How To Use This Book
B.
Encumbrances
If, like most homeowners, you borrowed money to buy your house and signed a deed of trust securing the loan, title to the property is encumbered. Past-due property taxes are another fairly common encumbrance. But you can skip this discussion if:
- the property being transferred has no existing deeds of trust, mortgages, past-due property taxes, or homeowners' association assessments, liens, or other encumbrances on its title (for example, the property is owned outright, free of ownership or lien claims by others, and property tax payments are up-to-date), or
- the owner(s) want only to change the form in which title is held (for example, from tenancy in common to joint tenancy, or from a single owner to a revocable trust with the owner as trustee), and the identity of the owners doesn't change.
If money is changing hands for the property, or a new owner is involved, or if you really don't know for sure whether or not there are encumbrances, it is wise to investigate just how clear the transferor's title to the property really is. That's when you need a title search (discussed later in this chapter).
Deeds and Encumbrances
When you use a grant deed (the kind of deed used most often in California) to transfer property, you automatically promise that you have disclosed to the new owner all encumbrances you have incurred. (Civil Code § 1113.) If you do not disclose the existence of such an encumbrance, you can be liable for the new owner's damages. For example, if you neglect to tell the buyer that there is a huge tax lien on the property, the buyer can sue you for what it costs to pay off the lien.
Under the law, the encumbrances about which a grantor must tell the grantee, when transferring property with a grant deed, include taxes, assessments, and liens on the property. (Civil Code § 1114.)
For example, if a carpenter who worked on a house has recorded a mechanic's lien on the property to insure that he is paid, the grantor must disclose it. Otherwise a recipient would take title to the property subject to the lien.
You are not promising that you have good title to the property. You are not responsible for other claims on the property that aren't based on your acts and are out of your control. The most common examples of such claims (none of them is very common) are claims by someone whose claim arose under a former owner, and eminent domain (condemnation) proceedings by government entities. For example, if you receive a grant deed to property and then find out there are condemnation proceedings underway, you're out of luck as far as suing under the promise that the statute says is implied in the grant deed.
Because buyers (and lenders) do not usually want to rely on the seller's disclosure and implied promise, they routinely order title searches and purchase title insurance. If a problem with the title (including an encumbrance that they didn't know about when they bought) is discovered later, the insurance will pay, and they don't have to sue (and try to collect from) the grantor.
Taking Care of Encumbrances
Most encumbrances can simply be paid off, leaving title to the property clear and free to be transferred. The most obvious example is the deed of trust. When you want to transfer property that is subject to a trust deed, you must do one of three things: pay it off, get the buyer to assume the loan, or get the buyer to take the property "subject to" the deed of trust. Assumption of a loan, which means that the new owner takes responsibility for paying it off, is handled through the bank. Your loan agreement with the financial institution, however, may have a "due on sale" clause, which limits who can assume a loan secured by the property (see below). If the new owner takes the property "subject to" the loan, he acknowledges the loan (by including a statement in the deed) but doesn't formally assume it. If the note were foreclosed on, however, he would lose the property.
Even if the property is not encumbered, a lien can appear out of thin air if the new owner has an outstanding court judgment against him. When the transfer is made, the judgment lien attaches to the property. Transferring the property back won't get rid of the lien.
Other simple money encumbrances include:
- past-due property taxes (due twice each year, in November and February)
- mechanic's or materialman's liens, filed by people who work on your house. (a lien is a notice, recorded with the county recorder, that alerts everyone to the fact that there is a claim against the property.)
- unpaid special assessment district bond liens (for example, imposed by special hospital or drainage districts), and
- judgment liens (liens placed against your property to guarantee payment of a judgment against you in a lawsuit).
A more complicated encumbrance is a lawsuit that may affect title to your property. It shows up in the public records when a notice of the suit (a "lis pendens") is recorded in the county recorder's office. You can't get rid of this kind of encumbrance by simply paying it off. You must, however, deal with it somehow, either by passing it on to the new owner, negotiating a settlement with the party who has the claim against your property, or -- if you absolutely can't avoid it -- going to court to slug it out. A common method of settlement is to pay the other party something in exchange for a quitclaim deed in which she gives up any interest that she might own in the property.
EXAMPLE: Andy and his brother Bill inherited some land from their uncle, but the uncle's will is being disputed in court by their cousin, Marsha. Depending on the outcome of the suit, Marsha may be determined to have some interest in the land. Andy wants to sell his half-interest to Bill, but title to the property is encumbered by a notice of the lawsuit (a "lis pendens"), which has been recorded with the county recorder. For payment of a few thousand dollars, Marsha agrees to drop the lawsuit and sign a quitclaim deed giving up all rights to the property. With the encumbrance removed, Bill can take clear title to the property.
| Due on Sale Clauses |
|
Many loan agreements contain a "due on sale" or "due on transfer" clause that makes the whole loan amount due immediately if the property is sold. And even if the existing loan can be assumed by the new owners, the terms of the loan probably require the new owners to get approval from the lender.
If a lender's approval is necessary, whether or not you will get it will probably have a lot to do with market interest rates. If interest rates have come down since the trust deed was signed, the lender will be happy to have a buyer (who has good credit) take over the loan at the relatively high interest rate. On the other hand, if rates have gone up, it will probably insist on a new loan at a higher rate of interest. If the original loan is a variable-rate loan, the lender has little incentive to be finicky unless market rates have exceeded even the maximum allowed by terms of the variable-rate loan. For this reason, variable-rate loans are often assumable.
Many people who own real property subject to a trust deed simply go ahead and transfer it, figuring the lender (who, after all, may be a large corporation at the other end of the country that bought the trust deed from a local bank), won't find out. They are often right.
Lenders do, however, have several ways to discover that the property was transferred, even if you don't tell them. A change in the name of the person making loan payments or named as beneficiary on the insurance policy often alerts a bank. Sometimes they simply call and ask for the original borrower; if the new owner says she doesn't live there, the game is up. The lender can also check (or pay someone to check) county records to see if title to the property has changed hands.
How diligent the bank is largely depends, again, on interest rates. Unless rates have gone up significantly (2% is a good general rule) since a fixed-rate loan was made, it isn't worth it to check title records all over the country to see if property has been sold. When interest rates shoot up quickly, however, and an investor holds a lot of fixed-rate loans, you can bet it is looking for transfers that will allow it to call those loans. The financial institution's policy also plays a part; some regularly use a title company to keep an eye on transfers.
Some people, to avoid notifying a bank of a transfer, don't record the deed in the county recorder's office. This is a bad idea, for all the reasons explained in Chapter 6. Experienced real estate lawyers can sometimes manage ways to get around due on sale clauses and still effectively transfer property. If a due on sale clause is a serious problem for you, talk to a lawyer.
Transfers to a living trust: If you take title to real estate in the name of a revocable living trust, your lender is forbidden by federal law from invoking a due on sale clause. (Garn-St. Germain Depository Institutions Act of 1982, 96 Stat. 1505.)
|
|
Back to Top
|
