3 Ways to Help Prevent Title Problems in Real Estate Investing

A negotiable title in a real estate transaction means that the buyer obtains a deed to the property that is insurable by a title insurance company and does not assume any liability from the previous owner. Any deficiencies in the chain of title (defects) or liens 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. To the casual observer at closing, this title may appear the same as a tradable security. The difference can be huge and very expensive for the buyer later. Title defects and deficiencies can be passed to the new owner if the closing agent makes these exceptions or exclusions to the title policy. Title will be secured at closing except for these title issues.

Fortunately, this process of passing a title issue to a buyer is not as common, except in REO (bank owned) properties. With REOs, the acquisition of property through a foreclosure action can cause title defects for a number of reasons, including improper notice to the legal owners of the property.

Many banks do not maintain their properties until requested to do so by the local code enforcement municipality. This can result in ongoing code violations that can quickly result in millions of dollars that banks are rarely willing to pay. In most cases, banks will try to pass these links on to the unsuspecting 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 include the following or a similar clause in your purchase contract: “Seller must provide clear, negotiable, and insurable title at closing.” Some banks that sell REO will not agree to this and you will likely have a big problem selling to an end buyer who wants to buy with conventional financing.

2. Ask to see the closing agent’s title commitment 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 on Schedule A or B, whichever is applicable to that title insurer. Ask the closing agent to remove the B-1 exceptions at closing and your title commitment will become your title policy. If you find line or title issues as exceptions in your commit, resolve them before closing.

3. Ask the closing agent to review the liaison letters you received from the municipalities that enforce code violations for your property. If the lien letters are not back, do not close as the letters state that there are no code violations that have not yet become liens on 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 short, taking a few minutes to review the above documents and using the specific clause in your contracts will go a long way to ensure you get a title that you can transfer to another buyer without worry. I see poor title work and defects in over 40% of the REO closings we do and it’s such a big problem that we do what I call tracking closings using our attorneys to review the title work of REO closing agents. CONVICT. As an example, the most common mistake is not paying an existing water bill at closing, since the bill is not yet a link, so it doesn’t show up in a link search. Only one of these bills was over $2,400, so be careful and review your closing documents or have your own attorney do it for you.