The DirtLaw Blog

The Partial Reconveyance

Often in a construction context, the Deed of Partial Reconveyance is required.  The most common scenario is when an owner wants to subdivide their parcel and the parcel is encumbered by a Deed of Trust.

The second most common scenario is when a neighbor wants to buy some additional portion of the adjacent property, usually to comply with setback requirements of their remodel or to preserve their view.

In both circumstances, the Lender made a loan against the entire property.  For ease of reference, assume Lender's Deed of Trust encumbers all of Property A, which totals 1 acre.

California is a Trust Deed state, which means there are 3 parties involved in the loan-- the lender is the Beneficiary, the borrower is the Trustor and the lender designates a Trustee (usually a title company).  The beneficiary has the power to tell the Trustee to reconvey title to the property back to the Trustor (borrower) if the loan is paid off.

However, when Owner A wants to sell 1/2 an acre to Owner B, the lender has to approve it and agree to instruct the Trustee to issue the Partial Reconveyance of the original Trust Deed.

The Lender will want an appraisal because it wants to make sure that if Owner A is shrinking the land (security or collateral for the loan) that the Trust Deed encumbers, that the borrower (Trustor) still meets the Lender's underwriting guidelines for the loan.   

The appraisal report will need to show the value before and after the proposed sale of the land to the neighbor.  If Owner A has owned the acre for a while, she or he may have experienced an increase in value and accordingly, even with the loss of the square footage, the value of the 1/2 acre may still be enough to meet the loan-to-value ratio the Lender requires.

After the Lender reassures themselves (with appraisal reports) that they are still adequately secured, they will instruct the Trustee to execute the partial release.  The Trustee is sometimes a title company and so they can usually prepare the Partial reconveyance in house.

In additional to the hurdles with the bank, the City or County will need to be involved for a lot line adjustment.

While the lender’s decision is not related to city or county approval, the city approval gives the appraiser a firm idea of what the boundaries are, square footage etc. on which to base his or her appraisal. 

Additionally, a civil engineer or surveyor will need to be involved in order to confirm those findings and describe the newly changed property boundaries.

In sum, it is not a particularly easy process to navigate as it requires the coordination of so many parties.  However, working with seasoned professionals will speed up this process.

California Trust Deed and Foreclosure Investing - Do You Know What's On Record? Part III

If you are a potential trust deed investor, or an investor looking at a California property in foreclosure, you will often look at the public record or obtain a preliminary title report.

If a borrower is in financial trouble, it will be common to see items like Mechanic's Liens, Abstracts of Judgment, or medical liens, or garbage liens, tax delinquency or child support judgments from the California Department of Child Support Services.  All of these items require close scrutiny but if you see a Lis Pendens, this is a major red flag.

What is a Lis Pendens?  It's Latin for Thing Pending, and the English equivalent is "Notice of Pendency of Action."  Who can file one? Any claimant as defined by California Code of Civil Procedure Section 405.1, "'Claimant' means a party to an action who asserts a real property claim and records a notice of the pendency of the action."

Most often, a Lis Pendens is filed in conjunction with an action to Quiet Title to the property, or with a mechanic's lien foreclosure action.  It is public notice to would-be purchasers or bidders to look into the related pending Court action. 

Be advised that if you bid at a Trustee's Sale or purchase a pre-foreclosure property that if you wish to sell the real estate later, it is not likely to be insurable by a title company until the Lis Pendens and liens have been cleared.

This will require engaging an attorney to expunge the Lis Pendens and/or remove the liens.  The California Code of Civil Procedure Section 405.30 provides the means for an owner to apply to the Court for an expungement of the lis pendens.  Section 405.37 also provides for reasonable attorneys fees to be awarded to the prevailing party.

Pre-foreclosure Investing and Foreclosure Sales - Do you know what's on record? Part I

With constant news reports that foreclosures are on the rise and investment gurus preaching real estate schemes, our office has been getting a lot of calls about how to buy at foreclosures.  We don't teach how to classes on high-risk investing (we leave that to the professionals), but we can educate our clients on the risks.

The primary factor for a foreclosure purchaser, whether equity purchasing or at Trustee's sale is to understand what liens have priority. 

There are a number of different types of liens that can affect a property, such as Abstracts of Judgment, Mechanics' liens, garbage liens, child support judgment liens in addition to the normal mortgages (or rather, deeds of Trust for California) that you would expect to see.

Smart investors do their homework.  Some investors have relationships with title companies and will actually obtain a Preliminary Title Report.  What does that guarantee? Well, absolutely nothing.  The report is a snapshot of what liens a quick search revealed and how the vesting of title is held.  The results are only an offer to sell title insurance subject to those exclusions. 

Often those reports will miss Abstracts of Judgment--especially if the debtor has a very common name.   Abstracts are recorded by judgment creditors who have obtained a judgment against the debtor.  They are in recorded in the county and attach to any property that debtor may own in that county.  The Judgments are good for ten years but usually can be renewed.  In some cases, the debtor may have filed bankruptcy and discharged the judgment.  Does that make the Abstract go away? Not necessarily.  If the Abstract itself was recorded before the bankruptcy petition was filed, it is deemed a perfected security instrument that stays attached to the property.

