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Seller Financing and Land Trusts

We are often asked whether a land trust can be used in a seller-financing transaction to avoid the need for judicial foreclosure in the event of the buyer-borrower’s default. In such a scenario, the property would be conveyed at closing to a third-party independent trustee who would hold title to the property until the purchase money note is paid in full. If the buyer-borrower defaults, then — under the terms of the land trust — the trustee would convey the property back to the seller-lender.

There are a couple of problems with this scenario in Florida. First, if a buyer is buying a property to occupy it as their primary residence, they will find it difficult if not impossible to obtain the Florida homestead tax exemptions or creditor protections while the property is held in the name of a third-party trustee. To obtain the tax exemption, the occupant must have at least an equitable interest in the property being occupied. In the case of a true Florida land trust, all equitable and legal title vests solely in the trustee. At that point, the buyer has no equitable interest that would be subject to homestead tax exemptions or creditor protections.

Secondly, Florida does not allow non-judicial foreclosures except in timeshare mortgage and assessment lien foreclosure actions. While it is common to see the land trust with a primary and secondary beneficiary used for hard money loans with real estate investors, those avoid judicial foreclosure mostly because the parties involved are looking at it solely from an economic rather than an emotional standpoint and are willing to work together to avoid the need for a formal judicial foreclosure. However, when the property in trust is occupied by the borrower, it has been our experience that the borrower is not willing to go down without a fight. In that case, judges consistently have required the lender to file a mortgage foreclosure action while disallowing the summary ejectment of the borrower from the trust property.

If a client is selling or buying a property, using seller financing, we will review their situation and advise them — in most cases — to stick to the traditional note and mortgage or agreement for deed, knowing that they may be forced to judicially foreclose the borrower’s equity of redemption in the future.

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