This article explains the legal deficiencies of using a grant deed to hold title to property given to secure the repayment of money.

Risks of alternative security devices

A parcel of real estate is encumbered by a trust deed securing a loan which is now due, with a principal balance equal to 70% of the property value. The owner does not have sufficient funds to pay off the loan.

The owner attempts to refinance the property, but is unable to obtain a new conventional loan. Finally, a private investor is located who advances the funds needed to pay off the loan. The investor wants to be repaid in two years.

As security for repayment of the funds advanced, the owner conveys the real estate to the investor by grant deed. However, the owner retains possession of the property, maintains the improvements and pays all property taxes, insurance premiums and operating expenses.

On delivery of the grant deed, the owner is given a lease and an option to repurchase the property, called a sale-leaseback and option. The rent installments and a single payment on the option equal the amount advanced and the yield sought by the private investor.

Did the grant deed from the owner convey fee simple ownership of the property to the private lender?

No! The transaction is merely a secured loan imposing a lien on the owner’s interest in the property for the amount of the debt, since:

  • the owner remains in possession of the property and pays all property taxes, insurance and operating costs;
  • the amount of the “purchase price” is substantially less than the value of the property; and
  • the repurchase option indicates the owner and the lender intend that the owner recover title to the property by paying back the amount advanced, plus a yield.

Thus, the grant deed conveying legal title to the lender is recharacterized to give the lender a security interest in the real estate. The deed does not convey an ownership interest. [Orlando v. Berns (1957) 154 CA2d 753]

A mortgage-in-fact

Normally, a grant deed transfers the fee ownership of real estate from a seller to a buyer. The buyer acquires title to the property conveyed, subject only to those encumbrances known to exist or which are recorded on the property. [Calif. Civil Code §1105]

However, a grant deed given by an owner for the sole purpose of securing the performance of an obligation – such as payment of a debt – is considered a mortgage, which is a lien on the property and not a transfer of ownership or title. [CC §2924]

Since a grant deed given to secure a debt functions as a mortgage, the “seller” (grantor) remains the owner of the property, subject to the security interest granted to the “buyer” (grantee), who in reality is merely a secured lender.

Thus, the rights and remedies of the parties are those of an owner and a lender, not a seller and a buyer.

A land sales contract is a variation on the grant deed as a mortgage; a grant deed is not used to provide security for money owed. Instead, title is retained by the seller as security for the buyer’s payment of the purchase price. The buyer on a land sales contract will not receive a grant deed until all payments on the purchase price have been made.

Nonetheless, the buyer becomes the owner of the real estate on execution of the land sales contract and transfer of possession, called equitable ownership.

Likewise, Cal-Vet lends money to a buyer to purchase real estate while retaining title to the property. As the vested owner of record and lender under a participation contract, Cal-Vet has no ownership interest in the property whatsoever, and no duty to perform the obligations of ownership. [Cunningham v. Superior Court (1998) 67 CA4th 743]

An owner’s grant deed mortgage risks

For an owner, a grant deed given to a lender to secure a debt:

  • creates confusion in the county records as to who owns the property should the owner later decide to sell or further encumber the property;
  • triggers the due-on clause in any existing trust deeds on the real estate;
  • triggers inquiry by the county assessor into reassessment of the property due to a change of ownership on title; and
  • creates a risk the lender will deed out or further encumber the property.

Transfer of title vs. security interest

Whether a grant deed conveyance constitutes a mortgage or a change of ownership depends on all aspects of the transaction, including:

  • whether a substantial difference exists between the “repurchase price” and the property’s fair market value;
  • who assumes the ownership duties of the property; and
  • the intentions of the parties as evidenced by written documents, such as purchase agreements, escrow instructions, loan documents, leases and repurchase options.

For example, an investor who receives a grant deed, assumes the existing liens and takes possession, collects rents, pays taxes and insurance premiums, and maintains the property is acting as the owner of the property. Since the investor assumed the duties of ownership, the grant deed is treated as a true change of ownership, even if a repurchase option is included in favor of the seller. [Develop-Amatic Engineering v. Republic Mortgage Co. (1970) 12 CA3d 143]

Conversely, consider an owner who “sells” his property to an investor under a sale-leaseback with an option to purchase for a price which is substantially less than the value of the property. The amount advanced by the investor resembles a loan more than an outright purchase of the property.

As part of the sale-leaseback transaction, the owner retains possession of the property and continues to pay taxes and maintain the property.

In this example, a grant deed given to the investor would be considered a mortgage, and the “seller” the true owner of the property – subject to a lien in favor of the investor/lender for the loan amount – since the investor did not assume any ownership duties in the property.

