Trust Deeds, Mortgages, Contracts, Warranty Deeds: What are They?
by Clifford Hockley
Charles was confused. He was trying to buy a four-plex, but just did not understand the real estate jargon.
Deeds, trust deed, contacts, mortgages all were words he thought he knew, but in the end really did not understand.
He was sitting in his real estate broker's office embarrassed that he did not understand, when the broker Mimi, said to him,"You know, the language of real estate can be very confusing. I have prepared a short summary of terms that might be helpful to you as we move forward with this transaction.
Instantly Charles glazed look disappeared. "You have a tool for me? Great!" he exclaimed. "I really am stymied by the words and I really like the four-plex and want to buy it."
Mimi pulled out her glossary and shared it with Charles.
"First of all there is a distinction to be made between financing instruments and ownership instruments," she commented.
Financing Instruments
Mortgage
A mortgage is a document created whereby one party pledges to another party as a security for obligations owed to that party. A promissory note is normally executed at the same time as a mortgage. The note creates the obligation to repay the loan in accordance with its terms and is secured by the mortgage. The elements essential to the existence of a mortgage are the obligation to pay (or perform) and a pledge of the property (as security) for that obligation. If foreclosed upon involves a judicial foreclosure
What's a trust deed?
A trust deed (also called a deed of trust) isn't like the other types of Deeds; It's a version of a mortgage, commonly used in some states (California, for example). It's not used to transfer property. And if foreclosed on involves a non-judicial foreclosure.
A trust deed transfers title of land to a "trustee," usually a trust or title company, which holds the land as security for a loan. When the loan is paid off, title is transferred to the borrower. The trustee has no powers unless the borrower defaults on the loan; then the trustee can sell the property and pay the lender back from the proceeds, without first going to court. After the property has been sold on the courthouse steps there may be a right of redemption, especially for homeowners.
Deficiency Judgments - Are permitted in Oregon.
A deficiency judgment may be obtained when a property in foreclosure is sold at a public sale for less than the loan amount which the underlying mortgage or deed of trust secures
Generally, a deficiency judgment may not be obtained using the non-judicial foreclosure process when a property in foreclosure is sold at a public sale for less than the loan amount that the underlying mortgage or deed of trust secures. A deficiency judgment can be obtained in judicial foreclosure sale, unless the property had been abandoned for the preceding six (6) months prior to the foreclosure judgment or decree that would preclude any deficiency.
The Differences between a trust deed and a mortgage
The basic difference between the mortgage as a security instrument and a Deed of Trust is that in a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage document there are only two parties involved, the borrower and the lender.
In a Deed of Trust, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid. Often a title company, escrow company or bank, is listed as the trustee on the Deed of Trust. When the loan has been paid, the trustee will issue a release deed or trustee's reconveyance deed. This deed of reconveyance should be recorded at the county recorder's office, to make public notice that the loan has been paid off and that the lender's interest in the property has ended. Occasionally the recording of a reconveyance deed is forgotten. Typically this is discovered when the property is sold.
Another difference between a mortgage and a deed of trust is the manner in which foreclosure proceedings take place. State law will determine the method of foreclosure which must be used. Generally, the rules when using a Deed of Trust allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property.
Right of redemption - After the foreclosure the person that owes the money (and owned the property) may have a right to redeem their property. This right is different in every state and must be researched on a case by case basis. A good resource for this is www.foreclosure.com.
Oregon for example, has a post-sale statutory right of redemption for judicial foreclosures, which would allow a party whose property has been foreclosed to reclaim that property 180 days after the sale by making payment in full of the sum of the unpaid loan plus costs and by submitting notice to the Sheriff not more than 30 and not less than 2 days in advance of the redemption.
Washington has a no post-sale statutory right of redemption for non-judicial foreclosures. For judicial foreclosures, there is a one-year right of redemption and a residential owner may remain in possession of the property during the redemption period.
When is seller financing used?
