This blog attempts to summarize some of the main issues that can come up with title and how they are generally dealt with. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney if you have any title issues.
A Summary of Title & Title Insurance
When we get a contract, the first thing we do is order a title search going back 60 years. This means that someone goes to the probate court and pulls all the public records they can find; this includes deeds, mortgages, liens, judgements, taxes, estates, etc. All of that plays into your property. When a title search comes back to us, it’s called a chain of title. Attorneys need to see the chain of title to know what’s going on with a specific property. We can look at the date everything was filed, who it was filed by, and can then connect it to the next person in line -- it is quite literally a chain that connects people down a line.
Sometimes we notice issues when we get title back, and these are known as breaks in the chain. A break in the chain could come about for many reasons:
- A mortgage was issued years prior but never released, and then another mortgage was assigned later.
Solution: We have to work with the seller to show proof of the mortgage being paid off or contact the lender to see if the mortgage can be paid off. - A break in ownership, such as when parents away and the kids take the house, and then when they pass away their own kids take the house, all of which happens without being recorded on the deed. This would result in the public records showing one set of owners, but then a few generations down the line there are new people attempting to sell it when in fact their grandparents are the ones on title.
Solution: If there is an estate, you can transfer ownership that way; if not, we may have to create an heirship affidavit saying the original owners are deceased and showing proof of it, then showing all the heirs that should have inherited the property. - Unpaid taxes, assessments, and liens
Solution: Use the proceeds from the sale of the property to pay off any outstanding debts. If the proceeds will not completely cover the debts then you can negotiate a partial payoff so that everyone who has a claim on the property will get their share. Everyone with claim to the property will have to sign a partial release stating that that property or land will no longer be encumbered by that lien. - Legal description issues, such as a metes and bounds legal description that doesn’t actually close or link back up to the initial point where the description begins.
Solution: Get a new survey on the property to close the box and clean up the legal description. - There is a judgement on a past owner that was missed by a previous attorney.
Solution: The seller can bring in their original title insurance policy to show that the past judgement is already covered under existing title insurance.
We have to fix these title issues so that we can confidently say to the buyers that they are the only ones who are going to own the property from the time of closing and that it will be theirs solely until they choose to sell it in the future. This is creating a clean chain of title.
Unpaid taxes, liens, and judgements can all attach to the property, so if someone was to sell a property without dealing with these issues then they would all transfer to the new owners. This means the person or entity who owns the tax lien against the property could potentially force the new owner to pay the lien in full, and if the owner can’t then the lien holder could take the property. The lien holder could also wait until the property is sold and then take money from the proceeds of the sale to cover the lien. This is an issue because it isn’t the buyer’s debt to reconcile, it’s the seller’s. We always want to solve these problems early and show a record of clean title for the new buyers to avoid problems like this down the line. This is also important for the lender -- the lender is on the hook for the property just like the owner is.
Most judgements can be fixed. You typically have to look at what the proceeds from the sale will be and whether the seller can pay the judgement from the proceeds or not. There are, however, some situations where title issues cannot be cured:
- We cannot find the initial owners or don’t know who they are.
- There is a judgement that cannot be fixed -- the party is unable to pay to have the judgement released.
- The issues will take too long to be fixed and the deal cannot withstand the time it will take to fix these things and so it falls through.
Ultimately you have to have clean title in order to get a lender involved. Lenders and attorneys will not issue a policy for a property unless they know there are no issues that will come back to bite them later on.
That being said, all underwriters are not created equal. I am an insurance agent and I have an insurance company working behind me. When issues in title pop up, we have to notify our insurance companies of the risk and how we interpret that risk, and then ask if they are still willing to issue title insurance. The insurance company will evaluate how old the issue is, what the risk factor is, and the chances that it will come up later on, and ultimately whether it is worth issuing title insurance or not. Just because one agent won’t cover something does not mean another won’t.
Sometimes an agent will already understand the issues with a property and be more likely to re-insure it. For example, if the same agent already issued title insurance 5 or 6 years ago for a specific property and they are already on the hook, insurance-wise, for that property, they’re likely to re-issue title insurance simply because doing so again won’t add any extra risk on top of what they’re already responsible for.
QUESTIONS
Lender’s insurance is mandatory but owner’s insurance is optional. Why?
Lenders do not like risk and will require title insurance on everything. The Consumer Finance Protection Bureau has clarified that if an owner does not want title insurance they are not required to get it; they are required to let the lender get insurance and to pay for that lender’s insurance, but they are not required to get the same insurance for themselves. If the owner wants to take on the risk and deal with it themselves in the future if it comes up then they are entitled to do so, though this is not advisable. A home is likely the biggest purchase a person will make in their lifetime, and it’s only a few hundred dollars to insure the whole deal. Then if anything comes up, they’re protected and the attorney will be responsible for fixing the problem for them.
If the mortgage company has title insurance, doesn’t their policy cover the problems? Why would a buyer need it? Can you describe a situation where a problem like this has occurred?
When a lender gets title insurance, they don’t care about fixing the problem for the owner. They’re solely looking at their own investment being covered. There are different amounts of coverage being given there: an owner’s policy insures you for the actual value of the property or what you’re purchasing it for, and a lender’s policy only insures it up to their loan amount. Any issues that need to be fixed will have to be claimed on an owner’s policy, not a lender’s policy. A lender will only claim things against their own policy if it affects their mortgage. For example, a lender wouldn’t typically file a claim when an owner finds out their septic tank is actually on someone else’s property — that is up to the owner to file against their own insurance. Owner’s insurance will cover the entire amount of the property and will allow you to contact the company directly and let them know what issues you want or need fixed.
