3 Ways to Help Prevent Title Issues in Real Estate Investing

A marketable title in a real estate transaction means that the buyer is getting a deed to the property that is insurable by a title insurance company and he is not assuming any liabilities from the former owner. All deficiencies in the chain of title (defects) or attachments have been cured in the past or do not exist at the time of closing.

It is very simple to get what is called an insurable title. For the casual observer at the closing, this title may appear to be the same as a marketable title. The difference can be enormous and very expensive later for the buyer. Title defects and deficiencies can be passed to the new owner if the closing agent makes these exceptions or exclusions to the title policy. The title will be insured at closing except for these title problems.

This process of passing a title issue to a buyer is luckily not all that common except in REO (bank-owned) properties. With REOs the acquisition of the property by a foreclosure action can cause defects in the title for a number of reasons, including improper service to the legal owners of the property.

Many banks don’t maintain their properties until required to do so by the local municipality that does code enforcement. This can result in on-going code violations that can quickly result in hundreds of thousands of dollars which the banks are seldom willing to pay. In most cases the banks will try and pass these liens on to the unwary buyer/investor.

While there are other preventative methods to protect yourself when buying any property, here are three that are simple and work very well:
1. Always put the following or similar clause in your purchase contract, “Seller to provide clear, marketable and insurable title at closing.” Some banks selling REOs will not agree to this and you will likely have a major problem selling to an end-buyer who wants to purchase with conventional financing.

2. Ask to see the title commitment from the closing agent before you go to the actual closing. This is the identical document that will become your title policy after your new deed has been recorded. Look carefully at the exclusions and exceptions listed in Schedule A or B, whichever is applicable to that title insurer. Ask the closing agent to delete the B-1 exceptions at the closing and your title commitment will become your title policy. If you find lines or title issues as exceptions in your commitment, get them cured before you close.

3. Ask the closing agent to review the lien letters he got back from the municipalities that enforce code violations for your property. If the lien letters are not back, don’t close as the letters stipulate that no code violations exist that have not yet become liens in the public record. These violations, but not yet liens, are exempt from the title policy in most cases, but you will be responsible for them as the new owner.

In summary, taking a few minutes to review the above documents and using the specific clause in your contracts will go a long way toward making sure you get a title that you can transfer to another buyer without concern. I am seeing deficient title work and defects in over 40% of REO closings that we do and it is such a problem that we do what I call shadowing the closings using our attorneys to review the title work of the REO closing agents. As an example, the most common mistake is not paying an existing water bill at closing as the bill is not yet a lien so it doesn’t appear in a lien search. Just one of these bills was over $2,400 alone so be careful and review you closing documents or have your own attorney do it for you.