Title problems tend to show up in one of three ways:-
• During the title search, and are addressed as a matter of course without delaying the closing
• During the search, but cannot be dealt with in a timely manner, so they do delay closing
• After the closing, at which time the owners hope that their title insurance policy will come to their defense and solve the problem
It is best to avoid title problems before the closing. In order to understand title problems, it helps to understand what title means. Title, simply put, is evidence that the owner is in full and lawful possession of a piece of real estate. This sounds simple enough, because if one holds a deed to a property, then one must own that property. That may not be the case. One can hold a deed without having the absolute and unquestionable rights of ownership. The title company is responsible for performing the search to discover any impediment to clear title. Impediments can exist for many reasons, and are referred to as clouds on the title.
An impediment may exist because of simple error such as a typing mistake or the misfiling of a document. Someone’s incompetence may have resulted in a legal procedure not being followed. A third example may be where someone commits fraud in order to dispose of a property. Any of those errors, acts of incompetence or fraud may be decades old, and they may remain unknown until either a title search exposes them or because a third party raises the matter. In this article we will discuss the process and explore some of the common title problems to watch for and avoid.
The Title Process
Real estate can be acquired and disposed of in many ways. Regardless of how property may change hands the issue of clean or clouded title still applies.
When a piece of real estate goes under a purchase contract, a title order is given to a title company, or an attorney, to perform a title search and to manage the conveyance from seller to buyer. The buyer could be, for example, a real estate investor, a corporation or a potential homeowner. The seller could be any of the above or an heir who acquired the property through probate, and who just wants to liquidate their inheritance. All are common examples, and are familiar to everyone. Each party either currently has or wants to take title. Other parties who may not be directly involved in the transfer may also impact title in some way. A mortgage lender may have a claim on the property that was not known about, or just not disclosed, when the offer to purchase was accepted. It is the title company’s function to search for, and discover, any such potential issues.
Once the contract is in place, the title order is raised and the work begins. In summary, the title agent, the person who represents the title insurance company, will search public records to determine the property’s ownership history, to see what liens may have been and may still be attached to the property, and what other encumbrances may exist.
The results of the title search are used to create an Abstract of Title. An attorney studies the abstract to prepare an Opinion of Title. The opinion may include qualifications, exclusions from coverage, conditions and limitations which the title insurance company will use to prepare the actual insurance coverage.
The owner’s title insurance policy exists to protect the new owner, or their subsequent heirs, against losses resulting from future claims by a third party. The lender’s policy protects the mortgagee, if the buyer is not paying cash. Potential title problems should be discovered during the search, and dealt with prior to closing. The more a buyer knows about such problems, the more likely they are to avoid them. Let us explore ten such problems.
1) Exclusions, Conditions and Limitations
Most future owners fail to fully understand what title insurance is and how it works. They do not know what the title insurance company may have excluded from cover, or how the company may have limited cover. The first title problem to watch for is to know what is included, excluded or limited. The easiest way to avoid this potential problem is to have the title agent explain the policy before closing.
2) Existing Liens
Unpaid liens are one of the most common examples of clouds on a title. Many liens, such as unpaid property taxes or Home Owner Association fees, are expected, looked for and discovered during the title search. They do not cause a problem because they are dealt with at closing to both parties’ mutual satisfaction.
Other liens may exist but will not be discovered if no one looks for them. A lien may exist but not be disclosed to the buyer, a lien may have been satisfied but that satisfaction was never recorded, or not recorded properly, so it still appears in public records as current. The title search should discover either of these scenarios.
An everyday example of this, just to make the point about how problems can remain undiscovered, would be when a homeowner purchases the vacant lot adjacent to their property. They search the public records to locate the lot owner. They learn that the owner will never build on it and is happy to sell. The easiest, and seemingly the cheapest, way to take ownership is to prepare a simple contract from an office supplies store, and the parties transfer ownership via a quit claim deed. Everything would seem to be quick, simple and inexpensive. If, however, the seller had used the lot as collateral for a loan which had never been repaid, the debt remains valid. The debt would be transferred with the purchase to the new owner. The problem could have been avoided if they had taken title with a general warranty deed and had a title search done prior to taking ownership. Existing, undisclosed or undiscovered liens affect title, so it behooves the purchaser to avoid inexpensive and speedy transfers in favor of knowing the title is clear.
