Discover what every investor should know about real estate title, including title searches, title commitments, title insurance, title companies, title problems, quiet title, dirty title and how you can use title issues to your advantage as a creative real estate investor.
What is Real Estate Title?
Real estate title is all the documents recorded against the property at a recorder's office. In every municipality, county, borough or parish, there is an office called either the clerk of the court, the register of deeds, or the recorder’s office. This is where official real estate related documents are recorded against a property's title.
- Ownership: Some recorded documents relate to ownership. You may be familiar with the terms “title holder” or “vested on title”. These terms refer to who is referenced on the current deed of record as the grantee, or owner, of the property.
- Liens & Encumbrances: Other recorded documents include liens such as mortgages, past due property taxes, unpaid contractor bills or encumbrances like a Homeowners Association (HOA) Covenants, Conditions and Restrictions or Deed Restrictions.
All of these recorded documents collectively are considered the property's title.
What is a Title Search?
A title search involves researching all the recorded documents against a property's title to determine ownership and any liens or encumbrances. Usually a title company hires a professional title researcher to do a title search in preparation for issuing a title insurance policy.
But for you as a real estate investor, you need to do your own title searches during the negotiation phase to avoid potential issues with ownership (meaning the person you're talking to may not be the title holder) and to understand the liens on the property. Often when we're negotiating with motivated sellers, they're thinking in terms of how much cash goes in their pocket, and if you are negotiating solely on how much they say they owe on their mortgage, you may be missing some key information. Their mortgage may not be the only lien against the property.
When you do your title search, you can access the same information from the recorder's office as a professional researcher. That database is available online, usually for free. Sometimes a local recorder's office charges a small fee, but either way, it's worth it. Now, it won't be completely official because at the end of the day, you still need to hire a professional title researcher, but it's a step in the right direction to ensure that you're not wasting your time and you're able to negotiate from a position of strength when issues are discovered through a title search.
What are Title Problems?
When issues are discovered in a title search, we in the industry refer to those as title problems and they usually fall into one of two categories: either ownership problems or liens that need to be released and removed.
Ownership problems can be extremely challenging for real estate investors when you're dealing with a seller who's going through a divorce or where there's been a death. If someone doesn't have the complete authority to execute a deed, meaning transfer title from them to you, that's an ownership title problem. And this can cost you a lot of money if you don't know what you're doing.
Real World Example: A rookie investor thinks they’ve found the deal of a lifetime and they get it under contract and start to move towards closing. Then it's discovered that the person they're negotiating with doesn't technically own the property yet. In fact, it's owned in the name of their deceased grandfather and in the will, it says that their grandson gets the house upon death. So all seems clean. Well, not really because it was owned in tenants in common on the current deed of record. And so technically, grandpa who just passed is no longer the owner. His estate owns the property, and it needs to go through probate.
The problem is that the grandson talked the investor into non-refundable earnest money. After the property goes through probate, it's discovered that there's more than one heir. Now there is more than one person that claims rights to that property, and they no longer want to sell for the great price that rookie investor originally negotiated. And since the contract they executed was invalid because the seller that signed was not the owner at that time, the rookie investor loses their earnest money, and the property is sold to another buyer.
So the first title problem is related to ownership, and your quick initial title search can reveal that, but if not, it will be revealed when you hire a title company in your due diligence phase.
Liens That Need to be Released and Removed
Liens can be anything from an IRS tax lien to an unpaid contractor. And oftentimes sellers legitimately don't know they're there. Like I mentioned above, if you're negotiating based on how much money is going into a seller's pocket, you need to be careful when you talk to those sellers. I make sure they know negotiations are contingent on the results of a professional title search. If it's discovered that there are additional liens that have not been paid, those are liens are their responsibility, not mine.
Municipal Liens Search: Not only do you need to do a title search at the recorder’s office, but there's also a municipal lien search. This is when a title company reaches out to the utility departments to see if there are past due bills. In certain states, past due utility bills carry with the person, and in other states like Florida they remain with the property. I purchased a property one time and when we did a municipal lien search it showed nothing past due. Then a week after I closed when I was trying to get the utilities turned on, they were requesting $1,600 from me. My title company paid that bill.
