Title Problems and Clouded Title for Real Estate Investors

Title Insurance
Jim Kimmons

A valid strategy in real estate investing involves the purchase of properties at a discount because they have title problems or a clouded title. The investor can hopefully purchase the property below value, correct the title problems and then sell it at a profit. These clouded title issues could involve:

  • Federal, state or local tax liens
  • Liens for work done on the property
  • Homeowner Association or Condo Association Liens
  • Missing heirs with possible claims on the property
  • Boundary or survey disputes
  • Other claims on ownership

The critical aspect of this investment strategy is to be sure that there is thorough research into the title problems, preferably by a title or abstract company or attorney who specializes in title searches. Once you've identified the problems, then you need a qualified attorney to give you an accurate idea of the cost to correct them. If doing so still leaves you with a property you own below its real value, then you probably have a good investment.

Title Insurance Information, Requirements & Exceptions

Whether it's called a title insurance binder or a commitment, there is a document prepared for the buyer of a property that sets forth all of the known publicly recording title information about a property.  Sometimes this is done with an "abstract of title" which is interpreted by an attorney, but more often a title company issues a binder/commitment.

Research at the courthouse is done to find every reference to the property in the public records.  This is where all liens, claims of ownership, restrictions to ownership and any other reference to the legal property title will be found, with copies of the documents.  It can be an extensive document, but at the beginning there will be the important sections, Exceptions and Requirements.

Title Binder Requirements

The document is a binder or commitment because the title company is promising the issue of a title policy.  However, the issuance of that policy will be contingent upon certain requirements being met before closing.  These can include:

  • Payoff of seller's mortgage.
  • New mortgage for buyer if not a cash purchase.
  • Payment in full of all property taxes owed.
  • Payment in full of all trash, water, sewer or other fees that are due by closing.
  • Possible quitclaim deeds from ex-spouses or others with possible claims on ownership.
  • Satisfaction of any and all other liens, including tax liens and mechanic liens.
  • Others

Generally, these requirements are a normal part of the process and will be handled during the transaction process.  But, make no mistake; if they're not all satisfied, the closing will probably not happen.

The Commitment Exceptions

Title insurance isn't all-encompassing in coverage.  There are things it will not, indeed cannot, cover.  Let's talk about the purpose of title insurance.  It is to protect the buyer from unknown and new threats to their rights of ownership and title to the property.  It is NOT to allow them to file a claim for damage due to things already of record.

 So, things that are not covered include (but aren't limited to):

  • LIens already of record.
  • Recorded covenants and restrictions.
  • Original land grants and government dispensations of title rights/limitations.
  • Existing encroachments on the property.
  • Existing rights of way or easements recorded.
  • Prior deed restrictions.

It is important to read and understand these exceptions.  If there are HOA restrictions on what you can do on the property, you need to be aware of them.