Securing debt with personal property

Investors buying income-producing property will often include personal property as part of the sales transaction. Becoming an expert on the security devices that facilitate these transactions make real estate professionals much more competitive in their local service areas.

Two documents are involved in properly securing a debt with personal property:

  • a security agreement which creates a lien on the personal property [See RPI Form 436]; and
  • a Uniform Commercial Code-1 (UCC-1) Financing Statement [See RPI Form 436-1] which is recorded to give public notice of the lien.

The UCC-1 is a statutory form which contains information about:

  • the lender, called the secured party;
  • the borrower, called the debtor;
  • a description of the personal property, called collateral; and
  • a description of the real estate where the personal property is located. [See RPI Form 436-1]

The security agreement contains the rights and obligations of the parties regarding the secured personal property, including:

  • protection against waste;
  • remedies on default; and
  • transfer-alienation provisions. [See RPI Form 436]

Related Article:

Client Q&A: How do I use my personal property to secure a debt?

The lien

The UCC-1 is used to lien personal property, such as inventory, furnishings, equipment and trade fixtures, just as trust deeds are used to lien a fee or leasehold interest real estate. By using a UCC-1, a creditor (carryback seller or lender) receives a security interest in personal property as collateral for a debt. A security agreement is the personal property counterpart to a trust deed used as the security device to impose a mortgage lien on real estate.

The UCC-1 is a security device attaching debt to property, not an agreement to do so. The document granting the security interest under the UCC-1 and defining the terms of the encumbrance is the security agreement, which must accompany the UCC-1 to create the lien.

In contrast, a trust deed is both an agreement to create a lien and the security device which attaches property as the lien.

The UCC-1 requires three pieces of information:

  • the debtor’s name and address;
  • the creditor’s name and address; and
  • a list of the personal property collateralized.

Filing a UCC-1 & perfecting the lien

Note that the agreement used to create the lien on personal property is not the document used to perfect the mortgage holder’s security interest in personal property against future claims or transfers of that personal property.

To put the public on notice of the lien created by the security agreement, a UCC-1 is prepared and filed. The filing is a recording of the UCC-1 with the Secretary of State or with the county recorder, depending on the type of personal property and its relationship to the real estate.

However, if the collateral is something tied to a particular piece of real property such as timber, mineral rights, or fixtures, the UCC-1 is also filed with the recorder’s office of the county where the property is located.

This process is called perfecting the lien. Perfecting the lien establishes the mortgage holder’s interest and priority over all other security interests in the personal property acquired by others after the UCC-1 is recorded.

Thus, the public is given notice that the described property is held as collateral — security for the carryback debt. If the borrower defaults on the note or security devices, the carryback seller or lender may foreclose and have the property sold. The proceeds of the foreclosure sales are used to reduce or pay off the debt.

Editor’s note — A carryback seller does not use a trust deed as a security device to create a lien on personal property. A recorded mortgage imposes a perfected lien on real estate, not personal property.

Sign up for the firsttuesday Newsletter for more Brokerage Reminders and tips on completing carryback sales using our free RPI Forms.

Related article: 

MLO Mentor: California’s nonjudicial foreclosure