3) Mechanics or Construction Liens
When a contractor does work on a home or commercial building, they may hire subcontractors and buy materials. The property owner may pay the contractor, but the contractor may not pay the subcontractor or materials supplier. There may come a time when the aggrieved party goes over the contractor’s head and files a lien against the property itself. One of the problems associated with this type of lien is that it may be filed some time after work is complete, because it takes time to decide payment will never happen. The lien may be filed after the title search has been done, so the title insurer may not protect the owner from the claim for payment. This type of problem can be avoided, and the buyer should ensure the title company has the matter in hand.
4) An Invalid Power of Attorney
Children are often given power of attorney (POA) over their aging parents’ legal matters. There comes a time when the parents move into assisted living, and the child decides to sell the parental home. The child has power of attorney, has been using their authority to control the parents’ bank accounts and insurance policies, so they confidently put the home on the market. It sells, and both parties want a quick closing. The problem arises when the POA documents arrive, and the title company realizes they were drawn up out of state, so they have no validity in the state where the home is being sold. A new set of POA documents must be drawn up, approved by the child’s own attorney, and returned ready for closing. The closing is delayed because of the invalid documents. This is an inconvenience but one that could have been avoided.
5) Probate Issues
Probate issues are a fairly common problem in some states. In the previous example, the problem was caused by invalid paperwork not bad faith. Bad faith may be unintentional but it can cloud the title. This scenario will serve to explain one such problem.
Jane Doe passes away. No one knows if her Will is the current Will, so her children ignore it and Jane is considered intestate. Jane leaves two living children as her heirs. Jane had another child who predeceased her. That child had a child, herself, but the grandchild has no contact with the family, so he did not know of Jane’s passing neither did he receive a Notice of Administration. At some point the court closes probate. The two children decide to sell their mother’s property. The property goes under contract and the title search shows that all probate proceedings are closed. The title company only carried out a general search, so did not attempt to discover if there were any heirs-at-law.
The surviving grandchild learned of the sale and issued a notice of lis pendens to prevent the transfer from taking place. The problem could have been avoided by ensuring that probate was completed with an original or a re-established Will court-ordered into probate. An attorney would be more likely to understand the potential problems associated with a sale in these circumstances, and would be able to advise the buyer how best to proceed.
6) Off-Record Interests
An off-record interest describes a person or other legal entity that is not recorded as an owner, or lien holder, but who has a say in what happens to the property. This simple example describes the situation and the problem.
A person owns a home which they bought when they were single. The property is homesteaded for tax and other purposes. The owner then gets married but the spouse remains unrecorded on the deed because both parties accept that the property belongs to the original owner. The couple then separate but do not get divorced. The now-estranged spouses have no contact but still live in the same town. The original homeowner decides to sell the homesteaded property. It goes under contract, and the closing day approaches. The estranged spouse learns about the sale and contacts an attorney. Because the couple was never divorced the spouse has an off-record interest in the homestead. They must both agree to the sale before the transaction can close. Without both spouses agreeing to sell, the title is clouded by the off-record interest. Unless the issue is resolved at or before closing, the new owner may find that the off-record spouse will lay a claim to an interest in the property. This title problem can be avoided by the agent asking a single-named owner for proof of their marital status.
7) Breaks in the Chain of Title
The title search traces property ownership back from the current to the first owner. This is called the chain of title. Every time the property changed hands, whether by purchase, donation, adverse possession or inheritance, it creates another link in that chain. A missing link is a red flag. Unless the gap can be closed, there is the potential danger for someone to show up and claim either full or partial ownership.
The most common reasons for breaks in the chain are missing documents or errors in documents. An error might be nothing more than omitting someone’s name. A property where the chain goes back many decades could have changed ownership through documents that were poorly written or that contained spelling mistakes. An attorney will know how to correct these errors so they do not become a problem for a subsequent owner.