If a seller owns a property that is free and clear of any debt, or if the existing loan allows a "wrap" a seller might offer a buyer a Land Sales contract, also called an installment sales contract. This is easier and quicker than applying for a loan with a bank, or credit union. Typically there is no appraisal and no loan costs. In this financing the Seller of the property also becomes the banker.
Under a land sales contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically amortized over 30 years and paid in periodic installments, and often includes a balloon payment after a mutually agreed upon time. At that time the loan is either paid off or refinanced.
When the full purchase price has been paid, the seller is obligated to deliver legal title to the property to the buyer. The legal status of land contracts varies from region to region, and the deal terms vary from contract to contract. There is more freedom to define payback terms and prepayment penalties for example in land sales contracts.
Ownership instruments
On the other hand we have Ownership deeds that convey the ownership of a property rather than financing. These deeds vary from state to state and application to application. Below summarized are the key generally accepted deeds.
General Warranty Deed
The seller or grantor conveys the property with certain covenants or warranties. The grantor is legally bound by these warranties. Whether expressly written into the deed, or implied by certain statutory words, basic warranties include:
Covenant of Seisin - Seisin means possession, and the grantor warrants that they own the property and have the legal right to convey it. (Seisin is the possession of such an estate in land as was anciently thought worthy to be held by a free man from Wikipedia)
Covenant against encumbrances -
The Grantor warrants that the property is free of any liens or encumbrances unless they're specifically stated in the deed. Covenant of quiet enjoyment-The buyer is guaranteed that the title will be good against third parties attempting to establish title to the property. Covenant of further assurance- The Grantor promises, in order to make the title good, they will deliver any document or instrument necessary.
The covenants or warranties in a general warranty deed do not cover just the period of ownership of this grantor.
They extend back to the origin of the property. Each grantor of a general warranty deed in the title chain would be liable for title problems before and through their ownership
Statutory warranty deed
The special warranty deed is not nearly as protective of the buyer as is the general warranty deed. The grantor of a special warranty deed conveys the property with two warranties: The grantor warrants that they have received title. The grantor warrants, unless noted specifically in the deed, that the property was not encumbered during their period of ownership.
The grantor of the special warranty deed, in effect, only warrants the title against their own actions or omissions. They warrant nothing prior to their taking title. If specifically stated in the deed, other warranties can be conveyed. Special warranty deeds are frequently used by executors and trustees.
For obvious reasons, most transfers are accomplished using the special warranty deed.
Quit claim deed
The quit claim deed is the least protective deed for the buyer. Basically, it only conveys whatever rights or interests the grantor has in the property. It provides no warranties or covenants to the buyer. If the grantor has good title, the quitclaim deed is as effective as a general warranty deed, but with none of the guarantees. Quitclaim deeds are frequently used to cure defects in the title. Quitclaim deeds are also frequently used to transfer property between family members also.
Bargain and sale deed
This deed does not warrant against any encumbrances. It does imply that the grantor holds title to the property. Since it does not warrant good title from the grantor, the grantee could be in trouble if title defects appear at a later date. This type of deed is used frequently in tax sales and for foreclosure actions. As with the special warranty deed, other warranties can be conveyed in a bargain and sale deed if they are specifically stated.
Sheriff's deed
A document giving ownership rights in property to a buyer at a sheriff's sale (a sale held by a sheriff to pay a court judgment against the owner of the property). A deed given at a sheriff's sale in the foreclosure of a mortgage. The giving of said deed begins a statutory redemption period.
A Trustee's deed
A trustee's deed is a deed to be executed by a person serving as a trustee in their appointed capacity. A trustee's deed is often used, for example, by a trustee in bankruptcy to sell real property of the debtor.
Conclusion
After Mimi finished her review of the glossary, Charles visibly relaxed. "Thank you Mimi," he murmured. "O.K. lets get down to business and write the offer. Please be sure to specify that we want to use a special warranty deed in our transaction and let's see if the seller will carry a land sales contract."
Mimi smiled to herself. It looked like she had gained Charlie's confidence and that they were well on their way to completing a real estate transaction with the writing of a purchase and sale agreement for the four-plex.
Published: May 22, 2008
Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon.
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