Legal Title versus Equitable Title

by Kelly Troy on June 7th, 2011

Equitable Title Versus Legal TitleThis may be a short article, but it’s an important one – especially with regards to insuring seller-financed ‘wraparound’ mortgages.  Since the insurance industry is founded on the principals of risk, contract law, and civil liability, properly insuring properties purchased in this manner can be a challenge, especially when titled in a trust, and the issue of ‘legal‘ title versus ‘equitable‘ title often arises with regards to who has an ‘insurable interest‘ and who doesn’t. 

 

EQUITABLE TITLE – This type of title refers to the actual enjoyment and use of a property without absolute ownership.  It is the interest in the property held by a buyer (vendee) under a purchase contract, contract-for-deed, or an installment-purchase agreement. The buyer (vendee) has the right to demand that legal title be transferred upon payment of the full purchase price after the final installment payment has been made. This interest is transferable by deed, assignment, subcontract, or mortgage. Equitable title is conveyed to the buyer (vendee) as soon as the seller (vendor) actually countersigns and agrees to the offer to purchase.  In other words, Jack agrees to purchase a home from David under a contract-for-deed’ arrangement. In layman’s terms, a contract-for-deed means “you (buyer) fulfill your part of the contract (pay the balance in full) and ONLY THEN do I (seller) have the obligation to transfer the deed to you.” Jack takes ‘equitable title’ in the property as soon as David agrees to the contract and signs it.  However, the legaltitle (which defines absolute ownership) is not formally transferred from David (seller/vendor) to Jack (buyer/vendee) until he has made his last installment payment under the contract and paid the agreed-upon amount in full, whether he pays the balance in one year or over a period of thirty years.  Also, with equitable title, the vendee (purchaser) benefits from any increase in value between the date of the agreement and the final delivery of the deed once the balance is paid in full. If the property increases in value the vendee gets the increased valuation of the property; if the property value declines the vendee in turns suffers that as well.   

Equitable does not give the actual legal title to the property like it would if a buyer were using a mortgage. Equitable Title means giving the buyer an “equitable position” in the property. The legal title is conveyed only after the buyer has satisfied the contract.  

The reason that equitable title and not legal title is conveyed in contract-for-deed purchases as mentioned above is because there is no deed of trust filed, this only occurs AFTER-THE-FACTonce the purchaser (vendee) fulfills the contract agreement, and legal title can only be transferred by a deed.  

 

LEGAL TITLELegal title is the ownership of property that is enforceable in a court of law, or one that is complete and perfect in apparent right of ownership and possession, but that unlike equitable title, carries no ‘beneficial interest’ in the property. In other words, in the example of David and Jack above, David holds the ‘legal’ title to the property and is the ‘legal owner’ while Jack only has ‘equitable title’. However, with his ‘legal’ title, if the property goes up in value, David cannot benefit from this change and retroactively increase his sales price to Jack to make more money. As another example, if valuable minerals were discovered on the property, David could not ‘benefit’ from this change in the property either.

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When utilizing traditional mortgage financing involving a bank or institutional lender, there is promissory note, a mortgage, and a deed of trust signed and filed. This deed of trust is what transfers legal title from the seller to the buyer.  The seller of the property transfers legal title to the new buyer at closing because the contract price has been paid in full by the bank or lender – and now it’s up to the borrower to repay the lender in installments.  The buyer now has both legal and equitable title.  In turn, the buyer collateralizes the bank’s loan with the property being purchased and the legal title still remains with the buyer unless there is a foreclosure.  If a foreclosure occurs on the property, the deed (and legal title) is transferred to the lender so that the lender then retains legal title.   

Kelly Troy

ABOUT THE AUTHOR: Kelly Troy is founder and President of InsuranceForInvestors.com as well as an active real estate investor himself, purchasing and ‘rehabbing’ both residential and commercial properties and actively engaging in non-traditional investing throughout the United States. As the founder of “STREETSMARTinvesting” as well as the developer of the “Riches in Rehabs” and “Riches in Rentals” investor programs; he has traveled extensively to host workshops and impart to other investors and real estate professionals the same principals and skills that he himself has learned regarding how to successfully profit from purchasing real estate. Kelly also established his own successful real-estate investor’s group and he is a frequent guest speaker at other REI groups and he often hosts local investing workshops in addition to teaching TREC-approved MCE courses for licensed real estate professionals. Kelly is also a combat veteran of the United States Army Infantry as well as an active member of his community, serving on several City and Regulatory Boards and having either Chaired or actively served on the Board of Directors for many professional and community organizations. In addition, after having spent several years as a traditional mortgage lender, he founded his own private-lending firm, Genesis Funding Solutions, and he was a hard-money lender underwriting and managing private loans to investors for projects of all types across the country. He is also extremely well-versed in all forms of seller-financing and in brokering privately-held mortgage notes. Prior to his investing career, Kelly was also a professional safety and risk consultant having developed many safety and risk management programs in various industries and he traveled frequently developing and implementing industrial and manufacturing processes, safety, and quality assurance programs throughout both the United States and Europe. He also worked for the Texas Worker’s Compensation Commission (TWCC) as well as the OSHA Consultation Program (OSHCON) as an Industrial Hygienist and he is; therefore, extremely familiar with risk management and loss mitigation, personal liability, worker’s compensation, and commercial risks. While having owned a previous agency with Farmer’s Insurance Group, he was chosen from over 150 agents as the President of the graduating class at the University of Farmers in Los Angeles, California and he was later recognized as one of the Top 25 commercial agents in Texas.

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