Many of these issues don’t matter at all while you own the property and only become an issue once you prepare to sell. If it’s a problem that affects your clean title, or “marketable title,” and will prevent you from selling, your lender could potentially get involved because if they were to foreclose on you and take the mortgage they would assume that problem. Again, though, you are more likely to be covered under your owner’s policy.
If there are three people on a deed and two have liens against them, how are the net proceeds disbursed once the liens are covered?
If the liens are specifically tied to a person (Person A) and that person has ownership of the property, usually they can go back to the lien holder and negotiate a separate payoff from that of the property. This usually entails telling the lien holder that although they have a lien against Person A, Person A is only going to get ⅓ of the proceeds and they should only consider that amount when they arrange for payment. This can result in a partial payoff or a full payoff. The problem is that this affects the other people who own the property with Person A because the lien has to be cleaned up in order to move forward. If Person A decides they cannot or will not pay the lien, then the property can’t be sold. We can order a payoff for the deal, but we cannot negotiate the payoff; this responsibility falls on the seller.
What if an LLC owns the property? Do you need the LLC docs? Who signs the paperwork?
The person with proper authority who owns the property has to be the one to sign the documents, and we have to ensure that the person selling the property has the right to do so. When it comes to an LLC with multiple members, if a member without proper authority is the one signing the documents at closing, then the other members of the LLC can come back later and say they didn’t actually want to sell the property, which creates a huge legal situation. Because of this, when an LLC is purchasing a property we require their formation documents showing they have been properly formed in the probate court, as well as their operating agreement so we can see who has authority to do what within the company. Our default with a multi-member LLC is to have all members sign off on the deed; if one member is able to convey property based on the operating agreement, then that person can sign everything else.
When an LLC sells a piece of property it’s a little different. We now have to also verify that they’re in good standing with the Secretary of State and that the Secretary of State hasn’t levied anything against that LLC. This can be confirmed with the certificate of good standing through the Secretary of State, which can be ordered online by the seller.
What happens when one member of an LLC passes away? What do you have to do to be able to sell a property the LLC owns?
LLC membership can be controlled in many ways. It can be controlled by the operating agreement, which can say that in this case the other members have to buy back the deceased member’s share. In other cases it can be controlled by the estate. If the deceased member’s will said that upon his death everything would go to his wife, then his wife is now in control of those shares of the LLC and she would have to perform that role. When we see that a member in an LLC has passed, we have to look to see if there was an estate, if a will has been filed, or if an estate has to be filed as intestate. There is a rule in Alabama that states that you can file a will within five years after death. This means that the other members need to decide if it’s worth the money to go through probate court, or if it makes more sense to wait five years and then file an heirship affidavit, which costs significantly less.
How useful is it to have previous title work and existing title insurance from the seller? Will providing this to the attorney reduce the cost to the buyer?
This is a great tip. If you have the previous owner’s title insurance you can use that to get a reduced rate the next time you sell the property. The limit to this is 10 years, so if you’re within that 10-year window we can apply it toward a reissue rate because it’s helpful to us to know that someone else has already reviewed title and said it’s good. We can link to that coverage when submitting our own and show that they’ve already insured it from that point back and all we have to do is cover from that time forward. It’s a great idea to have your sellers provide their owner’s title policy to the attorney when they’re selling their house. If the attorney finds a break in the chain of title that could hold up closing but they see that you already have title insurance covering that previous issue, then we don’t have to actually fix it. This can save weeks of time and a lot of money.
Are the default splits local to Madison County contracts?
Yes. The Real Estate Commission works with local attorneys to draft those contracts, and all of your default contracts in North Alabama will include default splits for title insurance. If you have an attorney draft up a contract specifically for you or you use a contract that came from your broker rather than the Real Estate Commission, then that’s a whole different story. The standard in our area, though, is that title will be split. The title search is not a split fee; this is a buyer fee. The deed is not a split fee either; this is a seller fee. The owner’s title policy, the lender’s title policy, the commitment for the lender, and the closing protection letter (CPL) for the lender are all split by default between buyer and seller. If you’re on the seller side, it’s always good to notify them of the fees they’ve agreed to pay by signing the contract, and that these fees are not covered in the seller paid closing costs if they’ve agreed to pay any. If you know your seller doesn’t want to pay title you can add that to the additional provisions — an attorney can help you draft that language if needed.
Do you recommend that sellers link up with an attorney for title work before listing?
We don’t typically worry about title work before listing. We’re always happy to do a quick title search online if it’s in Madison County and you just want to see what’s out there, but if you order the title search before we have a contract then we usually have to invoice you for the title search, which would amount to around $150 (and can be more depending on which county the property is in). Some people are very conservative and want to know what’s out there before they even go under contract, but it’s not that big of an issue. Your contract allows for a curative period if there are title issues; likewise, it also allows a buyer to exit a contract if title issues can’t be cured. There is no reason to allow title issues to scare you into not entering into a contract. Once you understand title insurance and how it plays in to a contract, you should feel comfortable entering into a contract on good faith that there are no title issues or that if there are they can be fixed.
We do perform title searches early, especially for clients in the county who are under metes and bounds. Sometimes buyers will have heard about restrictions in a specific area and want to know what those are before they get into a contract, so they are willing to pay the $150 up front in order to make an informed decision. We’re always happy to do that ahead of time, just let us know.
