Q: How would you handle buying land from a person who has title but still owes the original owner and makes his payments with your payments? He can sign the title over to you, but it is not a clear title. What do you do to ensure maximum safety for this transaction? – G.M., Bothell
A: It depends on whether the seller of the property is bound to the original owner by a real estate contract or a deed of trust. A real estate contract is a method of selling property in which the seller retains legal title to the property until all payments have been made on the contract.
That’s what banks do when you buy a car. They hold the title to your car until you pay off your loan, then the title is transferred to you. In a real estate contract, even though the seller holds the title, the buyer is given equitable title to the property, which means he or she has full ownership rights but not legal title.
But real estate contracts are relatively rare. The most common method of sale in this state involves a deed of trust.
Under that method, the buyer gets legal title to the property at closing, but the lender (or seller, in the case of a private contract) gets a deed of trust, which is a legal document that allows them to seize the property and sell it at auction if the buyer fails to make the required loan payments.
Since you indicated that the seller has title, I will assume that he is making payments to the original owner under a deed of trust. If that is the case, I would strongly encourage you to purchase the property using a deed of trust rather than a real estate contract, because you would immediately receive legal title to the property. If the seller is making payments to the original owner under a real estate contract, he does not have clear title to the property and therefore cannot transfer it to you.
Consult an attorney for further advice.
Here are some tips for protecting your interests if you purchase property from a private party using a deed of trust:
Have the seller purchase an owner’s title insurance policy for you guaranteeing that you have clear title to the property at the close of escrow.
Use an escrow company for the closing to make sure that all documents are properly filled out and recorded to protect your legal interest in the property.
Make your payments to a collection account rather than directly to the seller. Your payments would go into the collection account, the payments on the underlying loan would be made directly to the original property owner out of the collection account, and the remaining funds would then go to the seller from whom you are buying the property.
That way, you don’t have to take the seller’s word that he is making payments to the original owner. A collection account can be set up at a bank or a private payment collection company. You could split the annual maintenance fee for the account with the seller.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com
Steve Tytler is a licensed real estate broker and owner of Best Mortgage, Inc. You can visit the Best Mortage Web site at www.bestmortgage.com.
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