In California we have deeds of trust rather than mortgages. When we get real estate loans, our lenders are typically the trustees who receive the deed of trust with the power of sale(since they put up the money to purchase the property). 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.
At least, that is how it is supposed to go.
If you don’t hold up your end of the bargain by paying your bills and taking care of the property, the lender can protect their asset by kicking you out. If you default (stop paying) on your loan or don’t pay the required taxes and/or insurance, the trustee can exercise the “power of sale” and foreclose on your property. With a due-on-sale clause, 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. In this context, waste doesn’t mean getting busted for throwing a Popsicle wrapper on the lawn and forgetting to pick it up. Rather, waste is more like a Superfund clean-up site. For example, if you dump 50 gallons of used motor oil in the backyard 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, at least five days before the auction is scheduled, you fix whatever problem led to the foreclosure.
The deed of trust gives the trustee something called “bare legal title”—a type of ownership that provides legal rights but no equity 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. If you’re refinancing, this is something the escrow company normally handles for you.
Where this sometimes falls apart is with private party loans—when the loans are paid off rather than refinanced. If the reconveyance isn’t done right away and years pass, private lenders can be difficult to track down. And if the original lender dies and his estate is then divided among several heirs, things can get complicated in a hurry. Rather than dealing with the original owner, you could end up trying to get his six grown children to sign the reconveyance. If you didn’t keep good records, the children may not be convinced you paid off the loan. If things really go sideways, 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 why I recommend keeping every scrap of paper pertaining to your real estate payments and ownership. I also recommend confirming 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 slip. Once you pay off your real estate loan, make sure the lender’s deed of trust is removed.
If you have questions about property management or real estate, please contact me [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To see previous articles, visit www.selzerrealty.com and click on “How’s the Market”.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.
