Avoiding Legal Pitfalls in Subject-To Land Trust Deals: Lessons from the Arizona Lawsuit
Introduction
The real estate investment world was rocked by a recent lawsuit filed by the State of Arizona against a group of investors, title companies, and law firms involved in fraudulent "subject-to" transactions. The case exposes how improper use of subject-to purchases and trust structures can lead to serious legal consequences. For Florida investors who routinely purchase distressed properties subject-to the existing mortgage using land trusts, this lawsuit serves as a critical warning. Done correctly, subject-to transactions using land trusts can be a powerful investment tool. Done improperly, they can land you in court facing allegations of fraud, racketeering, and consumer protection violations.
What Happened in the Arizona Case?
In State of Arizona v. Cameron Jones et al, the Attorney General accused a network of investors of engaging in a scheme to strip equity from distressed homeowners through misleading subject-to transactions. Key allegations included:
- Failure to Disclose Material Terms – Homeowners were misled into believing they were completely off the mortgage when, in reality, their names remained on the loan.
- Fraudulent Use of Subject-To Agreements – The investors failed to properly notify lenders, leading to due-on-sale clause violations and eventual foreclosures.
- Use of Nominee Trustees & Alter Ego Entities – Investors used multiple trusts and LLCs to conceal true ownership, making it difficult for homeowners to challenge the transactions.
- Unlawful Evictions & Litigation Against Homeowners – Some homeowners who realized the scam were sued to force sales, while others were evicted after unknowingly renting back their own homes.
- Title Companies Ignored Red Flags – Title companies closed questionable transactions despite internal concerns that FHA and VA-backed mortgages prohibited such transfers.
Florida investors should pay close attention because this case highlights practices that could trigger similar legal action in the Sunshine State.
Lessons for Florida Investors Using Land Trusts in Subject-To Deals
Florida law offers robust tools for legally structuring subject-to transactions using landtrusts, but investors must operate ethically and legally to avoid being the next lawsuittarget. Here are the key takeaways:
The Right Way to Structure Subject-To Transactions in Florida
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Use a Properly Drafted Land Trust Agreement – Ensure the trust agreement explicitlystates that the borrower remains the beneficiary until the investor fulfills all agreed-uponobligations (i.e., keeping the mortgage current, paying taxes, insurance, etc.). - Full Disclosure to Homeowners – Never mislead the seller into thinking they are off thehook for the mortgage. Instead, provide a clear written explanation that their name remainson the loan and that a mortgage default will harm their credit while the outstandingmortgage can also prevent them from getting another loan (think too-high debt-to-incomeratio).
- Notify the Lender – While some investors try to avoid triggering the due-on-sale clause,failing to disclose a transfer when required could constitute fraudulent concealment. Thebest practice is to notify the lender that the title has been transferred at the time a change ofmailing address is submitted to the servicer. It has been our experience that more and morelenders are flagging the transactions anyway when they receive insurance or tax bills wherethe name doesn’t match their borrower’s name. So it’s better to “draw the sting” early onbefore spending a lot of money on property renovations. Also, providing the notice mayprovide the defense of waiver if the lender, months or years later accelerates and foreclosesthe loan under the due on sale clause.
- Ensure Seller Retains Legal Protections – A best practice is to include conditionalassignments of the beneficial interest so that if the investor defaults on payments,ownership reverts to the seller without costly litigation. At that point, the trustee wouldtransfer title back to the seller so the seller can re-sell the property.
- Work with Ethical Title Companies – Only use title and escrow agents who understandland trust transactions and are committed to compliance.
- Be Transparent About Exit Strategies – Investors must clearly explain their long-termintent (i.e., whether they plan to hold, sell, or lease the property). This ensures sellers arenot misled into thinking they have rights they do not. Also, sellers should be clearlyinformed that, should they get the property back, it may have tenants or additionalmortgages or other liens on the title, leaving no equity.
- Avoid Unlawful Leasebacks – If the seller remains in the home, the agreement must be alegitimate lease with clear terms rather than a disguised eviction trap.
- Do not purchase properties subject to FHA, USDA, or VA mortgages. Downpaymentassistance mortgages should be paid off at closing the purchase of the property as those tooare often backed by federal funds.
