Is it common for private lenders to fail to record when they have been paid off?


I am looking to buy an estate property at auction. The property was purchased in 2003 via a private loan ($565K) carried by the property seller. The new property owners took out a $67K HELOC in 2005 and in 2006 a $650K loan from Wells Fargo (in 2nd or 3rd position that is now foreclosing). It’s evident that the property owners used a fair amount of the $650K to improve the 2 acre property. They totally remodeled the main home (2200 sq ft) and added an 1800 sq ft guest house. Post remodel the property is conservatively worth $1.2 million. I was very surprised that Wells Fargo would make a large $650K loan in junior position. I hired an abstractor to recheck my records search and he confirmed my belief that Wells Fargo would be very unlikely to make a major loan ($650K) in junior position to the $565K 1st. He suggested that the $565K 1st was most likely reconveyed before the Wells Fargo loan ($650K) but was not recorded. He said this (failure to record) was not unusual for private loans. He noted that Wells Fargo most likely received a letter of indemnity from the 1st lender (the original property owner) attesting to the “repayment in full” on the $565K 1st. I am trying to locate the 1st lender to see if he will confirm this repayment. If the $565K is out of the way, then I can buy the foreclosing $650K 2nd at auction an repay the HELOC ($67K in a senior position) and there should still be plenty of equity in this property. My question … is it indeed common for a private lenders to fail to record a reconveyance when they’ve been paid-off?


Unrecorded reconveyances are not uncommon, but should be treated with great care. I would suggest getting a copy of the Wells Deed of Trust, and looking to see if the name of the title company, and hopefully the title officer is indicated (often the title co can tell by the escrow number). From there you MIGHT be able to talk that title officer into looking up the file and telling you if the senior loans were paid off by Wells or not. If you can get a copy of the settlement statement.

I’ve had problems in the past with private sellers trying to get paid twice - so I always try to make sure I have some proof they were paid before taking the risk at auction. Hope that helps.