Institutional lenders protect their interests; you should too. I hope that I don't lose you in the terminology that follows. If you are ever in the position to lend money on a property, either outright or by carrying back a second trust deed on a piece of property you are selling, you may need to know some of the following. A lender records with the county recorder's office a deed of trust, when a home is purchased. This deed of trust is a security document, which in effect transfers "bare legal" title from the trustor (the borrower) to a trustee, a neutral third party (usually a corporation), to be held in trust for the benefit of the beneficiary (the lender) until the trustor fulfills the obligation he/she has undertaken (usually the pay back of the money borrowed).
If you have received or have seen a Notice of Default recorded against a property, you may have observed that the Notice of Default was not necessarily executed by the lender. The lender has delegated the responsibility of the legal proceedings to a Trustee. The Trustee has the "power of sale" delegated to it by the beneficiary. The Trustee with the "power of sale" can conduct a non-judicial foreclosure in the event that the borrower defaults on the payment of the loan. I hope I haven't lost you!
You, as a private lender, either as a seller carrying back some paper on your property or advancing money for one to buy a home, must protect yourself before a small problem escalates into a financial catastrophe. A Notice of Default is usually filed by a trustee after a borrower has not made a payment on a loan for 90 days. Once a Notice of Default has been filed, a 90-day clock starts ticking before a Notice of Sale can be filed. The Notice of Sale will be filed and if the payments (including any legal costs) are not brought current within twenty one (21) days the trustee, working for the lender, has the right to sell the property through a non judicial foreclosure. If this happens, almost inevitably the holder of a second trust deed will be wiped out or receive less than what was invested.
How does a second trust deed holder protect himself? Just as an institutional lender protects itself by filing a Notice of Default for non receipt of payments, you should protect your investment by recording a NOTICE OF DELINQUENCY at the County recorder's office. Without it the first trust deed holder has no obligation to inform you, the second TD holder, that payments are not being made. If a borrower is not making payments on a second trust deed, most likely payments on the first TD are not being made. If payments are made on the second TD, how do you know that payments are being made on the first TD? You don't, if you are not notified.
Once you find out that a Notice of Default or Notice of Sale has been filed it may be too late for you to take action, i.e., bring the payments current. You may not have the money. The most effective way to protect your investment is to record and have sent to the holder of the first TD a NOTICE OF DELINQUENCY. This notice will be filed with the county recorder's office and sent to the beneficiary in first position on the property. The lender must then notify you that payments are not being made after four months of non payment. The Notice of Delinquency is good for five years at a of cost $40.00 (currently the notice is renewable @ $15.00), usually paid by the borrower. Often lenders will work out payment plans with borrowers and thus put you, the second TD holder, in a very precarious position if the borrowers do not fulfill their obligation. You want to be forewarned and the best way is through the Notice of Delinquency. You also want to be informed as to the payment of property taxes. For $60 to $75, a tax service will provide you with information for five years whether the taxes are being paid on time. This again is a fee that ordinarily will be paid by the borrower.
The ability to advance money for the purchase of a home and earn the rewards both monetarily and emotionally should not be jeopardized by the possibility that you could lose your money. Many people in today's real estate market need the help of others to buy a home. Lenders have developed programs to finance home purchases; they protect themselves. You, too, are helping people buy a home if you lend money. So, you also should take the necessary steps to protect yourself.
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