Robert E. Muir

110 West A Street, Suite 625, San Diego, CA 92101-3707 (619)231-6500 rm@muirlaw.com

SELLER CARRY-BACK “ALL-INCLUSIVE” LOANS

By: Robert E. Muir, Attorney

(Based on article author published in The San Diego Realtor, July 2013)

An “All-Inclusive Loan” is one the seller makes to the buyer using an All-Inclusive Deed of Trust (“AITD”) and promissory note that are held by the seller for a portion of the purchase price and the unpaid balance of an existing loan, often with a bank. The primary reason for using an AITD is to allow the buyer and seller to take advantage of the lower interest rate on the existing loan or to help a buyer who cannot obtain outside financing.

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 makes the payment directly to the bank which ensures the payments are being 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 also be accomplished by the buyer purchasing the property “subject to” the existing financing and having the seller carry back a note and junior trust deed.

The disadvantages of using an AITD are there is a risk that the underlying lender may call its note due as a result of the sale violating the terms of its “due-on-sale” provisions in the note and deed of trust. The underlying lender could also foreclose if it is not paid which would extinguish the AITD 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 foreclosure, not a trustee foreclosure. In any default situation, the seller and buyer’s credit could be negatively affected.

Because of the risks involved in an AITD, The San Diego Association of Realtors has a form entitled “Disclosures Regarding Subject To and AITD Transactions” which lists the risk that the parties have been advised by the real estate agents that they “recommend against this manner of financing.” Parties considering using an AITD should review this form and consult with an attorney.

(This article was published in The San Diego Realtor, June 2009, and update in August 2020.)

This article provides general information and is not intended to provide advice on any specific matter. Attorney Robert Muir can be reached at muirlaw.com

This article provides general information and is not intended to provide advice on any specific case. Attorney Robert Muir can be reached at rm@muirlaw.com