8) Foreclosure Issues
Mortgage foreclosures have been known to cause a lot of issues with the chain of title. Where a mortgage foreclosure is defective, even though the owner loses their home, they may not actually lose title to the property. Foreclosure failures include such simple errors as the lender failing to notify all interested parties, failing to correctly serve those parties or failing to file a lis pendens. In the heat of a foreclosure, an owner may not seek legal advice, but accept that they are behind on payments and walk away. The lender decides to sell the property to a new homeowner or, as is common, to a real estate investor who will fix-and-flip their new investment. If the original owner, who was foreclosed on, learns that the foreclosure process was faulty, they may seek to assert their interest in the property even though it may already have been sold.
This is a serious title problem but it can be avoided. Before that new owner takes possession, they should have their attorney investigate the file records to be sure that, for example, the property and its full legal description were correctly recorded, that all interested parties were named and correctly served, and that the foreclosed parties’ interests were subordinated to those of the foreclosing lender. Should the foreclosure proceedings be shown to be faulty, new foreclosure proceedings may need to be opened. At this point the buyer may decide to move on and find a different property. The alternative is for them to suffer the delay, remove the problem and know that they have clear title.
Real estate investors look for distressed properties to buy at attractive prices. Foreclosed properties are an obvious choice, so it is well worthwhile retaining a title company whose attorney is well versed in the minutiae of foreclosure problems. An unsatisfied mortgage clouds the title. An assigned mortgage does not protect a new owner against a creditor unless that assignment is indicated in the title of the document itself. Investors should protect themselves by making sure the title search shows that any previous mortgage was satisfied, cancelled or otherwise released in ways that really do avoid any future title problem.
9) Incorrect Legal Description
A property’s legal description identifies it and distinguishes it from any other property. An error in the legal description of record becomes an obvious title issue. There are two ways to describe real property. One way is commonly called the lot and block description usually seen in residential subdivisions. The other is the metes and bounds, or government survey description, and is common in rural or agricultural areas. Both descriptions look like a long series of letters, numbers and words. Legal descriptions are copied into new records every time the property changes hands. It is not unknown for a recording clerk to copy the description from the previous document. A simple typographical error may be copied and repeated into subsequent documents. Such errors invalidate title.
The error could mean that the land does not legally exist, or that the erroneous description makes it a duplicate of another property’s legal description. The error could duplicate the lot or block number of another property on a different page in the plat book, or the lot and block may be correct but the clerk recorded the wrong plat book or page number. If the legal description is based on metes and bounds, a simple typo, for example, could change NW¼ (Northwest Quarter) to NE¼ (Northeast Quarter).
While anyone can type the wrong number, the problem has to be resolved otherwise the new owner may find they have no legal right to what they thought was theirs. Another issue could be that the erroneous description could make it a duplicate of another property that has a loan attached to it. The loan is sold on the secondary market, the borrower defaults, and the creditor sues according to the legal description. It is obvious who owes the money and who does not, but the error will have to be corrected. It is much easier to correct the error before closing than during an unfair and unexpected legal action.
The problem, itself, can easily be avoided by the examiner checking all references to the legal description, not just the first or latest, and cross-referencing them to any mortgage documents and other legal records.
10) Reinterpretation of the Law
This is a relatively new kind of title problem, and one that could have far-reaching consequences. During the real estate meltdown of a few years ago many foreclosures were begun but not completed. The reason for non-completion was, simply, that the statute of limitations on foreclosure ran out. In Florida, for example, the statute of limitations is five years, but the average length of time taken to foreclose was five years and two months. The result was that many attempts to foreclose were ultimately dismissed. One reason for the failure to foreclose on time was that the law firms handling the cases ceased to practice. Some lenders are seeking to reopen previously-dismissed files and have the statute of limitations clock reset.
Many homeowner and condo associations inherited foreclosed properties and the so-called zombie mortgages that went with them. If the clock can be reset, it could mean that these associations, as well as individual property owners, could find themselves with both clouds on the title and demands for special assessments to settle law suits or satisfy old liens.
There are, literally, dozens of potential impediments to clear title. Current and prospective property owners should retain a suitably qualified, and experienced, title professional to protect their rights.