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Article of the Month for September 2002 Printer Friendly Version

Completing an Equity Buyout in CA

(Without Using Escrow)

Sometimes you won't have enough time to go through a formal escrow and you'll have to either prepare your own purchase paperwork or forget the deal. So, let's walk through all the forms necessary to successfully close a pre-sale deal without the need for escrow. And let's do it two different ways-first without using a title holding trust and then using it.

  1. Taking title without using the title holding trust.
    1. Write up the Equity Purchase Agreement and Notice of Cancellation just like you'd normally do.
    2. During California's 5 day hiatus of the notice of cancellation period prepare a Grant Deed that transfers title from the sellers to you.
      1. Call the Customer Service department of a local title company and ask them to fax you a copy of the most recently recorded deed to the property.
      2. Copy the legal description onto your new grant deed form and copy the names of the owners (yes, exactly as they appear) as grantors onto your new deed.
      3. Type in your name as the grantee and fill in the "Return to" address lines.
    3. After the 5 day hiatus have all sellers sign their names on the transfer deed in front of a notary public.
    4. If you're giving your sellers part cash up front and securing the balance due them in the form of a Trust Deed and promissory note, then structure it so you're not making any payments during your holding period-use a Straight Note.
      1. A straight note is a promissory note where there are no interim payments on the principal balance during the term of the note. And it frequently won't call for any interim payments of interest either. All principal and interest will be due in one lump sum at the end of the term. Set the interest rate somewhere between 7% to 10%, depending on home loan interest rate levels at the time.
        1. The end of the term is described as: The entire note balance, including all unpaid principal and accumulated interest, shall be fully due and payable upon the occurrence of any of the following events:
          1. the refinance of the secured property, or
          2. upon the resale of the property, or
          3. within 18 months of the recorded date of the deed of trust, whichever event occurs first.
    5. It is becoming common for title companies to require that you get an Affidavit of Deed from your sellers whenever you take title without the benefit of title insurance. The hitch though is, you'll need the affidavit in the future, whenever you refinance or resell and use title insurance when doing so. So once the affidavit is executed and signed in front of a notary put it in a safe place for your future use.
      1. The affidavit needs to be dated and signed later in time than the deed that transferred ownership to you.
      2. In addition, the notary that notarizes the affidavit has to be different than the notary who originally notarized the transfer deed to you.
    6. Generally the up front cash being paid the sellers is done in two installments (40% and 60%). Pay the smaller installment when the 5 days is up and the sellers have signed your grant deed. Pay the second installment when the sellers have signed the affidavit of deed in front of a notary and have vacated.
    7. Record the Grant Deed and get a certified copy of it at the time of recording. Make file copies of all the other documents and tell the sellers to record their Trust Deed. If they don't have their new address yet, have the trust deed come back to your address after being recorded. When you give the sellers their Straight Note, tell them to put it in a safe spot, one where they can easily retrieve it in the next four months or so. You need them to give you or your resale or refinance escrow the original straight note whenever you pay the sellers off.

  2. Incorporating the use of the title holding trust.
    1. Instead of taking title in your name, create a title holding trust that names you or your nominee as the trustee and uses the sellers' surname as the name of the trust. For example, "Financial Fitness, LLC as Trustee of the Harrison Trust, dated 8-23-02". That's the vesting verbiage that goes in the grantee spot on the grant deed.
    2. Create the Trust Declaration and have the sellers sign as the trustors and you sign as the trustee. Have the sellers sign the Beneficiary's Acknowledgment sheet and fill in their names on Exhibit "A". Complete the Exhibit "B" regarding the property's description.
    3. Prepare the Assignment of Beneficial Interest (ABI) that the sellers will sign in front of a notary public at the time you give them the balance of the upfront cash. Have the trust issue the sellers' carry-back trust deed and straight promissory note in the amount of the balance you owe them. Sign both documents in your position as trustee rather than personally. For example, Financial Fitness, LLC as Trustee, by Ward Hanigan, as Managing Member, not personally. Make sure your signature on the trust deed is notarized. Urge the sellers to keep the note in a safe, retrievable spot since they'll have to surrender it to escrow when you pay it off.
    4. At the time the sellers are signing the ABI have them sign the letters to be sent to their lender(s) and their insurance company announcing the fact that the sellers have transferred their title from themselves to their trust. Include a copy of the recorded transfer deed and a copy of the Certification of Trust in the letters.

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