Practices to Avoid That Could Lead to Legal Trouble in Florida
• Hiding Behind Trusts to Evade Liability – If you use a trust solely to concealownership or mislead parties, it can be deemed an alter ego entity in court, piercingany asset protection.
• Violating the Due-On-Sale Clause Without Legal Strategy – Some subject-to deals areflagged by lenders, leading to foreclosures and lawsuits. Investors must have a planin place to mitigate this risk (think hard money or private lenders to refinance andpayoff the outstanding mortgage).
• Using Fraudulent Affidavits to Cloud Title – The Arizona case included investorswho recorded fraudulent title affidavits to manipulate ownership rights. Florida lawprovides harsh penalties for fraudulent recordings. Memoranda or affidavits ofagreement that aren’t signed by the property owner traditionally aren’t enforceable,and lawsuits based on them could get the law firm in hot water like it did in Arizona.
• Improperly Assigning Beneficial Interests – If you sell or assign a beneficial interestin a land trust without clear documentation, courts may find the deal fraudulent.
• Predatory Tactics Against Distressed Homeowners – If a deal’s structure is intendedto confuse, deceive, or take advantage of a seller, it will likely be deemed fraudulent.
Final Thoughts: Do Subject-To Deals the Right Way in Florida
Subject-to investing via land trusts is legal and effective — when done properly. TheArizona lawsuit should serve as a wake-up call to investors who cut corners. While the realestate investors, title companies, and law firms named in the Arizona Attorney General’slawsuit may have sufficient defenses, and a jury may find that everything they did was legal,they are David fighting a Goliath with unlimited resources. Their victory in the lawsuit couldbe Pyrrhic.Be careful in doing subject-to closings outside Florida. Other states don’t have Florida’s landtrust statute that enables independent third-party trustees who can help protect distressedsellers from equity stripping by returning the property to the seller if the buyer fails to paythe mortgage. If the investor’s own LLC or corporation is acting as the trustee, claims ofequity stripping would be easier to prove since there’s no guarantee that the trustee wouldgive the property back to the seller.By fully disclosing risks, properly structuring contracts, and ensuring ethical dealings,Florida investors can avoid regulatory scrutiny while still leveraging the power of subject-to transactions.
Additional Tips for the Ethical Subject-To Real Estate Investor
- Avoid buying homes subject-to once a foreclosure has been filed. If a foreclosure ispending at the time you purchase the property, to comply with Florida’s ForeclosureRescue Acts, you must either payoff or at least reinstate the seller’s mortgage at theclosing of the transfer of title to the property.
- Never obtain a deed from a seller “at their kitchen table.” Get a contract signed andthen go through a title agency for the closing.
- If you require a memorandum of agreement to be recorded, giving notice of yourcontractual interest in the property, the seller should sign that document before anotary public before it is recorded.
- If you do record a memorandum or affidavit of agreement and then the closing fallsthrough – even if the seller is backing out with no valid legal reason – it is advisableto record a satisfaction or cancellation of the recorded memorandum of agreementrather than to demand exorbitant sums of money in exchange for such releases.
- Obtain an appraisal, or at least have comps of similar properties that you gather atthe time of contracting as evidence of the property’s value on that date.
- Take pictures of the property and any damages or areas that are going to requirerepair or renovation as of the date of contracting.
- Keep receipts of time and money spent during any renovations.
- Take pictures of the renovations as they’re occurring and after they’re completed.
- Retain all of the before-and-after information in your files as evidence of the state ofthe property at purchase. If you later sell the property at a much higher price thanyou paid for it, this is proof as to why it is worth more.
- Do not purchase properties that are subject to “federal” mortgages such as VA, FHA,USDA, or downpayment assistance loans.
- Use an independent third-party trustee to hold title to the property, and use aconditional assignment of beneficial interest that allows the seller to take backcontrol of the trust and the property if you default on their mortgage to avoidallegations of equity stripping.
- Never, ever file bankruptcy or probate on behalf of a seller without their informedknowledge, consent, and active participation.
- Never submit any communication to a lender that contains false or misleadingstatements.
- Send notice to the lender that there has been a transfer of title. This can be done inthe same document that is submitted to the lender to inform them of the addresschange for all communications related to the mortgage servicing.
- Retain copies of all documents, pictures, and other communications (including textsor other instant messages) related to the purchase, ownership, and sale of anyproperty so that it may be presented in any future lawsuit related to the property
