This article presents the due date notice, its application to debts secured by one-to-four unit residential real estate, and the enforcement of due dates in trust deed notes.
Carrybacks and loans on one-to-four units
A buyer agrees to purchase a single family residence (SFR), contingent on obtaining 90% loan-to-value (LTV) fixed-rate loan to fund the balance of the price after his 10% down payment. Due to a rise in long-term interest rates, the maximum loan amount the buyer qualifies for is less than 90% of the purchase price.
The buyer wants to acquire the home, not cancel escrow. However, he is unable to increase his down payment and cannot purchase the property at the agreed-to purchase price and terms.
As explained to the seller by his listing agent, the seller has three financial options:
- carry back a note secured by a second trust deed for a portion of the agreed-to sales price, with the consent of the new lender;
- reduce the sales price; or
- cancel the sale for lack of sufficient financing, conventional or carryback.
The seller elects to carry a second trust deed note, with monthly payments of interest only with a five-year due date. Thus, the carryback note contains a final/balloon payment as the debt does not amortize over the five-year term.
The buyer’s final/balloon payment in five years will be nearly 100 times greater than any of the regularly scheduled monthly payments.
Compute and disclose upfront
The dollar amount of the final balloon payment must be computed and disclosed to the buyer on two separate occasions, since:
- the balloon payment on the due date exceeds twice the regularly scheduled payments; and
- the property contains one-to-four residential units.
The disclosure of the dollar amount of the final/balloon payment on the carryback note occurs:
- first in a Seller Carryback Disclosure Statement submitted to the buyer and seller as an attachment to the purchase agreement, or for further approval (as a contingency) before the close of escrow [Calif. Civil Code §2963]; and
- again in a written due date notice delivered at least 90 days, but not more than 150 days, before the balloon payment is enforced by the carryback seller. [See Form 419 accompanying this article]
Additionally, the carryback note prepared by escrow is to include the statutory provision which calls for the balloon payment due date notice. [CC §2966(d)]
Carryback sellers (or the brokers preparing the purchase offer) must compute and disclose the due date and the dollar amount of the balloon payment on an installment sale of any one-to-four unit residential real estate in a carryback disclosure statement, whether or not the buyer will occupy the property. In contrast, money lenders are only required to make the balloon payment calculation and disclosure on loans secured by one- to-four residential units when the secured property is owner- occupied.
Notes containing a balloon payment
A balloon payment is any final payment on a note which is an amount greater than twice the amount of any one of the six regularly scheduled payments preceding the date of the balloon payment. [CC §§2924i(d)(1), 2957(b)]
Balloon payment notes are notes with due date provisions calling for an accelerated final payoff of the principal in a lump sum amount before the note balance has been fully amortized.
Also, a note has a final balloon payment if it contains a call provision giving the carryback seller or money lender the right to demand final payment at any time or after a specified time. [CC §§2924i(d)(2), 2957(c)]
Balloon payment notice and due dates
Not all notes with due dates require a balloon payment notice.
A due date notice provision is required to be included in balloon payment notes with a term exceeding one year if:
- the note is carried back by a seller in a credit sale and secured by a trust deed on one-to-four residential units; and
- the note evidences a money loan secured by a trust deed on an owner-occupied, one-to-four unit residential property.
A due date notice for a final/balloon payment is not required, unless agreed to by both parties, on transactions including:
- carryback notes secured by nonresidential real estate or residential real estate exceeding four units;
- money loans secured by any type of real estate except owner- occupied, one-to-four residential units;
- open-ended credit secured by any real estate; and
- construction loans for any type of improvements. [CC §2924i(b)(1), (3)]
The purpose of the 90/150-day due date notice in a carryback note is to remind the buyer of the final payment, and to give him an opportunity to refinance or pay off the note. It also sends a signal to the buyer who may be negotiating for an extension of the time for a payoff that the seller is not likely to extend the due date.
Delivery and contents of the notice
Carryback sellers and money lenders must deliver the notice to the buyer or the current owner of the property personally, or by first- class certified mail to the buyer’s or current property owner’s last known address. The notice must be given at least 90 days, but not more than 150 days, before the due date. [CC §§2924i(c), 2966(a)]
If the notice is not delivered on time, the final due date of the loan is extended until 90 days after proper notice is given. No other terms of the note are affected. Thus, the accrual of interest and the schedule of repayments (and all other terms) on the note remain the same during the extended due date period. [CC §§2924i(e), 2966(b)]
The failure to deliver the notice does not invalidate the note or lessen the property owner’s obligation to continue making the regular periodic payments. Non-delivery of the notice merely extends the date by which the property owner is obligated to pay off the note.
If the property owner defaults on a payment during the due-date extension period, the lender may initiate foreclosure.
Consequences of non-delivery
A carryback seller secured by a one-to-four unit residential property cannot foreclose if the buyer fails to make a balloon payment on a scheduled due date unless proper notice of the upcoming payoff date and the amount due has been given. [CC §§2924i(e), 2966(b)]
Further, if the carryback seller begins foreclosure proceedings without first giving the due date notice, he is liable to the buyer for any money damages the buyer incurs due to the seller’s foreclosure efforts, including attorney fees. [CC §§2924i(f), 2965]
If the carryback seller fails to give proper notice of the balloon payment to the buyer and successfully completes a foreclosure sale and takes title to the property as the high bidder at the trustee’s sale, the buyer can rescind the foreclosure sale. However, if an unrelated third party purchases the property at the trustee’s sale, the buyer cannot rescind the sale.
When the rescission remedy is not available, money in the amount of the buyer’s lost equity can be recovered from the carryback seller. [CC §2966(c)]
Balloon payment disclosures
Sellers who carry back notes containing balloon payments due more than one year after closing and are secured by one-to-four residential units, must initially estimate and disclose the amount of the balloon payment in the Seller Carryback Disclosure Statement.
The disclosure statement, if not prepared and attached to the purchase agreement, must be delivered before escrow closes.
Specifically, the carryback statement requires the buyer to be made aware of:
- the presence of a balloon payment;
- the approximate amount of the balloon payment;
- any negative amortization; and
- the fact the buyer may not be able to refinance the balloon payment when it is due. [CC §2963]