Is that short sale listing owned by a Living Trust? This may be problematic...

If your home is held in a living trust, and you are seeking to do a short sale, you may have an additional hurdle to jump through when you list and try to sell your property. Why, you may ask?

Well...living trusts generally don't obtain home mortgages; individual people obtain mortgages, and then they transfer the title of the home into their living trust, while their mortgage remains in their names personally. There's no problem with doing this -- folks do it all the time and use living trusts for family estate planning and asset protection purposes. So what is the issue that occurs when a home that is held in a trust is listed for a short sale?

The title to the home is "Smith Family Living Trust", however the names on the mortgage company records are John Smith and Mary Smith. On the listing agreement documents, the seller is listed as "Smith Family Living Trust" rather than John Smith and Mary Smith. On the documents that the title company generates, the trust is listed as the owner, not the individuals who obtained the mortgage. Soooo....when the short sale lender receives the request for a short sale, and the name trust appears on all of the listing agreement, purchase contract, and escrow/preliminary title report documents -- this can be problematic.

When this information does not match, the short sale lender will probably ask why, and may request new documents that name the individuals as the sellers. So basically, the short sale lender may indirectly require that the title to the home be transferred out of the living trust and back into the names of the individuals. Simply providing a modified listing agreement and a new purchase contract with corrected names will not be sufficient...and is probably illegal. The title company absolutely WILL NOT be able to issue a revised preliminary title report and HUD-1 document unless there is proof of recording a transfer with the county recorders' office. Doing so often takes valuable time (document preparation, signing, notarization, filing with the county recorders' office, etc). Also, the seller really needs to get legal advice -- removing a home from a trust may have certain tax or legal ramifications.

Some short sale lenders will not care, however some will. If you are a homeowner with property in a trust, and you are considering doing a short sale, you may want to have a conversation with the attorney who prepared your trust in advance of listing the house to find out if it makes sense to transfer the title back to you (as individuals)...before listing the house. AND if you are a buyer, and you get into contract on a short sale and on your contract documents list the seller in a trust - you may wish to have your agent ask the listing agent if this may be an issue. It is best to be proactive before it becomes a problem!