In almost all real estate transactions, there are title issues that must be cleared up in order to transfer ownership of the home from the seller to the buyer.
Does the seller have the legal right to sell the property? Is the home’s title free of “clouds” or “defects” – such as judgments, liens or bankruptcies – that would prevent the seller from transferring “clear” or “marketable” title to the buyer? How can you be sure?
Title companies report that in more than one-third of all real estate transactions they must undertake “extraordinary work” to address title issues. The title company will examine public records – often going back 50 years or more – to look for past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgments and tax records that may be defective or outstanding.
No matter how small a problem it may be, any title issue will need to be resolved in order to offer a clear title to the buyer. The results of the search will be compiled into a preliminary title report that will be given to the buyer, seller, real estate agent, lender and attorney involved in the sale.
Mechanic’s liens are common. They are liens placed against a property that a general contractor – or anyone who provides services to improve the property – files before starting the work. It’s a way to ensure that they will get paid; the lien is supposed to be released when the job is done.
Specific laws, which vary from state to state, dictate how a mechanic’s lien must be filed, processed and/or acted upon. The procedure for the District can be different from that in Virginia, Maryland or any other state in the country. Whether it will take precedence over other liens on the property will also be specific to the jurisdiction where the work was performed.
Problems arise when the contractor fails to file a “satisfaction” of the lien and it remains on the property’s title, or when the lien is contested. The title company must determine whether the lien was filed properly and recorded in the public records, and whether notice was given in accordance with state law.
Most mechanics’s liens do not have an indefinite lifespan and will expire if not acted upon in the prescribed amount of time. Mechanic’s liens usually are able to be resolved, but the process can be time-consuming – for example, if the contractor has left the area or cannot be found – and could cause the closing to be delayed.
Bankruptcies are another source for potential title issues. For example, a seller could have bought a house while single, and then married someone with a recent bankruptcy. The title company would need to be sure not only that the new spouse had signed off on the deed, but that the bankruptcy case had been discharged. If not, it would be necessary to petition the court to release the property from the bankruptcy process.
Another common type of lien occurs when a divorced spouse either forgets or doesn’t remove a lien for child support – even though the debt may have been resolved decades ago. A child could inherit his father’s house and decide to sell the property. A lien placed by his mother years ago – but since resolved – could show up in the title search and prevent the sale.
The child would have to get his surviving parent to sign a “release of judgment” that states that the debt has been paid in full in order to have clear title.
Liens for past-due spousal support or delinquent taxes are also common. The American Land Title Association recently found that fraud and forgery issues between spouses have become more prevalent over the past several years and must be dealt with before a property can change hands.
A typical spousal fraud issue could be that a spouse signs the signature of the other spouse on a document or deed – without telling them – to either eliminate an interest or add someone else to the title. It’s similar to when a spouse signs a joint tax return for both spouses – and one spouse is not aware of what he or she is now responsible for.
If the seller is not aware that a lien or other encumbrance is attached to the property, it can take days – or weeks – to resolve the problem. The seller may have inherited the property from a trust and be unaware that one of the beneficiaries or co-owners now lives overseas and cannot be found. The co-owner’s signature would be necessary to transfer the title, and if the owner can’t be located the legal steps to remedy the problem could take months.
Title companies do most of their remediation work behind the scenes. You may not even be aware that some title defects existed and were taken care of before the closing. Other times you may be asked to sign a document to remove or release the lien or title defect. Many title issues can be resolved by filing one of three common documents:
- A quit claim deed removes an heir and clears up title among co-owners or spouses.
- A release of lien/judgment removes a paid mortgage or spousal or child support lien.
- A deed of reconveyance records payment of a mortgage under a deed of trust.
What about defects in the title that are not recorded – or defects that the title company has no way to know exist?
There could have been forgeries, claims from the use of an “alias” or fictitious name, a deed given under duress or fraud, deeds affecting property of a deceased person, a deed following administration of an estate of a missing person who later appears, an undisclosed but recorded federal or state tax lien, errors in the legal description, a right of access wiped out by foreclosure on a neighboring land, and many others.
For a list of more than 70 possible title issues, go to www.firstam.com/title/resources.
If you suspect that there may be title issues (unknown or unresolved liens) on your property, you can do a search of the title yourself. Recorded documents are filed at the county recorder or clerk’s office and are available to the public.
You may find an unreleased mortgage that the lender did not report as paid in full or a lien from someone you have never heard of.
A title insurance policy will be your best protection against those and many other title problems that may become known after you close on your transaction. The cost for the policy is a one-time fee, and the policy will remain in effect for as long as you own the property.
But in order to purchase title insurance, you’ll need a complete title search conducted by a title company.