How to Solve Title Issues
Who solves title problems when they appear? In theory, it's supposed to be the title company you hired, but in practice it is oftentimes you and the seller working through any title issues.
Real World Example: The property owner refinanced their home 7 years ago and the original first mortgage was supposed to be paid off by the new refinance loan. However, a satisfaction of mortgage was never recorded so technically, the old loan was still against the property. To make matters more complicated, the bank of the original mortgage didn't exist anymore, so there was no way to get a release from the old mortgage company. How was this problem solved? The title company suggested some ideas but ultimately, the investor and the seller had to solve the problem by going back to the title company that closed the refinance 7 years ago and getting documentation to show that it was paid.
And this is where you can use title issues to your advantage as a creative real estate investor. Title issues are the kind of situations where you can take the bull by the horns and find solutions and make good money. You're the one that gets the deal done when other people leave it to someone else. I love title problems that are solvable because I'm willing to roll up my sleeves and get it done and solve it. And that can create a lot more economic opportunity for me than the person that just wants to walk away.
What is a Title Company?
A title company is an insurance brokerage that issues title insurance policies. Now, in some states the title companies handle the entire real estate closing from start to finish. In other states, a closing attorney handles the closing, and the title insurance company simply issues the title insurance. And if you're in California, there's also an escrow company involved.
What is Title Insurance?
In theory a title insurance policy protects buyers from claims that may arise after purchasing a property, not only in relation to ownership, but also in relation to any liens that didn't get paid off. However, this doesn’t always play out it the real world.
Real World Example: I had an apprentice that purchased a property for $150,000 and at the time of purchase he bought title insurance. He had a lot of experience in rehab, so he put $70,000 into a major rehab. He was in it about $220,000 and then he sold a property for $350,000. About a year after he sold the property, he got a lawsuit in the mail from the aunt of the person he bought the property from. In the lawsuit she was claimed that her niece didn’t have the authority to sell the property to him.
The lawsuit was for $200,000 plus all her legal fees. When he reached out to me, I said, “Well, that's what you bought title insurance for. File a claim with First American, your title insurer, it’s their job is to defend you in that lawsuit”. As you can imagine, insurance companies love to write policies and collect premiums, but they hate to pay out claims. So First American initially rejected the claim. Our apprentice had to hire an attorney to file a lawsuit against First American to get them to honor their insurance policy. First American did eventually represent him, and it turned out that the aunt was wrong, and our apprentice Sean won in the end. Thankfully, although we had to twist their arm, First American paid for all the legal fees to protect him in that lawsuit. So that's an example of title insurance. And in the real world, it's like any other insurance policy, you're still going to have to fight to get the insurance company to do what they promised to do in writing.
What is a Title Commitment?
A title commitment is a report that is generated by the title company after a title search is completed and analyzed that explains who the current title holder is, what must be satisfied prior to the insurer issuing the policy as well as any exceptions to the coverage. The report itself is broken up into several sections, or schedules:
- Schedule A: The most important part of this section is the explanation of who the title holders are.
- Schedule B: This outlines all of the exceptions to the coverage.
- Schedule C: This describes all of the liens and encumbrances against the property as well as what the insurer will need in order to satisfy each one.
Why Are Title Commitments So Important to Investors?
- We do our own title search during the negotiation phase.
- As soon we get the property under contract, we send it to a title company for a professional title search because we want the title company to get us a title commitment during the due diligence phase.
This gives us the ability to see not only truly what's on there, but more importantly, what a title insurer is willing to do and not do, what their rules and requirements are. Because sometimes we are structuring a subject to deal and usually title insurance companies will not issue a title insurance policy if you're not paying off one of the underlying mortgages. Now, in some situations, we found title insurers that will add an exception to the policy, but most of the time in most states when it comes to subject to transactions, we're not able to get title insurance because we're taking over an existing loan and there might be other liens that we're leaving on title as well when we transfer the ownership.