However, once the underlying Judgment itself has been discharged in bankruptcy, it can no longer be renewed so the Abstract itself can never be recorded again once the Judgment has expired.

Will you be bidding on a property subject to a judgment lien ahead of you? If you acquire that property, the judgment creditor will have the power to levy against the property until that judgment is paid.  While you could always cross your fingers and hope to outlast the creditor--keep in mind that Judgments accrue interest at the rate of 10 percent per annum. The best approach is to negotiate with the judgment creditor.  An attorney can be a good investment at any juncture in the process to advise as to the risk of the transaction or to negotiate a discount on the liens.

Liens and Stop Notices, oh my!

Suppose that you are building your dream home, or rather, you have engaged a general contractor to build your dream home.  As is inevitable with such a project, you may have changes that you wish to implement that differ from the original drawings.  To memorialize the cost and labor difference, the parties should have a change order.  The change order is especially crucial if your GC has agreed to a fixed price contract.

This change order ensures that he or she will be paid for the extra work.  Without this change order, both parties are vulnerable to the uncertainties of payment and job completion on the increased scope of the job.

What happens if the homeowner and the general contractor cannot agree?  Perhaps the homeowner had different expectations or perhaps there is a certain area of the job that demands more labor from the GC.  If the disagreement cannot be resolved, there is always the fear that the homeowner will either demand the GC leave the job or the GC will walk because of the homeowner's refusal to tender a milestone payment.

The GC is gone, the job is half done.  Now what?  Well, if the GC is owed payment, they can record a mechanics' lien against the property.  The mechanics' lien remedy is very powerful, and is written into the California State Constitution.  Further, once the lien has been recorded, the general contractor (or unpaid sub) must file an action to foreclose the mechanics' lien within 90 days (or 60 days, if the job is already complete).  Mechanics' lien remedies are powerful, but also hyper-technical and require a 20 day preliminary notice prior to the recordation of the lien.

Additionally, failure to file a suit after the 90 days from recordation renders the lien stale.  However, even if the mechanics' lien is stale, the general contractor may still seek a pre-judgment Writ of Attachment against the homeowner.  If granted, that Writ may attach to more than just real property, and can attach to personal assets (checking account, vehicles, etc.).

If the project is being funded by a lender, the contractor also has the remedy of the stop notice, which can halt funds from being released to the owner-builder. 

As for the homeowner, if the lien is wrongfully recorded and no lawsuit is filed by the contractor to foreclose the lien, then the owner can bring a motion to have it expunged.  The problem with the lien is that even after they are stale, they will continue to be on record until a release of mechanics' lien is recorded.

Do You Know Who Has Been Working on Your Home?

and more importantly, do you know whether they have been paid?  When a homeowner undertakes a remodel, they can decide whether to act as the general contractor themself, engaging and coordinating all the subcontractors directly, or simply retain the services of a general contractor. 

When engaging a general contractor, the first step is to verify that they are licensed, and in good standing with the California Contractors State License Board.  The website has a search function that will tell you the status of the licensee.  Even more importantly, it will tell you whether or not the general contractor is bonded and carries workers compensation insurance.

Once you have satisfied yourself that your GC is in good standing, the payment structure will need to be negotiated.  Often, the GC will ask for a time and materials basis cost, and profit and overhead over that.  The going range for the profit and overhead is usually 10% to 15%.  At 10%, that means if all the materials like lumber and sheetrock, etc. cost $100k, you will pay $110k.

However, the GC has a discount with the lumber suppliers and should pass through his savings to you.  So if he has a 10% discount on the materials, his cost is $90k, and you would pay him $99k.  This is the built in incentive for using a GC as opposed to hiring the subs yourself.

Now, for the time component, the GC will normally need to engage subs for labor.  If the hourly cost of the worker is $30/hr, and the total labor cost was $50k, the time and materials (with discount) would be $140k.  Your total payment to the GC, including his profit and overhead would total $154k. 

What does this mean for the homeowner?  That means that if the labor cost is $30/hr, the GC cannot charge you $50/hr, in addition to the profit and overhead percentage.  This would be a deceptive and an unfair business practice.  How can a homeowner protect themself when beginning a remodel?  The homeowner needs to arm himself or herself with knowledge of these industry practices.  Word of mouth referrals are usually the first way to find a contractor.  If you don't know anyone who has used the GC, ask the GC for references from other homeowners.  Call these homeowners, do a driveby of the properties that this GC has worked on.

Lastly, when it gets down to contract time, take it to an attorney.  The review of the contract will reveal how payment milestones should work, how mechanics' liens should be handled, and further assurances from the GC of how they will handle your job.  Failure to do these preventative steps often leads to the horror stories of the GC taking payment in advance, failure to pay subcontractors, mechanics' liens clouding the title to the property, unfinished jobs leaving the property in shambles and more.