How to Get a Title Policy at the Closing of a Real Estate Purchase
Most investors would agree that it is critical to get a title policy for any property you buy, however, that's only part of the real story.
The title policy basically insures that the property you are purchasing is being purchased from the legitimate owner and that the title to the property is free and clear of deficiencies and encumbrances such as liens (code or mortgages, etc.
) and judgments that attached to the seller.
However, there are always written exceptions in the policy itself.
There is a major difference between an insurable and a marketable title.
An insurable title simply means that the closing agent is issuing a title insurance policy for the property but exceptions to the policy can exist.
Hence, the policy has exceptions written into it and the property has some type of encumbrances attached.
If the buyer wants to get conventional financing he will likely have a problem that must be resolved, possibly by doing a quiet title court action.
On the other hand, a marketable title is defined as having no encumbrances attached to the property at the closing of the sale.
The buyer can get conventional financing immediately upon its purchase.
Marketable title is sometimes referred to as good or clear title.
Getting a marketable title is critical to an investor's ability to resell the property as quickly as possible.
What most homeowners and investors don't understand is that simply because a buyer closes on a property and gets a title policy that the title to the property is free and clear of encumbrances.
A simple encumbrance that doesn't show up on title searches is an unpaid water bill.
When the water bill becomes a lien on the property, it shows in the public record and the title agent will have to pay it off at closing or the title remains encumbered.
A marketable title is important because potential buyers will not be able to get hard money or conventional financing for the property and there is always a chance that an ugly law suit may be lurking just around the corner.
It is critical to look at the title policy's Schedule B, which is Section 1 of most title policies.
The "B-1" Exclusions on the title commitment, which later becomes your title policy, become exceptions that may be title deficiencies and can cost you more than the property's original purchase price! HERE IS THE BIGGEST RUB - This issue of exceptions to title deficiencies is especially prevalent with REOs because some Asset Managers are sticking clauses in the Addendums that clearly state that the Buyer is responsible for any outstanding liens or other encumbrances (i.
e.
code violations).
We have even seen where the Addendums state that the Seller will pay the liens off at closing, however, the Seller will not close open permits, get permits, or negotiate settlement of the liens.
Hence, if the outstanding penalties are paid at closing, through the closing date, the liens will start accruing again the day after the closing.
The title commitment the investor gets at closing will clearly list the specific liens as exceptions.
In summary, make sure you review the title commitment before you close and request that the B-1 Exclusions be deleted at the closing - each and every one of them.
If they can't be deleted, you have two options - close and face the unknown money pit you are about to buy, or don't close until the issue(s) is resolved.
In summary, I suggest you carefully read every REO Addendum that you get from your realtor.
If you agree to the Addendum, make certain the title commitment gets its B-1 Exclusions deleted at the closing so you actually have a title policy that has no exclusions that could impact your selling the property in the future.
Getting the title commitment with the deletions makes it a title policy at the closing and allows you to more quickly resell the property to another cash buyer.
The deed must be recorded to have the title policy go into effect.
Despite the importance of the title policy, some investors have never received a title policy from the closing agent; please don't let this happen to you.
The title policy basically insures that the property you are purchasing is being purchased from the legitimate owner and that the title to the property is free and clear of deficiencies and encumbrances such as liens (code or mortgages, etc.
) and judgments that attached to the seller.
However, there are always written exceptions in the policy itself.
There is a major difference between an insurable and a marketable title.
An insurable title simply means that the closing agent is issuing a title insurance policy for the property but exceptions to the policy can exist.
Hence, the policy has exceptions written into it and the property has some type of encumbrances attached.
If the buyer wants to get conventional financing he will likely have a problem that must be resolved, possibly by doing a quiet title court action.
On the other hand, a marketable title is defined as having no encumbrances attached to the property at the closing of the sale.
The buyer can get conventional financing immediately upon its purchase.
Marketable title is sometimes referred to as good or clear title.
Getting a marketable title is critical to an investor's ability to resell the property as quickly as possible.
What most homeowners and investors don't understand is that simply because a buyer closes on a property and gets a title policy that the title to the property is free and clear of encumbrances.
A simple encumbrance that doesn't show up on title searches is an unpaid water bill.
When the water bill becomes a lien on the property, it shows in the public record and the title agent will have to pay it off at closing or the title remains encumbered.
A marketable title is important because potential buyers will not be able to get hard money or conventional financing for the property and there is always a chance that an ugly law suit may be lurking just around the corner.
It is critical to look at the title policy's Schedule B, which is Section 1 of most title policies.
The "B-1" Exclusions on the title commitment, which later becomes your title policy, become exceptions that may be title deficiencies and can cost you more than the property's original purchase price! HERE IS THE BIGGEST RUB - This issue of exceptions to title deficiencies is especially prevalent with REOs because some Asset Managers are sticking clauses in the Addendums that clearly state that the Buyer is responsible for any outstanding liens or other encumbrances (i.
e.
code violations).
We have even seen where the Addendums state that the Seller will pay the liens off at closing, however, the Seller will not close open permits, get permits, or negotiate settlement of the liens.
Hence, if the outstanding penalties are paid at closing, through the closing date, the liens will start accruing again the day after the closing.
The title commitment the investor gets at closing will clearly list the specific liens as exceptions.
In summary, make sure you review the title commitment before you close and request that the B-1 Exclusions be deleted at the closing - each and every one of them.
If they can't be deleted, you have two options - close and face the unknown money pit you are about to buy, or don't close until the issue(s) is resolved.
In summary, I suggest you carefully read every REO Addendum that you get from your realtor.
If you agree to the Addendum, make certain the title commitment gets its B-1 Exclusions deleted at the closing so you actually have a title policy that has no exclusions that could impact your selling the property in the future.
Getting the title commitment with the deletions makes it a title policy at the closing and allows you to more quickly resell the property to another cash buyer.
The deed must be recorded to have the title policy go into effect.
Despite the importance of the title policy, some investors have never received a title policy from the closing agent; please don't let this happen to you.