Loan Pay-Offs

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

Once a year or so, I revisit this subject. EVERY time I write about loan pay-offs, I receive a few calls that go something like this: “I wish I had read your article two months ago; I have just had the exact nightmare”.

If you are making payments on real estate, your Note is either fully amortized or has a balloon payment. Unfortunately, the average person pays off either the final payment or the balloon payment ASSUMING that “everything will be taken care of”. This is usually true when dealing with a conventional lender, but, unfortunately, usually NOT TRUE when dealing with a private beneficiary. Imagine the following scenario; it happens somewhere in California EVERY DAY.

You purchased your home or units fifteen years ago and the balloon payment is coming due. You have an amortization schedule clearly showing the amount of the last payment and you dutifully send in that correct amount. You feel wonderful that this loan is finally paid off and you own the property free and clear! Eight years go by and you decide to sell the property. You find a willing buyer, arrange a sale, and open escrow. A week later escrow sends you a copy of the Preliminary Title Report which shows your old Note and Deed of Trust are still “Of Record”. You assure everybody that that obligation was paid off and try to find your canceled check from eight years ago. Unfortunately, you could not find the check. It really doesn’t matter because proof of payment is not the issue, a “Deed of Reconveyance” is. You now try to find the beneficiaries of the old Note, only to discover that the husband died and the wife remarried and moved to Alaska. Even with proof of payment, the Trustee on the Deed of Trust will not reconvey the Deed of Trust without the original documents AND the beneficiary’s signature on a “Request for Full Reconveyance”.

If you could have found the beneficiary, this theoretical catastrophe could have been easily solved. Even if the husband had died, the widow could “possibly” find the original documents and provide the Trustee with a copy of the husband’s death certificate. Even if the documents were not available, the title company would accept a “Substitution of Trustee and Deed of Reconveyance” signed by the widow.

On the assumption that the beneficiary cannot be found, your only avenue, at this point, is to “Bond” around the Deed of Trust. Let’s assume that the Deed of Trust was for $150,000, the cost of that Bond would be “approximately” $4,000-6,000. That’s right, I said THOUSANDS. To Bond around an existing Deed of Trust, the Bond must be for twice the amount of the Deed of Trust, i.e. $300,000. Bonding companies usually charge between 1 to 2% of the amount of the Bond.

The moral of this sad story is very simple. In the event that you are paying off a conventional lender, i.e. bank or credit union, merely call to verify the reconveyance process. Find out when the reconveyance will be recorded. Then make the final payment; get a receipt, and keep checking every few weeks until you get a copy of the reconveyance. If you cannot verify that the Deed of Reconveyance has been RECORDED within four to six weeks after the pay-off, have a real estate professional contact the lender.

In the event that you are paying off a private party, make certain that all parties are still alive; then make certain that they have the ORIGINAL DOCUMENTS. Arrange to exchange a cashier’s check for the ORIGINAL DOCUMENTS (Note and Deed of Trust). Make certain that all parties sign the back of the Deed of Trust, i.e. “Request for Full Reconveyance”. In the event that all the parties AND ORIGINAL DOCUMENTS are not available,immediately contact a real estate attorney or knowledgeable real estate professional.

After this article is published, I will count the number of calls I get; it always happens!

Peter Rosenthal
VIP Trust Deed Company