Chain of Title, Title Seasoning and Land Trusts

These three strange concepts are tightly related and may make or break your deal.

Chain of Title is the real estate property ownership history. You may think that only current state of title is important, but in reality last couple years of ownership are important because of two words: mortgage fraud.

Here is the most common scenario of mortgage fraud. A scammer, mortgage broker and crooked appraiser work together to pull this off. Let’s say a scammer buys a house worth 100k, appraisal is done to show that house is worth 150k, mortgage broker falsifies documents and buyer from behind the interstate overpass is brought to the closing to sign the papers. The homeless buyer gets his $100 for troubles and $50k get split up by the 3 scammers. New mortgage never gets a single payment made and the house goes into foreclosure.

Banks are not dumb, after couple hundred cases like this they instituted a new requirement – Title Seasoning. What they saw is when house gets sold 2-3 times in a short time period the loan goes bad in much higher number of cases versus the cases where houses where sold only once every 2-3 years. So if the buyer wants to get a loan to buy a home the present owner has to own the home for at least 12 month in most cases.

So if you just bought the home for 100k, put in 20k worth of renovations and now are trying to sell this same home 2 month later will you have a title seasoning issue? To the bank this looks very similar to the mortgage fraud. House was bought for 100k and being sold for 150k in 2 month period – red flag goes up.

So how can you overcome this little issue? The answer is Land Trust. Land trust in essence is just a bunch of papers. It is designed to own real property. For the Land Trust to exist there has to be 3 ingredients: Land (we have a piece of dirt with everything stuck to it in semi permanent way), trustee and the beneficiary. Beneficiary is the entity who will benefit from this trust and trustee acts on behalf of beneficiary. Conveying the property into a land trust does not break the chain of title. If you own the property for 2 month and the previous owner owned for 4 years, when the new lender will request a title binder from the closing attorney title seasoning will show 4 years and 2 months. The event of conveying property to the land trust will show, but not break the chain of title.

Here you have it. We buy all our properties now into a land trust. This has too very good side effects: limited privacy and limited liability. I will not go into details, but if you will be dragged into a courtroom that is where that limit will end.

And one quick note. Never, ever buy property on Quick Claim Deed. Always go the real estate attorney’s office (title company, escrow agent), order title, pay closing and get title insurance. To close on 200k home here in GA costs me around $700 and title insurance another $700. Considering how much money is at stake this is a small price to pay.