In our society, buying and selling happens every minute of every day. When people buy or sell anything, the purchaser usually gets some sort of documentation confirming that possession of the item was voluntarily transferred (the item was not stolen).
For most personal property, a receipt evidences proper possession and ownership. However, for some personal property, like many items purchased at auctions or from farm implement dealers, the evidence of ownership is sometimes a slightly different document called a “bill of sale.” For real estate, proof of ownership is a deed.
Sometimes, a buyer borrows money to make a purchase. Most retailers accommodate such purchases by allowing lenders to pay for a purchase at the same time that a buyer agrees to pay back the lender. For example, my local Dollar General facilitates my loans from my bank through my credit card as a part of my purchases from Dollar General. In these instances, retailer is paid in full immediately, and the lender has a promise to pay from the buyer.
For larger transactions, like the purchase of real estate or a business, lenders are often still involved. However, in those larger transactions, lenders usually want some “security” for loaning the money. That security is usually a promise from the buyer that the purchased item will be given to the lender if the buyer does not repay the lender.
In purchases of real estate, the promise to potentially give back the property is called a mortgage.
If the item purchased is not real estate (such as machines or tools), the promise to give the lender the property for which the buyer did not pay is usually a written contract called a “security agreement.” A security agreement is like a mortgage, except that security agreements affect personal property.
The signed security agreement gives the lender the right to file a “financing statement” in the office of the Secretary of State. That filing (like the recording of a mortgage) ensures that nobody else will buy the property from the buyer without knowing that the lender could take possession of the property if the lender is not paid by the initial buyer.
However, the Secretary of State filing process does not involve vehicles and trailers that have titles. Physical paper titles evidence ownership of those vehicles.
For titled vehicles purchased with borrowed money, the lender has two primary ways to ensure conveyance of the vehicle to the lender if the loan is not paid. First, the lender may simply require possession of the physical paper title and issue a “memorandum of title” to the owner. This allows the buyer to prove ownership to purchase license and insurance. The memorandum of title usually recites the lender’s name for reference.
Alternatively, a lender can note its status in writing on the front of the physical paper title. In addition to writing the lender’s status on the front of the physical paper title, the buyer’s promise is also indexed in Ohio’s Bureau of Motor Vehicles computer system.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.