Title Problems at Closing
It took a while but you're finally at the closing table of your home sale.
Since you have eschewed the services of a real estate agent and went FSBO, months have been spent preparing your home for a sale. You also willingly climbed the steep learning curve of real estate sales and negotiations and now you're on the verge of closing your first deal!
But then, it turns out there's a problem with your home's title! These title defects existed long before and have evaded detection until now. Nevertheless, it is up to you to resolve them--delaying the completion of the sale. Your buyer seems to be disappointed and is about to walk away.
Is there anything you could've done to avoid this headache? Well, it turns out, indeed there are, and in this article, we'll walk you through them.
What Is a Title Search?
To avoid delays at the closing table, it is recommended that a title search be performed first. This due diligence is performed by title companies.
The title company researches and sifts through all available public records such as past deeds affecting property, permit history, divorce records, bankruptcy filings, court judgments, and tax records, to check the legitimacy of the title.
Afterwards, they will issue a preliminary title report which contains information regarding property ownership alongside liens and other title issues that need to be dealt with before the property could change hands.
This report, which is issued to both the buyer and the seller, or other parties interested in the transaction, will be the basis of the title insurance policy. This means the liens outlined in the report won't be covered by the insurance anymore and you would have to resolve them.
To have your home's title free of clouds, enlist the services of a title agent.
What Are Common Title Defects?
Omitted or Missing Heirs
There are cases where previously unknown heirs will contest the will at closing.
Other times, the Will of a deceased person is only located much later, and the previous owner may have very different stipulations regarding the ownership of the property, thus preventing the sale of the property.
To clear up this title defect, arrange a property survey to settle disputes and establish the correct property lines. Afterwards, update the deed and refile it to ensure that the corrections are properly recorded.
Liens are title issues resulting from unpaid debts which can't be removed until the debt has been settled.
State Tax Lien
If you fail to settle your tax bill when the tax man comes knocking, the state may file a lien, or a claim on your property.
Spousal Support or Child Support Lien
In cases of divorce where one spouse retains ownership of the home, and the other gets custody, the latter may file a lien on the former marital property to ensure continued child support until the child turns 18. Once everything has been settled, a release of judgment must be given by the custodial spouse in order to clear the title.
Another lien arising from divorce is a lien for alimony or spousal support. Unpaid, past due spousal support can become a cloud on the title and stop an attempted property sale in its tracks.
A mortgage lien occurs when you use financing to acquire real estate so your lender can claim ownership of the property in case you are unable to make payments.
Depending on your loan terms, your lender might also require you to settle your tax payments on time so they don't lose their lien priority.
If the house gets sold before you have a fully paid mortgage, part of the proceeds go directly to your lender to pay off the loan before the title can be transferred to the buyer.
Mechanic's liens are the filed by contractors before starting to work on a house to ensure that they get paid. Although most mechanics's liens expire if not acted upon, it is still is important to obtain a lien release once the work is completed and the contractors paid.
In the event that they cannot be contacted in the future, this outstanding, unreleased lien will be a cloud on the property's title, and will hamper the closing process.
For multiple contractors or subcontractors, make sure to get a lien release from all of them.
Mistakes in Public Records
Something as little as a typographical error in the title can cause massive delays come closing time. Once you notice something amiss, whether it is an error in the legal description or a typo in the name of the property owner, correct the mistake and have the deed refiled as soon as possible.
Fraud and Forgery Issues
According to the American Land Title Association, a typical spousal fraud issue is when a disgruntled spouse forges their ex's signature to eliminate the latter's legal claim on the property.
There are also instances where a co owner's signature is forged leading to a fraudulent transfer of ownership. Other times, illegal deeds are filed by unauthorized persons which may place your legal right of ownership in jeopardy.
Because of cases like these, due diligence (i.e. a complete title search) must be conducted to avoid the hassle.
How Do You Clear Title Problems?
Title defects won't hinder real estate transactions indefinitely as long as you take the necessary steps to resolve them.
It would be better to have a real estate attorney involved to help you complete and file the necessary paperwork needed to clear unknown or unresolved liens.
Quit Claim Deed
As the name implies, a quit claim deed removes any interest a party may have on a property. For instance, in case of a buyout during a divorce, the departing spouse signs a quit claim in order to relinquish their ownership and equity in the former marital home.
Additionally, if family members wish to transfer ownership of a property, a party may sign a quit claim as well in order to address title issues.
Release of Lien or Judgment
Even if the debts or liens have been resolved decades ago, it is still necessary to obtain a lien release. This is a document that forms part of the public record to indicate the removal of a lien.
For example, once you have paid a contractor for the work they have done, they have the duty to remove the mechanic's lien that they have filed against your property. If they fail to do so, you can pursue legal action to compel them to remove the lien.
Deed of Reconveyance
A deed of reconveyance records payment of a mortgage loan. It is a document that transfers ownership of a property from the lender to the borrower, and once you have it, it means you own the home free and clear.
Is It Necessary to Work With a Title Company?
To make sure that there won't be any title issues at closing, it is recommended that a title search be performed first.
While it is something that you can definitely do on your own, do note that it entails a lot of legwork and a significant time investment. On the other hand, an exhaustive and complete title search conducted by a title company only costs a few hundred dollars--which you'll find to be more cost-effective. It may seem confusing, but it will end up saving you potential complicated or costly issues further down the line.
Should You Purchase Title Insurance ?
Occasionally, a title defect may not show up in the initial search by title companies. When this happens after the real estate transaction has been completed, the new owner will be responsible for resolving any title issues and title claims that come up--which can quickly turn out to be a stressful and costly affair.
To guard against this contingency, it is recommended that you purchase title insurance. If you're the seller, the title insurance policy usually forms part of the closing costs you have to pay in order to protect your buyer's equity in the property.
Final Thoughts: Title Defects at Closing
Selling a house with a problematic title and selling it fast doesn't have to be mutually exclusive.
If you're looking to quickly sell encumbered property, look no further! Here at House Buyer Network, we instantly connect you with real estate investors who's got plenty of experience in dealing with troublesome properties.
Just fill in our form with your property address, phone number, and email, expect a call in 24 hours with our fair, no obligation cash offer. You don't even have to worry about closing costs--we'll cover them for you, so you get everything that's on offer!
If you'd like to know more, give us a call at (855) 835-2544 and we'd love to answer any questions you might have.