California law incorporates a “race–notice” system of recording liens against real property. Simply stated, the general rule is that the first person to “race” to the county recorder’s office and record his mortgage or conveyance has superior legal title to a person who records an instrument later. California Civil Code §1213 states that recorded documents provide constructive notice to third parties of the interest conveyed by the recorded instrument, thereby preventing anyone with a subsequently recorded interest from obtaining better title to the property from the holder of the current title. The importance of the constructive notice statute is enforced by California Civil Code §1107, which provides that every grant of an estate in real property is conclusive against the grantor, also against everyone subsequently claiming under him, except a purchaser or encumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first dully recorded. Civil Code §1214 provides every conveyance of real property is void as against any subsequent purchaser or mortgager of the property in good faith and for valuable consideration whose conveyance is first dully recorded. The importance of Civil Code §1214 is that even an earlier conveyance may not be enforceable against a later conveyance, where the holder of the later conveyance races first to the county recorder’s office to record the mortgage or deed.
A type of fraud sometimes occurs when a property owner applies for multiple loans secured by the same parcel of real property in order to receive loan proceeds that exceed the value of the real property, without each lender knowing about the other prospective loan. The property owner commits fraud by failing to inform each lender that he is in the process of obtaining loans from other lenders secured by the same property. This type of fraud can be difficult to detect due to the delay between the time when the borrower signs a deed of trust placing a lien on his land and the time that the deed of trust is finally processed, delivered to the county recorder, and recorded in the public record of the county recorder.
The innocent lender or the innocent purchaser of the later recorded documents then finds himself in a dispute over which conveyance is valid and enforceable. If a title company conducted the transaction, then a policy of title insurance may provide coverage for the loss to the innocent party. However, often in interfamily transactions or transactions handled informally between persons who are acquainted with one another, an escrow might not be used, and title insurance might not be purchased. The best practice is to engage an attorney or use a reputable escrow holder and obtain an appropriate policy of title insurance in every transaction that involves real property, even as between family members and close business associates.
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