encumbering an unencumbered property

19 Replies

Greetings,

We have an investment property that is not officially unencumbered, we borrowed money from a family member a few years ago, we were supposed to make payments but have not been able to, the family is ok with this as long as the loan gets paid back. Given that this property looks like a open opportunity for a person to sue us, we would like to officially encumber so that it shows on county records. We are in California, we do trust deeds out here or we could do a lein. I dont know the best way to go about this. If its a loan without interest, Im told, the IRS will see this as a gift, and want taxes. Any suggestions? thanks to all responders.

Your talking about imputed interest vis a vi the IRS not the end of the day.

Who is threatening to sue YOU.. Sell the property and pay your relatives back..is one thought.

You can record a DT on the property

Cant sell at this time and get enough to pay back family. However it will change in the next year or two with the opening of a big new industry within a mile.

the question is still todo a DT or a lien.

Thx for the input.

Originally posted by @Lynn Potter :
Cant sell at this time and get enough to pay back family. However it will change in the next year or two with the opening of a big new industry within a mile.

the question is still todo a DT or a lien.

Thx for the input.

Are you talking about creating an illusory lien for the purpose of making it look like the property has no equity? Or are you interested in protecting the interests of of your private lenders?

The debt to family is no illusion. I wish to protect their interest cause if we were to loose the property we would never be able to pay them back.

I am not a lawyer but it seems to me that you could record a mortgage or deed of trust to secure the loan you already have.

Go ahead and execute a promissory note in favor of the lenders, secured by a deed of trust. Unless you're a legal eagle, I recommend that you don't prepare and record them yourself.

I was hoping to be able todo a lien DIY, a DT would require help. But if the general opinion is a DT then I will need professional help.

Thx for your opinions

Hello,

I agree with creating a DEED to protect the interests of your Private Lender. I just spoke with a couple of lawyers the other day about this and they suggested that is the best way.

We are in a similar situation, we partnered with a Private Lender to be able to assume additional options and we where worried about their interest if something happened to us (partners in my company) before it sold. In reality, they are family, therefore major concern! No one would want to leave someone of trust holding an empty bag, especially family!

Originally posted by @Lynn Potter :
I was hoping to be able todo a lien DIY, a DT would require help. But if the general opinion is a DT then I will need professional help.

Thx for your opinions

Actually, an enforce-able lien is not that easy to create. You can't just create a doc and call it lien. What was your plan on that one?

Shouldn't cost you more than an hour with an attorney or legal service to get someone to fill out a standard note and deed of trust. Then you walk it over to the recorder's office and pay to record it. If you have a relationship with a title company, an escrow officer may be willing to do it for you.

Originally posted by @Christy Glenn :
Hello,
I agree with creating a DEED to protect the interests of your Private Lender. I just spoke with a couple of lawyers the other day about this and they suggested that is the best way.

We are in a similar situation, we partnered with a Private Lender to be able to assume additional options and we where worried about their interest if something happened to us (partners in my company) before it sold. In reality, they are family, therefore major concern! No one would want to leave someone of trust holding an empty bag, especially family!

To be clear, we're not talking about a deed here. We're talking about a deed of trust, which is the standard mortgage instrument in CA.

Putting lenders on title gives them ownership rights. Not a good idea.

Here, Deeds of Trusts are done by title companies every day hundreds of times. Colorado also has standard language for a deed of trust so just fill in the blanks.

Ultimately that doesn't solve your problem because of the interest issue you previously mentioned. They could "loan" you the money as interest only and gift the interest back to you each year (with spouses you can do in excess of $40K per year). Kind of complicated but your situation is not exactly simple either.

@Lynn Potter It sounds like the property actually IS unencumbered. What you're doing (if I understand correctly) is voluntarily securing the loan with the property. That might work, if I was on the other side I would argue that there was no consideration for doing so. If you record it as a 0% loan, you might run into IRS problems as you indicated. This might be a situation where you want to talk to a laywer for an hour or two.

Originally posted by @Bill S. :
Here, Deeds of Trusts are done by title companies every day hundreds of times. Colorado also has standard language for a deed of trust so just fill in the blanks.

Ultimately that doesn't solve your problem because of the interest issue you previously mentioned. They could "loan" you the money as interest only and gift the interest back to you each year (with spouses you can do in excess of $40K per year). Kind of complicated but your situation is not exactly simple either.

Title companies here won't usually prepare and record docs without selling you a title policy. In this case, a lender's title policy. They'll sometimes do it as a courtesy for a regular client. Escrow and other services that these companies provide are all in support of selling title insurance.

Kristine Marie Poe good point. I was thinking in terms of when it occurs at a closing but that was long past.

Originally posted by @Adrian Tilley :
@Lynn Potter It sounds like the property actually IS unencumbered. What you're doing (if I understand correctly) is voluntarily securing the loan with the property. That might work, if I was on the other side I would argue that there was no consideration for doing so. If you record it as a 0% loan, you might run into IRS problems as you indicated. This might be a situation where you want to talk to a laywer for an hour or two.

I'd put a minimal interest rate (2.5%) on the promissory note. The note isn't recorded anyway.

Thx for your opinions. The Deed of Trust does leave the family with power over the property, wifes side of the family. Giving any controll over the property makes me nervous, you never know, they could foreclose.

I understand a DT is easier to create, and a lien would require a court to make a judgement, (since its not a mechanics lien), but with a lien they cant take controll of the property.

Is there a tpe of lien that isnt a mechanics lien a doesnt require a court judgement?

Originally posted by @Lynn Potter :
Thx for your opinions. The Deed of Trust does leave the family with power over the property, wifes side of the family. Giving any controll over the property makes me nervous, you never know, they could foreclose.

I understand a DT is easier to create, and a lien would require a court to make a judgement, (since its not a mechanics lien), but with a lien they cant take controll of the property.

Is there a tpe of lien that isnt a mechanics lien a doesnt require a court judgement?

Honestly, from your questions it appears this isn't something you should be dealing with without legal help. First you say you want to protect your lenders, then you say you don't want them to have a way to get their money back. You really can't have it both ways. Why not just leave the situation like it is (unsecured loan). A properly written promissory note secured by a deed of trust spells out the terms of the repayment and is only foreclose-able when you default on those terms. I think you need legal advice to execute such a note.

Originally posted by Kristine Marie Poe:
Originally posted by @Christy Glenn:
Hello,
I agree with creating a DEED to protect the interests of your Private Lender. I just spoke with a couple of lawyers the other day about this and they suggested that is the best way. We are in a similar situation, we partnered with a Private Lender to be able to assume additional options and we where worried about their interest if something happened to us (partners in my company) before it sold. In reality, they are family, therefore major concern! No one would want to leave someone of trust holding an empty bag, especially family!

To be clear, we're not talking about a deed here. We're talking about a deed of trust, which is the standard mortgage instrument in CA.

Putting lenders on title gives them ownership rights. Not a good idea.

Hello, K. Marie,

I agree, I'm sorry. I should have been more clear. The discussion was centered around that, therefore, I didn't type it all out but I should have because I see where it could be confusing....sorry, BP.

Christy

It appears that what you want is an instrument that could be used against your successors-in-interest, but not against you.

I don't think such a thing exists, and I think it would be seen as contrary to public policy if you created it.

But that's just me. As everyone said, you need a lawyer.

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