Due-on and reassessment

Normally, further encumbering an owner-occupied, single-family residence (SFR) with a junior lien does not trigger the senior lender’s due-on clause. [12 Code of Federal Regulations §591.5(b)(1)(i)]

However, a grant deed used as security for a loan is not only a further encumbrance, but a transfer of legal title. The grant deed can lead to due-on enforcement, since the due-on clause in an existing trust deed is triggered by the conveyance of any title or interest in real estate – including a lease-option, a lease with a term over three years or a land sales contract. [12 CFR §591.2(b)]

Thus, while a junior trust deed will not lead to the senior lender calling the loan on an owner-occupied SFR, a grant deed used to document the same loan transaction will trigger the due-on clause unless it can be shown to be a secured transaction.

A further risk exists regarding reassessment by the county assessor. A grant deed indicates a change of ownership. However, the transfer of a security interest in real estate – even by grant deed – is not considered a change of ownership for property tax purposes. [Calif. Revenue and Taxation Code §62(c)(1)]

Thus, to avoid reassessment, the owner must demonstrate to the assessor (or the assessment appeals board) that the grant deed is only a lien on the property, and was not intended to transfer ownership.

Subsequent buyers

A borrower who agrees to use a grant deed to secure repayment of a loan also faces the possibility the lender might die or deed the property to others. Whether the conveyance of the property by the lender to another constitutes a valid sale depends on whether the buyer has notice of the borrower’s ownership interest in the property.

For example, if an owner executes a grant deed mortgage and remains in possession, acting as the owner of the property, the third party buyer is on notice to inquire into the rights of the owner. [Gates Rubber Company v. Ulman (1989) 214 CA3d 356]

Also, the buyer may have constructive notice of the owner’s rights based on a recorded document, such as a lis pendens or any other document relating to the loan transaction for which the grant deed is security.

If the buyer has notice of the owner’s rights, the buyer is not considered a bona fide purchaser (BFP), and does not acquire any greater title or interest in the property than was held by the lender who held the deed as security.

However, if the buyer acquires the property without receiving actual or constructive notice of the owner’s rights – i.e., without being aware the grant deed to the lender is merely a mortgage – the buyer acquires clear title as a BFP. [Carpenter v. Lewis (1897) 119 C 18; CC §2950]

The owner cannot recover the property from a BFP. His only remedy would be to recover his lost equity in the property from the lender – the loss being the difference between the price received by the lender (or the property’s fair market value, if greater) and the debts encumbering the property, including the debt owed to the lender. [Segura v. McBride (1992) 5 CA4th 1028]

A lender’s grant deed mortgage risks

The private lender’s concerns as a grant deed mortgage holder include:

  • possible usury claims by the owner if the amount of the installments and repurchase price exceeds the amount of the funds advanced by more than the allowable average annual yield;
  • the need to foreclose judicially to exhaust the right of redemption should the owner default, since the grant deed, recharacterized as a security device, does not contain a power-of-sale provision, as does a trust deed;
  • compliance with equity purchase (EP) laws if the property is an owner-occupied, one-to-four unit residential property in foreclosure; and
  • tax reporting as an owner or lender.

Thus, in any loan transaction, a simple note and trust deed is a far better choice of documentation to express and establish the rights and obligations of both the lender and the borrower.


A private lender using a grant deed as a security device may be charging a usurious rate of interest. [Orlando, supra]

When a grant deed with a leaseback and repurchase option is used to secure a loan, the interest charged on the loan is the difference between:

  • the amount of the funds advanced by the lender – the loan amount; and
  • the repurchase price to be paid by the borrower and rent payments.

Since a sale-leaseback transaction is a loan, usury laws limit the amount of the “repurchase price” – repayment of the loan plus interest – the lender can charge the borrower.

If the borrower successfully challenges the loan as usurious, the lender is subject to loss of interest as a penalty for an excess yield.

Equity purchase rules

Equity purchase laws protect owners who enter into sales-leaseback transactions on owner-occupied, one-to-four unit residential property in foreclosure in which a grant deed conveys title to the property as security for a loan. [Segura, supra]

If the EP agreement grants the seller an option to repurchase the property, the transaction is considered a loan, and the conveyance of the property to the equity purchaser is a mortgage, granting a security interest only.

Broker’s duty to advise

A broker promoting the use of a grant deed as a mortgage is not liable for malpractice, since the lender has received security for the loan. [Lovelady v. Bryson Escrow, Inc. (1994) 27 CA4th 25]

However, the broker giving such advice is not serving the best interests of his client. Given the many disadvantages for both the lender and the borrower when a grant deed is used as a mortgage, the conventional note and trust deed is always a better form for documenting a real estate loan transaction.

A loan broker has a duty to disclose to his clients all aspects and consequences of a loan transaction. Thus, the broker’s agency duty requires him to inform his client of the risks involved when using a grant deed as a security device. [Wyatt v. Union Mortgage Company (1979) 24 C3d 773]

A competent broker would advise against a lender using a grant deed as security for a loan, and suggest the use of a trust deed instead. This advice will avoid surprises and litigation.