Q: We must sell our house, and this tight money market is killing us. We have agreed with a buyer that we will take back a second deed of trust for a period of a few years, at least until money becomes availabe. Can you advise us how we can best protect our money?
A: More and more, sellers are turning to creative financing in order to make a deal. One of the methods is forthe seller to take back a second deed of trust.
A second trust (mortgage) can be a very effective tool to assist you in marketing your house. Whether your buyer is assuming your existing loan or obtaining a new loan, your willingness to take back financing for a period of time may make the difference in the cash needed by the buyer to meet your selling needs.
It is important, however, that the second trust be properly prepared. Each state has different rules affecting second-trust financing. You have to check with your attorney about such matters as usury laws, recording details and other requirements which your state law may impose on a second trust.
For example, the note signed by your borrower might have to state that it is "not negotiable." This means that you may not be able to sell (discount) the note to a third pary, butwill have to wait until the time expires to get paid in full. As this column has discussed in the past, there also may be prohibitions on balloon notes, whereby the last payment is substantially higher than the installment payments.
To protect yourself, you will have toinvestigate the creditworthines of your buyer. Find out what income your buyer makes and get the buyer's permission to do a credit search with a local credit bureau. If the credit bureau reports a history of slow or delinquent payments to such places as local department stores or oil companies, you may want to think about extending further credit to an already overextended purchaser.
Oversimplified, when you lend money, your buyer will have to sign two pieces of paper. One is a promissory note, whereby the buyer states that he or she has borrowed a certain sum of money, and agrees to repay that money, with interest, in monthly orquarterly payments. You have to figure out whether you want the paymentsamortized equally over a period of years, or whether the buyer will be permitted to pay interest only until the entire balance of the note becomes due.
This promissory note must reflect provisons for default, so that you will be able to call the note in the event the purchaser misses a payment or two. You have to take a tough stance in connection with your buyer. If a payment is missed, and you are lenient, you may end up having to foreclose because your buyer will be too far behind in payments to ever catch up.
Additionally, to secure the note, thebuyer will sign a deed of trust. The deed of trust (the mortgage paper) puts a cloud on the title to the property, so that if your buyer is unable to make the payments on the note, you will have an opportunity to foreclose on the property. You have to select trustees, whom you respect and trust.
You have the right to select any person of your choosing and it can be a relative, friend, business acquaintance, or your attorneys. It is advisable to have at least two trustees, and you also have absolute discretion to substitute trustees.
The deed of trust is a vey important legal document. It must be prepared carefully, and it must reflect the true legal description of the property.
The original note, signed by the borrower, must be given to you at settlement. Do not rely on the title attorney or title company to keep that note in the files. It is a very valuable piece of paper, which you should keep in a safe place.
The deed of trust will be recorded inthe office of land records where your property is located. Make sure that your name and address are written clearly on the original deed of trust so that the recorder's office will be able to mail it back to you after it has been recorded.
Every jurisdiction in this area provides a recorder's receipt, which gives number for identification purposes. Insist that the attorney or title company conducting the settlement give you the original recorder's receipt shortly after settlement. This is your proof that the deed of trust was infact recorded on the land records.
If your buyer is assuming your existing deed of trust, provide for cross default provisions. This means that a statement should be in the second note and deed of trust that if there is a default or delinquency on the first mortgage, it also will trigger a default on the second mortgage. You don't want to find yourself in a situation where the first lender forecloses, and your security is wiped out.
After settlement, send a letter, certified mail, return receipt requested, to the first lender, informing him or her that there is a second trust on the property. Ask that you be given notice by the first note-holder of any delinquency so that you can proect your security.
It is also necessary that your buyer maintain adequate hazard insurance, naming you asthe beneficiary if a fire destroys the property. If you are not protected by this kind of insurance, it is possible that the first mortgage holder will be paid off if the property is destroyed, but you will be left out in the cold.
You also should insist that the buyerfurnish you proof that the yearly real estate property taxes have been paid. A simple clause should be inserted in the note and deed of trust stating:
The borrower will furnish the noteholder, no later than four weeks after the real estate property taxes are due, satisfactory evidence that the current real estate taxes have been paid.
Finally, make sure that someone visits the property periodically. If the property is run-down, its value may be diminishing, thereby imparing your security. If significantrepairs are evident, you may want to insist that your borrower take care of the property. Most standard deeds of trustspecifically require that the borrower maintain the property in decent condition.
Second deeds of trust are very valuable to a seller, especially in these tight money market times. Buta poorly drafted legal instrument is of no use to anyone.