In California we have deeds of trust rather than mortgages, and when we get real estate loans, our lenders are typically the trustees who receive a deed of trust with the power of sale (since they put up the money to purchase the property). If all goes as it should, when you finish paying off the loan the trustee issues a reconveyance to remove their deed of trust. That reconveyance is then recorded at the county, and everyone lives happily ever after.
That is, unless something doesn’t go as planned.
If you default (stop paying) on your loan, or you don’t pay the required taxes and/or insurance, the trustee can exercise the “power of sale” and foreclose on your property. The trustee can also foreclose if you try to be sneaky and transfer the property to another owner without the lender’s consent (this is called “alienation” and it really makes lenders mad). Finally, if you create waste on the property, the trustee can foreclose. I’m not suggesting that if you throw a Popsicle wrapper on the lawn and forget to pick it up then you’ll lose your home. In this context, waste is more like a Superfund clean-up site. For example, if you dump 50 gallons of used motor oil or hit the house with a wrecking ball, then the trustee has a legal right to declare a default and start foreclosure.
Provided the proper procedures are followed, trustees can sell your property to the highest bidder at a foreclosure auction unless you fix whatever problem led to the foreclosure five days before the auction is scheduled to take place.
The deed of trust gives the trustee something called “bare legal title”—a purely legal, but not equitable, ownership interest in the property. If you pay off the loan early or refinance the property, the trustee still has bare legal title until a reconveyance is completed. To resolve this conflict, the original lender signs a full reconveyance that you must take to the county to record. This removes any interest or claim the original lender has on the property. Normally, this is something the escrow company handles for you if you’re refinancing.
Where this falls apart is with private party loans when the loans are paid off, not refinanced. If the reconveyance isn’t done right away, private lenders can be difficult to track down years (even decades) later. And if the original lender passes away and his or her estate is then divided among several heirs, things can get complicated in a hurry. Rather than dealing with John or Jane Doe, you’re dealing with John Doe Jr. and his 15 siblings, trying to get everyone to sign the reconveyance. If you didn’t keep good records, then John Doe Jr. and his siblings may not be convinced you paid off the loan. If things really go south, you may have to hire an attorney to go through something called “quiet title action.” This process determines who the rightful owner of a property is, as well as who may have claims on the property.
This is where I remind my readers to keep every scrap of paper pertaining to real estate payments and ownership. Another useful piece of advice is to follow up and make sure any reconveyance you’re entitled to is recorded at the county. Most escrow companies and lenders require final payment before issuing a reconveyance. Once they’ve received final payment, the motivation to do additional work (like head down to the county to formally record the reconveyance) can dwindle. Don’t let this one slip. Make sure if you pay off your real estate loan, that the deed of trust is removed.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.