So the title commitment gives us a great look at what the potential risks are going to be for us doing a subject to deal and any potential issues down the road. We typically will not do it if there's a divorce or a death in the equation. However, if it does look clear, a clear title, then we will do a deal where we do not get title insurance. Now, that is not for the faint of heart, and you need to know what you're doing. If you do a deal without title insurance, you've just done a dirty title deal.
Dirty title refers to properties that can’t obtain a title insurance policy from a title company. These can include subject to properties and tax foreclosures. A lot of tax foreclosure properties do not provide title insurance, nor can you get title insurance for the new buyer when you sell immediately. Instead, you need to put the dirty title through a legal cleaning process called quiet title or quieting title. It doesn't always work with every lien in every situation, but it gives you a shot at cleaning up a property with dirty title or in the case of a subject to it gets cleaned up by simply paying off the original first mortgage.
Buyers that acquire properties through a tax foreclosure must go through the quieting process and it can cost several thousand dollars or more, depending on how many different encumbrances and liens that are part of that quieting of title. If you can't clean it up completely, you might still be able to use the property. Maybe you could rent it out, or even live in it. So it's not the end of the world. But if you're going to play in this sandbox, you need to be aware of two things:
- If you can't clean up the title with quieting, you may not be able to resell it to a conventional buyer because they won't be able to get title insurance and lenders require title insurance to qualify for a loan.
- You may not be able to refinance it either because again, lenders require title insurance.
People still invest in dirty title properties, but you can't refinance it or really sell it in the future. You basically must use it into perpetuity. But wait! There's one more aspect to this. You've heard the old phrase; time heals all things. Well, sometimes dirty title properties don't get cleaned up by the quieting of title, but by time.
Statute of Limitations
Enter the statute of limitations, which refers to how long a rule remains in place. So when it comes to liens on properties, especially in Florida, the statute of limitation for almost all liens except for mortgages is 10 years at which time the lien is no longer valid. A great example of this is an IRS lien. They literally put on the IRS lien when it expires. And this can provide you as a real estate investor the opportunity to make a lot of money on deals simply because you know about this when others don't.
Cleaning Up a Dirty Title Deal Real World Example: I had a seller contact me in a panic. They needed money as fast as possible because the owner was being moved into a nursing home. They were looking to get $10,000 out of the deal. Now, they had been working with a real estate agent, but they hadn't sold the property yet. The problem was the agent couldn't drop the price any further, and it was because of the liens that were against the property. When they contacted me, I looked at the deal, and within about five minutes I happily agreed to give them $10,000 for the deed. And yes, I did do a title search, but I did it myself, and I was confident to do it on my own in the county that I was working in.
Why was I so quick to do the deal? Well, what happened was they had a $70,000 IRS lien that only had four months left until the statute of limitations was over. Then there was also a Ford Motor Company lien for another $30,000 that too was about three months from expiring.
The seller thought they had ripped me off and the agent was baffled. But I just waited it out. I did a little bit of rehab while I was waiting, and that deal made me over a hundred thousand dollars simply because I knew about the statute of limitations. Now, the seller needed money immediately, but if they had waited just five months, they could have made an extra $90,000.
5 Rules of Real Estate Title for Creative Real Estate Investors
- Do your own title searches when you're negotiating with sellers so that you know you're negotiating with the actual owner and you understand what liens are recorded against the property.
- Review title commitments rather than title searches because title commitments give you a clear understanding of what the title company is willing to do (and not do).
- Don't shy away from properties with title problems because they can be great opportunities with no competition.
- If you are dealing with a dirty title property, you can clean it up with quieting title or waiting out the statute of limitations.
- Whenever possible, get a title insurance policy when purchasing property but remember that they're an insurance company like any other, and you will have to fight them to do what they promised in writing if you ever have file a claim.
Every Successful Investor Has a Mentor
Real estate title can be extremely complicated and there is no video, podcast, blog article or book that can explain it since every deal is different. Eventually, you'll run into title situations that require a mentor to help you through them. In fact, every successful creative real estate investor has a mentor. Get your mentor here: Freedom Mentor Apprentice Program.