When you tour a home, a big question is whether “what you see is what you get.” Appraisers, home inspection professionals, and title companies help offer the answers. Through the title search, ownership of the land in traced back in time, showing current legal ownership, easements, and any notable issues.
Until the moment the seller signs the buyer’s purchase offer, the buyer can back out of the deal, and a frequent reason for doing so involves marketability of title. A cloud on the title or an undisclosed easement might come to light, putting off a reasonable buyer. In any case, the mortgage lender must be convinced that the market price of the asset is truly fair and accurate—that what you see is what you get.
So, in the all-important title search, a title company scours deeds and other documents recorded with the county, state and federal tax lien records, and various financial, bankruptcy, and divorce records that could complicate a title. If nothing substantial is unearthed, the title is deemed clean. Some common, even beneficial encumbrances will turn up in a title search. A buyer can expect to learn about homeowners’ association rules, utility easements, and normal zoning restrictions. But detrimental encumbrances can be dealbreakers.
Here are seven of the most common title issues to watch for in any real estate sale:
1. Mortgage liens.
Could the property have a second mortgage lingering at the time of sale? In the worst-case scenario, an unpaid mortgage can lead to foreclosure of a home whose new owner had nothing to do with the debt. In other cases, the payoff slips through the cracks and the lender fails to record the mortgage release.
And you can’t rely on the preliminary title report to guarantee a lien-free title. That’s just a summary of terms and conditions the title insurer is placing on its decision to issue title insurance.
What about the insurance policy itself? Once the insurer issues a title policy to the mortgage lender, that’s a contract: the title company has insured the lender against unknown liens. If you buy a property, the lender’s policy is not a contract made with and for you. You need an owner’s title insurance policy so that you are the beneficiary in case the removal of a pre-existing lien becomes necessary, or you need to recoup the loss in value.
2. Mechanics’ and vendors’ liens.
Home renovation companies and vendors can file liens if a homeowner owes them money, clouding a title. Here again, the title search usually unearths any liens needing to be satisfied, paid, and released for the county record before the closing can occur. And sellers usually agree to use the proceeds of the sale to pay off the liens.
If the seller cannot cure them promptly, then the buyer, upon consulting with the real estate agent or attorney, may walk away from a signed contract. Buyers should be able to back out without losing their earnest money if they can cite the seller’s failure to meet specified contingencies in the offer within the agreed-upon time.
But if the title company performing the search misses any liens placed on real property, they stick to the property. Is the buyer covered for the cost of removing debts incurred by a prior owner? Only if the buyer has an owner’s policy, and is therefore the policy’s named beneficiary. What options does the buyer have, other than to pay to get the lien off? First, communicate with the creditor to see if that company would release the lien.
3. Judicial liens.
Some court cases lead to liens on a person’s house. Before selling, the owner must pay off what’s due to the creditor involved, so the lien can be discharged, the satisfaction can be filed with the county and recorded, and the cloud can be removed from the title.
A title search usually brings recorded judgments to light, such as unpaid spousal or child support commitments. Or there could have been an improper sale by an ex-spouse during a divorce. Court cases can continue through a real estate sale, and sometimes appeals can prolong matters further. On the other hand, time can also work beneficially for the buyer. If an old judgment comes up in the title search, it might be expired under the time limit set by state law.
Pending legal action against a condo, co-op, or homeowners’ association is an especially common situation. Legal actions can begin with unpaid association fees, construction without the proper permits, disputes that indicate a dysfunctional board, and so forth. Not every lawsuit is a dealbreaker, but these problems do cause underwriters to balk and they can scuttle a mortgage loan approval if they’re pertinent to the sale at hand.
Pro tip: Buying a condo? Check with the homeowner’s association early in the process to make sure that there’s no litigation pending—or, if there is, that the lender won’t withhold a mortgage approval on account of it.
5. Encroachments and easements.
Sometimes, fixtures encroach on adjacent land. Sometimes, one survey shows boundaries that don’t match other surveys. Some deeds carry errors in lot descriptions from one homeowner to the next. These are boundary disputes waiting to happen.
Then there are easements—rights to use, or come onto, or move across a part of someone else’s property. A prior homeowner could have agreed to a setback on the property, or agreed to refrain from building anything that obstructs another person’s view, access, drainage, and so forth. There can be beneficial infrastructure easements, involving gas, water, or electric conduits, hydrants and so forth. These impact the title as they allow workers on the property to check equipment, cut trees, or use resources. They can also come with financial obligations, such as road maintenance and sewer assessments.
Look for the phrase “subject to” in a deed. It typically refers to standard easements. They might not rise to the level of defects, but they can inform realistic expectations. For example, does the utility company’s easement rule out a must-have swimming pool or accessory cottage? Would your plans to start up a home-based meal kit company be thwarted by a township zoning ordinance?
In some rare cases, the problem is an easement that your own property is missing. If the land lacks public roadway access—perhaps the easement from the next-door property was extinguished by foreclosure or other circumstances—then the title has a significant defect.
6. Surprise heirs and wills.
Where there’s a will, there’s a relative, the saying goes—but sometimes there’s no will, and relatives have gone unnoticed. If they surface later, they could challenge a bona fide buyer’s right to own the home.
Sometimes there really was a will, and it turns up later on. Sometimes a supposedly last will went through probate, but it wasn’t really the last. Sometimes, evidence comes to light showing that the heirs misunderstood the deceased owner’s last wishes, or that the will maker was coerced.
In any case, surprises do happen, and they can get terribly complicated. Did we mention what a good idea it is for a buyer to invest in an owner’s title insurance policy?
7. Clerical errors.
Filing errors or clerical mistakes happen. Some part of a deed’s documentation might be missing, or:
- Witnessing didn’t conform to the state requirements.
- The notary public’s commission was expired.
- No legal description of the property appears.
- The deed was recorded out of the county.
- The deed was recorded without the required fee.
- The recorded deed is not properly indexed for searches.
And so forth. An owner’s policy and title insurance can prevent serious financial consequences, and cover the legal costs of clearing up the mistakes.
To err is human. Protect your home.
A title search can miss things: clerical fumbles, fraudulent deeds, unrecorded liens. Purchasing owner’s title insurance guards the buyer from unpleasant surprises for years to come.
Perhaps a prior owner was not of sound mind, or signed a home away under undue pressure, or by fraud or mistake. A power of attorney might have been abused. A transfer on behalf of a child might have been improper under the terms of a trust. Perhaps an undisclosed co-owner exists, or someone with a right of first refusal. Perhaps a deed came from a questionable nonprofit or an unincorporated “corporation”—or someone unauthorized to make the conveyance for a variety of reasons: foreign laws, environmental restrictions, pending lawsuits.
If you face any of these scenarios, you might need extended coverage to have recourse to the title insurance. Others are covered in an insurer’s standard policy. (Here is one title company’s list of what’s covered in a standard policy as well as what’s covered in an extended version.) Speak to a representative of a title company; be informed before buying your new home.
We sign off with the usual reminder that this article is not legal advice. If you are buying a home, you might wish to have a real estate lawyer review your title report and provide support in negotiations and purchase decisions. A real estate lawyer can also dig into the documents, statutes and case law, and address any questions you might have about encumbrances on your property.
Nick Youngson, Alpha Stock Images, CC BY-SA 3.0