When someone says tracking, you can think of a detective following a spy or an episode of a TV show where a detective follows a suspect on a case. In fact, the term applies to one of the best kept secrets in the real estate industry. Still, only some of the most active professionals use it regularly. That was until last year, when less active investors found a critical need.
I mention tracking because keeping it secret is not nearly as important as its purpose, which is to help real estate investors steer clear of a specific type of problem: “Chain of Defective Titles” problems. It has been estimated that forty percent (40%) or more of all foreclosed properties have chain of title problems.
These faulty titles sometimes become apparent when the property is transferred to another investor, or when the new buyer tries to obtain conventional financing for the property. The following closing agent is not employed by the foreclosure lender and a more extensive title search is used. The problem may be simple, since the lender who foreclosed on the mortgage did not actually have the mortgage note and could not legally do so, but did so anyway. When the owner did not make any foreclosure defense, or even show up at the hearing, title to the property was transferred to the lender at auction.
An even more common problem is when the foreclosure lender initiates the foreclosure process by having the lis pendens served on the person on the mortgage and anyone living in the property. If someone accepts that notice of service that is not on the citation or related in a specific way, the service is illegal. This means that the foreclosure sale may also not be legal and that there is a defect in the chain of title.
The problem is often referred to as a break in the title chain. The break occurs when an individual entity transfers title to the property to another person or entity and he or she was not the true owner of record.
A very common example is when their children approach an elderly parent and ask them to sign a quitclaim deed so that, when their time comes, the deed will be recorded and the property will be transferred without going through probate. At least that’s what the kids think. In reality, the property must be probated in order for the court to prosecute all claims against the decedent’s estate. What if one child is transferred the deed and the other siblings don’t get their fair share?
Children often transfer property from their parents before they have to commit the parents to a nursing home to get state or federal money to support the parents’ nursing care. These transfers may be illegal as they mask the parents’ assets. They also cloud the chain of titles when discovered, which can be years later.
Follow-up is the process by which you have your title company review the closing agent’s title work for the transaction as soon as the closing agent completes the work. This is a must for us when dealing with REO (bank owned) properties due to inadequate reviews by so called “factory closing agents” that banks use.
In summary, it may seem like an unnecessary expense to do title work twice for a single closing, however the cost is similar to an insurance policy in that the actual cost is small compared to the risk exposure. The most common money savings we see are on faulty lien searches, lost water bills that have not been converted to liens, and sellers in the chain of title who have no legal right to sell the property. Most of these issues can be resolved by paying the existing liens, bills or judgments or by pursuing a Quiet Title action in the court system which can take up to five years in some states, all of which is much more expensive than having your shaded enclosures.
