3 Important Title Issues When Buying Bank Owned Property
So you want to buy a bank-owned (REO) property? Well they can be a great deal for buyers and the buying experience does not have to be comparable to getting dental work done without Novocain.
You put in an offer on an REO property and eventually the lender comes back with an addendum that includes the "requirement" that the buyer must use the lender's title company.
Here are a few things to keep in mind:
•1) Are you getting "Insurable Title" or "Marketable Title" to the property? Is there really a difference and if so why should we care?
•2) Insurable Title - Title to the property may have issues such as unreleased liens, this can include deeds of trust and other money related issues. Even if those liens have been paid off, the public records may not reflect that since a Certificate of Satisfaction or a Release has never been recorded. Other matters may encumber title as well, and those are what I will call "Title Baggage". The lender will find a Title Insurance company at that point who is willing to assume the risk and insure the transaction without cleaning up the baggage. Buyer is then acquiring "Insurable Title".
•3) Marketable Title - Title to the property may have baggage but the settlement agent handling the transaction insists on clearing up those messes. For example, they may track down a prior lender on a loan that has been paid off but no one bothered to record the release in public records, you will want that release obtained and very importantly recorded. Of course there are times when tracking down a lender is not possible. For example, a loan made by a private individual who has since "disappeared", retired on an island somewhere, and cannot be found, or has long ago died.
So why should you as a buyer care? Once the buyer acquires "Insurable Title" and say wants to refinance a year or two later, guess what is still on title? You got it, the "baggage" we talked about earlier. This can cause delays and in some cases interest rate locks may expire while cleaning up the mess, known as "Title Curative Action", which can take a while. Of course the borrower can always go back to the same company that insured it to begin with, but that can also be challenging on many different levels. Or worse, we've had situations where the buyer goes to sell at some point in the future only to find out that the "baggage" is still there, delayed settlements can be frustrating and in some cases costly.
In short, if and when possible, it is usually a good idea to have your own settlement agent review the title, address curative matters, and settle the transaction. So what about the "free" owner's policy the REO lender entices the buyer with? Experience has shown, that in a lot of cases when you compare a preliminary HUD 1 (settlement sheet), from the REO lender's preferred settlement company vs. a settlement company that's going to make every attempt to clean up the "baggage", the cost is nearly the same to you the buyer, and not to mention that you, the buyer, will acquire "Marketable Title" to the property.
It's a no brainer. As always, thank you so much to Susan Lloyd from Mid-Atlantic Title for her tips and guidance. You can contact Susan directly at - SusanLloyd@MASettlement.com