call loans due.
They have enough concerns with the high rate of foreclosures in the United States today.
North Carolina has no problem with anyone purchasing or selling property in their state and feels strongly that the Constitution allows its citizens to do so. This was emphasized by Mr. Brogden.
I feel this is an important first step in understanding the concerns from both sides concerning the creative investing industry.
I would personally like to thank Mr. Brogden for taking the time from his busy schedule to talk with this investor and stating the views of his office.
I also said he should be glad he doesn’t handle the complaints regarding used car dealers.
John $Cash$ Locke
Hey John.
Thanks for all your assistance in this matter with the AG. I think by talking to the horses mouth, we can get some straight answers about what and what shouldn't be done when transfering title.
Thanks John for all the great information on this issue.
I do use land trust and will continue because of my business practice of full disclosure to the customers and each customer must sign off.
This is not an area to practice in if you lack experience.
When being creative one must explain all aspects of this form of investing to their customer and if they do not understand "DO NOT DO IT".
Know your customer, be honest, be fair and most importantly know your state rules and regulations with all forms of creative investing or you may find yourself in one heck of a mess.
How do you make them know about the Land Trust??
Not knowing how others use trust, I explain to my customer that's it main purpose is to protect both of us and to have an account handle the funding. I explain to the homeowner all the in's and out's with the lender, tax issues they may face and so on.
I give them options - Land trust, subject to, and so one.
I think a lot investors get into trouble by just taking title without really buying the subject property. They simply act as a realtor without a license and this is where one can get in trouble.
Personally, I've always had a problem with using a land trust with subject to investing as taught by some course writers. It's not explained well as to the AG's specific problem with land trusts, but reading between the lines, it may be the same as mine.
So here it is. What is taught is for the investor to get the seller to put his property into a land trust for "estate planning" purposes. Only at that point will the investor buy the property and transfer ownership via the landtrust. This is the problem, plain and simple. First, the trust wasn't created for "estate planning" as told. It was created because the investor told the seller to do so before he would buy the property. Second, the reason for the trust was to conceal the sell from the lender. That would not be that difficult to prove either. If it is proven, then there have been a whole hosts of laws broken, including fraud.
Now, I have no problem with using trusts. They are a good vehicle to get your name out of the public view. However, used in the method above, they are being used as a concealment method, pure and simple.
I'll personally stick with John Locke on this one. As long as the payments are made on time, the majority of lenders will not care who is paying them.
I will add one more point here as it relates to NC subject to investing, and maybe other states as well.
More and more lenders here are filing a separate form that states in brief that they must be notified if ANY changes in title are recorded. So, as an investor, if you have taken one of these properties and haven't notified the lender, you would be in violation of that agreement. In that case, if the lender found out, I'd wager that they would invoke the DOS at that point.
Roger
John,
Your comments are excellent, and I have to say that I agree with most of what Mr. Brogen (the Dep AG) says as well However, it should be carefully understood by your readers that a borrower's placing its home into a land trust and nominating a third-party trustee and a remainder agent, or co-beneficiary, does not fly in the face of any law in N.C., or any other state
Land Trust Legislation As in most states, no specific land trust authority, but land trusts are wholly functional by the land trust model's exclusion from prohibitions within trust and North Carolina land use regulations (i.e., C.S. 1740 et. Seq.). NCRC §41-7 (indirectly, but fully applicable to land trust conveyance). N.C. does recognize the Doctrine of Equitable Conversion; and its Statue of Uses does not in any manner exclude land trust formation and usage. Nominee and grantor trusts are recognized; and NC follows Illinois relative to land trust matters.
Cases:
Kirman v. Holland, 139 N.C., 185, 51 S.E. 856 (1905)
Pilkington v. West, 246 N.C. 575, 99 S.E.2nd 798 (1957)
Wachovia Bank v. Poindexter, 259 N.C. 371, 128 S.E.2d 867 (1963)
Deviations/Variations/ Nuances Re. Land Trusts The trustee needs to retain only the function of dealing with matters of the property, in order to avoid characterization as a passive or dry (or “failed”) trust.
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Neither is there a due-on-sale clause violation issue if the borrower remains a beneficiary of the trust and does not give up control and revocability of the it. Although, one can certainly direct its trustee, in a side document, to respond) re. revocation or other matters) only to mutual direction all beneficiaries...his wife, his kids or his remainder agent...the trust is still revocable and still inter-vivos).
