Q: My wife and I are moving to a retirement community here in Fairfield. We plan to sell our home to our son and daughter-in-law. Our home is currently unencumbered and our plan is to accept a mortgage note from our son and daughter-in-law. The home is currently part of our trust and we plan to include the note there as well. What are the possible pitfalls in this transaction?
A: Honestly, not many since the risk of being sued by your son and daughter-in-law is, I presume, low.
However, the law doesn’t really differentiate between parents selling their property to their children, as opposed to the typical arm’s-length sale between two strangers. So the legal requirements still need to be followed. That means all of the standard, compulsory disclosures need to be given.
Additionally, you will want to open an escrow with a local title company. With a little studying, you could do all the paperwork an escrow officer normally does, especially since there are no mortgage lenders to deal with. However, there are two reasons for going to the escrow and title company.
First, you, or rather your son, want to make sure all of the recorded documents are properly executed and unambiguous. One of these days your son and daughter-in-law are going to want to either sell the property or refinance it. If there is a problem with any of the recorded documents because you did them yourself, and thus the chain of title is said to be “clouded,” your son could have a big problem on his hands.
Secondly, and maybe even more important, you son and daughter-in-law want to have a title insurance policy. I think your average homebuyer sees the title insurance paperwork in the mountain of documents they sign a few days before the close of escrow, but really have little understanding of what a title insurance policy is and why it’s so necessary.
In your case, you’ve owned the home for many years. Over those years, you’ve probably financed and refinanced, had work done on the property by contractors, and maybe even got sued years ago and thought that was long behind you. Any of those things could have resulted in a lien being recorded against the property and not properly removed when the time came.
Normally, you wouldn’t even know about it. But your son wants to make sure when he takes title that he’s getting that title free and clear of those liens. That’s where the insurance policy comes in.
And, just so you know, they do pay off. In my career, I’ve seen dozens of examples of title insurance companies having to pay claims.
The other consideration that comes to mind is more of an estate planning issue related to this sale. You didn’t say if you have other children, or you or your spouse have children from a previous marriage, but it’s possible for such a sale to be second-guessed by your heirs after you’re gone, maybe resulting in a lawsuit.
Also, the note your son will execute making your trust the mortgage lender, means your other heirs will, collectively, wind up being the bank. If you have five other heirs, your son could conceivably have to make five different payments each month unless your trust provides otherwise. Any one of those heirs-turned-lenders could become quite a hassle for your son. And all of that’s fine if that’s your intent, but you should be aware of it.
I wouldn’t hesitate to do the transaction, albeit while considering the advice above. But I do think it would be worth a visit to your estate planning attorney to see if the note should be addressed specifically in the language of the trust.
Tim Jones is a real estate attorney in Fairfield. If you have any questions you would like answered in this column you can contact him at [email protected].