Form-of-the-Week: Trustor’s Offset Statement – Form 414
Buying a note and trust deed, together called paper, is a reliable and profitable investment for trust deed investors, often called private money lenders.
Comparable to the advice and assistance a buyer of real estate expects from their agent, the trust deed investor buying a note is advised and assisted by their trust deed broker, also called a loan broker. [See first tuesday Form 241]
In an economy with rising mortgage rates, as we will soon experience as the economy continues to recover and expand, loan assumptions and carryback seller financing become more common than when mortgage rates are low and buyer-occupant demand is weak, as experienced in 2013-2014. During a rising interest rate economy, private party lenders and carryback sellers create new paper. Carryback paper is often immediately sold at a discount to trust deed investors through loan brokers.
Prudent trust deed brokerage practice compels the loan broker representing the investor to investigate and analyze the note and trust deed offered for sale. To do so, the broker obtains and reviews every document associated with the note and trust deed considered for purchase. If it is carryback paper, all the sales documentation for disclosures and agreements are obtained and reviewed to determine both:
- the sufficiency of the property as security; and
- the quality of the note and trust deed.
Further, the loan broker reviews the hazard and title insurance policies which cover risks of loss and the conditions of title surrounding the trust deed. An appraisal of the property is also appropriate to ensure it functions as suitable security, as with any origination of a loan.
The due diligence investigation includes obtaining a trustor’s offset statement to uncover defects in the note the property owner might assert against enforcement. The offset statement is prepared by the beneficiary selling the note (or the loan broker or escrow), then delivered to the property owner for review and confirmation of the information contained in the statement. Once reviewed and signed by the property owner, it is delivered to escrow for further approval by the trust deed investor prior to closing and acquiring the trust deed note. [See first tuesday Form 414]
Use of the trustor’s offset statement
The trustor’s offset statement signed and returned by the owner of the property confirms the:
- address and legal description of the property securing the loan [See first tuesday Form 414 §4];
- date of the note [See first tuesday Form 414 §5.1];
- original amount of the note and unpaid balance [See first tuesday Form 414 §§5.2, 5.3];
- periodic payment amount and schedule [See first tuesday Form 414 §5.4];
- interest rate on the note [See first tuesday Form 414 §5.4(a)];
- date through which interest has been paid [See first tuesday Form 414 §5.4(b)];
- date next payment is due [See first tuesday Form 414 §5.4(c)]; and
- due date of any final/balloon payment. [See first tuesday Form 414 §5.4(d)]
A property owner who receives a trustor’s offset statement from the beneficiary holding the note has no duty to respond to a request for the statement.
However, regardless of the property owner’s duty to respond, if the owner signs and returns the statement, the information it contains may be relied upon by the trust deed investor. When a signed statement is not returned by the owner, the broker and the investor need to investigate and confirm the owner has no defense to payment of the note. Generally, when the owner will not respond, the broker and investor may conclude a problem exists with the repayment of the debt.
Guarantees from the holder selling the note may be a solution when the property owner does not respond.
The trustor’s offset statement is fundamental to the investor’s holder in due course status, imperative on an assignment of the note and trust deed. The sending of the offset statement and the owner’s positive response demonstrates the investor acquired the note in good faith without any known defects in the paper or defenses against its enforcement the property owner may have, except as noted by the property owner in their response to the offset statement.