Furthermore, if that appointed co-beneficiary or remainder agent needs a place to live, and the trust property is available for lease, there is no reason he/she shouldn't be allowed to be the party who leases the property from the trust.
And as far as the trust's hiding ownership interest in concerned, that's one of the primary reasons for, and benefits of, the land trust...”Anonymity.” That's what it’s for! That’s why it was created (by Chi. Title circa 1919). It’s an *****et protection device used by millions over the years…especially by large corporations (e.g., The Disney Corporation…the Buena Vista Land Trust).
John, I weighed in on this N.C. debacle early on, and stand ready to *****ist the folks involved in any way I can.
Those using land trusts today who follow our system, will be shown to be well within the law and well within the moral and ethical standards that all creative RE investors should be held to.
In my opinion, any problems that will arise in court concerning land trusts will have to do with whether the settlor was coerced into giving up something he/she may not have otherwise opted to give up; whether or not the borrower’s control over the property was usurped; whether or not ALL of the beneficiary interest was transferred. Whether or not all disclosures were made; whether or not the pathway to redemption of title was impaired in the face of default by any party; whether or not any aspect of the partial transfer was purely withheld from the parties, and so on.
We and our legal counsel are solidly and soundly ready to support our manner of using land trusts.
1. A property is placed in its owner's land trust under the owner's name only…with no other beneficiaries.
2. A deed is transferred by the owner to its nominated trustee (preferably a third-party corporation that can’t die and which is experienced in the holding of such responsibilities)
3) An *****ignment of Beneficiary Interest is effected, conveying a partial beneficiary interest to a remainder agent nominee (co-beneficiary)
4) A Beneficiary Agreement is struck between/among the parties outlining their respective benefits and responsibilities to the trust, the trust property and to each other
5) If one of the beneficiaries opt to be a resident in the property, that party leases the property from the trust via a triple-net lease. (“Triple net” meaning that the tenant pays all costs of ownership).
6) Any *****ignment of control or direction by the settlor (e.g., by Power of Attorney or *****ignment of Power of Direction) is Limited and Revocable at any time by the Settlor (owner/borrower of record).
Note also that in working foreclosures...we strongly advocate (insist upon) leaving the borrower with no less than 80% of its existing equity, with express provision for a full payout upon the property's disposition at the trust's termination (makes the deal more fair and easier to get, and alleviates claims of “unconscionable advantage”).
John, I/we firmly think that when the Dep. AG sees what it is that those folks being sued are actually doing (versus their using the blind one-sided land trust scheme of full transfer), the entire mood of the situation will shift.
Best of good fortune…and looking forward to having your on our Tele Coaching program again soon (You were a big hit).
Bill Gatten
So in what way does using a Land Trust make you a realtor without a license? I use Land Trusts all the time. In fact, other than my house I don't think I've ever bought a property without a Land Trust. I find the LT process pretty straightforward and I cannot figure out why running a property through a Land Trust makes the transaction no longer exempt from the licensing requirement.
In my opinion problems come when investors take the property with out money changing hands, some investors are playing a slippery game with the home owner by not educating them what they are doing. Some are implying that if they WD the property into the trust they will not be foreclosed on.
I give my customer options, I tell them about all the work outs available just like most lenders do, I only use LT's if my customer fully understands, if they do not I just simply do not use LT's.
I only use LT's with marginal profits when it comes to preforeclosure homeowners.
Trouble comes when a few investors get greedy and start taking advantage of folks.
I make profit on doing a lot of little deals and the most I have ever made net on a LT deal is $12,000 but so did the homeowner and a year later I got them in another home that they purchased from me.
Keep it fair and honest and trouble never comes your way.
I don't think it's that a land trust is what makes the situation one of the investor acting as an agent without license. It's that they are selling a property and receiving a profit for it. Here's how it looks from an agent-oriented perspective:
Your intent is to make money off of the property. You are taking the deed (ownership) and selling the property, and receiving the difference between what your negotiated price with the seller is, and what they buyer will pay. A Realtor lists a property to make money off of the sale. The money the realtor makes is the negotiated commission. What the AG's office seems to be saying is that the investor is doing is, like the agent, making money off the sale--but without any of the regulatory constraints that a Realtor would face, and thus without the protections for the original seller that the laws of agency provide the seller.
