Robert E. Muir

110 West A Street, Suite 625, San Diego, CA 92101-3707 (619)231-6500

All-Inclusive Loans

By: Robert Muir, Attorney

An "All-Inclusive Loan" is one the seller makes to the buyer in which an All-Inclusive Deed of Trust ("AITD") and promissory note are held by the seller for a portion of the purchase price and the unpaid balance of an existing loan, often with a bank. An AITD allows the buyer and seller to take advantage of the lower interest rate on the existing loan. With interest rates low, and tighter lending requirements, buyers and sellers are now considering using seller financing, including AITD's.

The benefits to the seller include obtaining a higher yield on the loan to the buyer who is charged a higher rate than what the underlying lender is charging. The seller also makes the payments directly to the bank which ensures that the payments are made. There may also be tax advantages for deferred capital gain. The seller also has the right to conduct a trustee's foreclosure in the event of a default. The seller may also avoid a prepayment penalty on the underlying loan, although this goal could be accomplished by the buyer purchasing the property "subject to" the existing financing and the seller carrying back a note and junior trust deed.

The disadvantages to using an AITD are that the underlying lender may call its note due as a result of the sale violating the terms of its note and deed of trust. The underlying lender could also foreclose if not paid which would extinguish the AITD note held by the seller, leaving the seller without a remedy against the buyer. The lender could also conduct a foreclosure and sue the seller for the deficiency between the amount due on the note and the foreclosure sale price. The lender could do this if the underlying loan was not a purchase money loan, and the lender conducts a judicial, not a trustee foreclosure. In any default situation, the seller and buyer's credit could be negatively affected.

The San Diego Association of Realtors has a form entitled "Disclosures Regarding Subject To and AITD Transactions"which lists the risk involved in these transactions. Because these risks, the form states that the parties have been advised by the real estate agents that they "recommend against this manner of financing." Therefore, parties considering using an AITD should review this form and speak to an attorney before proceeding.

This article, with modification, was published in The San Diego Realtor in June 2009.