Title: REO-Foreclosure Buyer Beware

Dated: 07/26/2019

Views: 32

INSURABLE TITLE vs MARKETABLE TITLE 

Banks often require buyers of REO properties to accept insurable rather than marketable title. 

Marketable Title is title that is clean and has no defects that will come up again in a future title examination when the property owner attempts to obtain financing or more importantly tries to sell the property.  Insurable title, on the other hand, is title that may come with a host of defects. Some of which are summarized below:

1. A survey may disclose easements, improper boundaries, illegal structures or encroachments. These issues may be cleared up with a Seller's proper affidavit if the Seller owned the property for a number of years. In the case of a bank as a Seller, an affidavit is not likely. 

2. If there's a lease that predated the mortgage, it may not be cut off by the foreclosure. 

3. If the property doesn't comply with building codes or if there are violations of covenants or there are restrictions on the property, the foreclosure may not extinguish those problems. 

4. Finally, there may be liens on the property that survived the foreclosure. Though a title company may insure the title with these problems, they can be serious potential problems down the road for a Seller delivering marketable title. 

5. The Bank may have missed, or improperly served a party to the foreclosure proceeding.

Despite these defects, a title insurance underwriter will weigh the risks involved and allow the title agent to issue a title policy even though there may be blemishes and potential problems down the road. Ironically, should the value of the property increase dramatically, the Buyer is only protected to the extent of the original purchase price. 

In contrast, marketable title is a title that is clean, and offers the buyer more protections in the future when he attempts to sell or refinance the property. You may want to advise your Buyer to select his own title company when purchasing an REO. 

Unfortunately, a great number of foreclosures are filled with title problems. When these problems arise, often times the Lender will be required to go back and either re-foreclose the property or obtain the necessary releases or corrective documents. As a result, you should recognize the need to have an independent title exam performed for anyone who is not willing to accept the lender's title policy which often has countless exclusions for liens, etc. leading Buyers to have a false sense of security. These exceptions are specific title issues that are excluded from being covered under the title policy. Once again, these may include existing boundary lines of the property or items that the title policy issuer doesn't want to cover. The title insurer will issue the policy with the exceptions or not at all. The Buyer may not be aware of these exceptions unless he goes to sell and the subsequent Buyer can't finance the property because his title insurance company will not insure the property.

Too often Buyers haggle over the purchase price and overlook some of the biggest expenses of sale on closing statements. Many times Sellers dangle the carrot of even offering to pay for the cost of the title insurance provided you close through the Seller's Closing Agent. In essence, oftentimes there may be hidden defects or costs involved.

Remember the old adage "if it sounds to good to be true..... At the end of the day, protect yourself, and be sure to engage your own title company to perform an independent title examination any time the Seller offers to provide title insurance because insurable title does not necessarily mean marketable title!

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Courtney Silverman

• I KNOW RESIDENTIAL REAL ESTATE • Full-time top producing Real Estate Professional 18 yrs+ • Marketing, Negotiating skills, Competence & Ethical standards • Get your home sold - ASAP for top ....

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