What it looks like, then, from that point of view is a "net listing." That is a listing where the commission is any amount above a set sale price. The seller says, "I need to clear $100,000 from the sale. Anything above that is yours, Mr. Realtor." The reason this is illegal in Michigan is that it would allow a realtor to deceive a seller about market value and benefit from that: "I figure that you'll sell for $109,000 or so. How about we just say, then, that you get your $100,000 and I'll take whatever is over that?" The realtor, meanwhile, knows the probable market value is on the order of $165,000.
Subject to transactions are analogous to a net listing commission in that the seller's receipt is determined beforehand, and anything that the property sells for above that is all to the investor. I think the AG office is saying, with respect to this agency issue, that the rest of the transaction--the subject to contract, transfer of the deed, the land trust ownership--is all an elaborate structure that is beside the point when you get down to the seller selling, the investor getting a residual above that sale price. AND then the investor is NOT acting as a seller's agent, which would be required with a realtor's listing contract. But he is FUNCTIONING as an agent in the certain other respects.
David
David i don't understand your comment about the land trust deal. You said the problem lays when a buyer negotiates with the seller and turn around and sale the property for a profit.
Isn't that what wholesaling is and assigining as well as double closings?
Also net listing is a term realtors came up with. What was it called before the realtors named it.
Realtors use three ways to get paid. One way is from the seller straight commission, because they are representing the seller.
From the buyer because they represent the buyer and the net listing. I think they came up with all of these terms to confuse the public.
Realtors are regulated by the board and investors are regulated by common law.
It comes down to disclosure. A realtor should not be forbidden to be an investor. If a realtor lists a property he takes time to market it for the seller. When the seller is not in a position to wait for the sale, he may ask that it be sold fast. That usually means a much lower price. If the realtor is willing to take on the risk of making payments, risk of not making a profit after all holding and clean up costs, etc. he should be able to make a direct purchase. What he makes on it is not at all related to what he could have made as an agent. An agent should not take advantage of the situation, but who is to say what that would be? If the agent didn't buy it, the seller may even sell to a vulture investor who would pay even less. I'd say that as long as the agent discloses that he is an agent, he and the seller should be allowed to come to a mutually acceptable agreement. Most sellers know what their homes are worth. Most expect more than they are worth. If you restrict sellers pool of market buyers, you are hurting them not helping them. The buyer who can purchase quickly and then fix and remarket does perform a service and should be allowed to benefit. Remember, sometimes the buyer of a property buys at a wrong point in the market and ends up holding the bag. The seller is not required to give back any money is he? Risk is made with the expectation of reward or it is not undertaken.
FBI tightens cuffs on real estate fraud
www.Inman.com, CA - 2 hours ago
... While the FBI has had success in dismantling a number of financial fraud rings, many real estate fraud perpetrators managed to escape investigators and are now ...
See full story: http://www.inman.com/inmannews.aspx?ID=42927
In my opinion this is merely a straighjacketed attempt by the dept of real estate to hijack back the properties being taken away from the licensed real estate world. Yes, there are investors that take advantage of homeowners in trouble, but what about the investors that are providing a true service? Is the realtor getting the homeowner out of a jam by merely listing the troubled owners property? Who is going to bring the payments current? The agent? The broker? I dont think so. I will say this, I have spent countless dollars halping homeowners get out of a bad situation and it doesnt always mean a profit in my pocket. Many times it results in a loss. Do I go after the homeowner? Absolutely not. Is one to think that a homeowner in distress who is helped out by an investor is going to file a comlaint against than investor? Not likely. This is a crackdown against investors. RE agents and brokers want their commissions back. These "real estate" professions, at least most of them are only concerned with their commissions. Most would not step up to the plate and buy the property if it meant the lender would take it back through foreclosure. What would the lenders do with all these properties back? I think its time the various RE organizations realize that the services they are providing are not worth while for most distressed homeowners. They need to take a step back, take a deep breath and move on with those that desire to list their properties on the MLS. And if there is actually a hard working agent out there reading this, this doesnt apply towards you, but towards the other 99.99% of the Professional real estate community. We have an epidemic out there. Its called a bad economy. And its the investors saving this market from getting flushed down the toliet. Maybe this is whats wanted. I'll make sure I battle until the end.
Do we have any current updates on this issue?
JohnMichael,
I will check and see if there are any updates, thanks for bringing this to my attention.
John $Cash$ Locke
NC General Assembly has proposed the following bill:
http://www.ncleg.net/gascripts/BillLookUp/BillLookUp.pl?Session=2005&BillID=H725
If it passes investing will be difficult in NC, don't you guys think?