Question: How would we handle buying land from a person who has title, but still owes the original owner and makes his payments with our payments? He can sign title over to us, but it is not clear title. What do we do to ensure maximum safety for this transaction?
Answer: The answer depends on whether the seller of the property is bound to the original owner by a real estate contract or a deed of trust. Those are two very different types of property ownership.
A real estate contract is a method of selling a 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. The bank holds the title to your car until you pay off your car loan, then the title is transferred to you.
In a real estate contract, even though the seller holds the legal title to the property, the buyer is given “equitable title” which means they have full “ownership” rights, but not legal title.
Real estate contracts are relatively rare in this state. They are typically used in rural or recreational areas for sale of raw land. So it’s possible that your deal involves a real estate contract, but the most common method of selling property 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 currently making payments to the original owner under a real estate contract rather than a deed of trust, he does not have clear title to the property and therefore he cannot easily transfer it to you. If you are dealing with a real estate contract, please consult an attorney for further advice.
Assuming that you are dealing with a deed of trust, here are some tips for protecting your interests in the property:
1. Have the seller purchase an owner’s title insurance policy for you guaranteeing that you have clear title to the property as of the date of the close of escrow.
2. Use an escrow company for the closing to make sure that all documents are filled out and recorded properly to ensure that you are the legal owner of the property.
3. Make your payments to a collection account rather than directly to the seller. Your payments would go into the collection account, the administrator of the collection account would then make the payments on the underlying loan directly to the original property owner and give the remaining funds 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 collection account with the seller.
Regardless of whether you are dealing with a real estate contract or a deed of trust, I strongly encourage you to spend a few hundred dollars to have an experienced real estate attorney review the deal to make sure that all of your interests are properly protected.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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