Q: We are selling our house and because of the present market have decided to take back a second-trust mortgage. Our real estate agent suggested that she could be one of the trustees on this mortgage, and we wonder if this is legal.
A: When you take back a second mortgage, it means that you are lending your buyer a sum of money, and of course, you want to make sure that your money is secured.
The best way to secure it is to file a lien against the property, so that if your buyer cannot make the required payments on time, you will have the right to foreclose on the property.
For purposes of this discussion, a mortgage is similar to a deed of trust. In this area, we use deeds of trust because it is easier and faster to foreclose on property with a deed of trust instrument rather than the mortgage instrument.
When you lend money to be secured by a piece of property, the borrower signs two documents. The first is the promissory note whereby your borrower agrees to pay you the sum of money lent, with the agreed upon interest, over a period of years.
All of the terms of this loan are negotiable and you have the right to insist on terms acceptable to you. For example, a due-on-sale clause should be contained in the documents to protect you against a third party trying to assume the obligation under the note and trust.
After all, you are lending the money. You should draw up the mortgage documents, rather than rely on the documents drafted by the buyer's attorney.
It is important, however, to assure yourself that there are no usury restrictions in the jurisdiction where your property is located that affect your ability to collect on the entire note. Balloon notes are tricky and should be reviewed by your lawyer.
The second document that is signed is a deed of trust. Under this instrument the owners of the property (your borrowers) will sign over the property to at least two trustees, who will hold the property in trust to assure you that the promissory note will be paid in full.
If this note is paid up, the trustees will be obligated to release the property back to the borrower. There are archaic procedures in the Washington area for releasing these deeds of trust, and the recorder of deeds or your attorney will be able to assist you in filing these release forms.
If your borrower does not pay the note in accordance with its terms, you have the right to direct the trustees to sell the property at an auction sale. In each of the local jurisdictions the foreclosure procedures vary, and again, your attorney will be able to assist you.
It should be noted, however, that the trustees have the legal power to sell the property, if they are satisfied that the borrower is in default.
The role of the trustee is often misunderstood. You, the lender, have the absolute right to select the trustee of your choice. It can be your real estate agent, or a relative, friend, business adviser, bank or other financial institution, or your attorney.
It is important to remember that the deed of trust must contain language permitting you to substitute trustees at your discretion.
Additionally, you should be aware of the fact that a trustee has a fiduciary relationship to both the borrower and the lender. Failure to perform the duties of trustee may subject the trustee to liability.
Benny L. Kass is a Washington attorney. Write him in care of the real estate section, The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. For a copy of the free booklet, "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Kass at 1528 18th St. NW, Washington, D.C. 20036.