What Is A Title Search And Why Do You Need One?

A Title Search is conducted for many reasons.  The most common is before the transfer of ownership interest from one party to another or simply put, “before it is sold”.  If the buyer is securing financing for the purchase, the lending institution usually requires proof of ownership of the seller and their right to transfer interest as well as to ensure that there are no outstanding liens or encumbrances on the property that may be associated with the subject property.  In some instances a lender may want to use this information for title insurance, thus adding a high level of security to the lenders investment.

Experienced investors routinely obtain title search reports.  One of the biggest mistakes commonly made by a novice investor, is the failure to obtain a Certified Title Report prior to a sale or auction   Sean O’Toole, founder and chief executive of ForeclsoureRadar.com says on MSN.COM  that a title search is your best chance of success and that “the title search is must.”

Litigation and property rights are other important reasons to obtain a title report.  For example:  What do you do if your home is being wrongfully foreclosed?  How do you resolve an ownership dispute?  Does someone else have the mineral rights to your land?  Do you suspect you inherited land from a deceased family member, but you can’t prove it?  What if you are being audited by the IRS or other government agency? Did you re-invest your capital gains into a piece of real estate in accordance with the law? How do you prove that you did?

The bottom line is, if you are buying, selling, financing, litigating or investing in a piece of real estate, it is part of your due diligence to obtain an official title report.

What is a title search?

1.      A title search is a process of determining who, from the official public land records, has the legal right of ownership to the subject property.  The answer can be as simple as a single person owning a house or as complicated as multinational corporations owning fractions of interest that may contain mineral rights, easements, contractual covenants, obligations and rights of survivor ship.

2.      There are two typical types of searches.  A Current Owner Search and a Chain of Title.  A chain of title search is just what it sounds like. It is the historical record of ownership from one party to another up until the present time.  A chain of title is usually for a specific period of time and is often used for mineral rights, litigation, title insurance and historical research.  A current ownership search looks at the subject property starting from when the current owner first took possession of the property.  This could be 2 weeks ago, or 2 centuries.  It is like a snapshot in time of the financial and legal standing of that property as it currently exists.

3.      A title search can show you if there are any open liens, mortgages, and deeds of trust or even other owners.  This information can be critical to determine who is needed in order to legally transfer the ownership to another party

4.      In addition to all of this, the title search provides the present status of real estate taxes and other municipal charges that may be due and payable from previous years.

5.      A quality title search will also contain a judgment search.  This is performed to determine whether there are any unsatisfied judgments, federal or state income tax liens, mechanic’s liens, bankruptcy or other judgments against the seller or prior owners that attached to the property.

6.      Some title search services may provide a list of “Comps”.  This type of information generally shows the buying and selling history of similar properties in the local neighborhood.  This information is important for home buyers, investors and developers.

REO Sales Surging

Large lending institutions are beginning to benefit from the rise in home prices by selling repossessed properties, or REO’s, at an accelerated rate.

Investopedia explains REO (Real Estate Owned) as “If the property is real estate owned, the bank will then go through the process of trying to sell the property on its own. It will try to remove some of the liens and other expenses on the home, and then try to sell it on the market. Real estate investors will often go after these properties as banks are not in the business of owning homes and, in some cases, the house can be bought at a discount to its market value”.

Institutional investors had backed off the markets earlier this year, due to bidding wars, but have recently shown a renewed interest.  CNBC reports that, these investor purchases “represented 7.7% of all home sales in November, up from 6.3% a year ago”.

According to RealtyTrac, sales of bank owned homes accounted for 10% of all residential home sales in November. An increase of 9.1% in October and is the driving factor for the third consecutive month of increases in REO sales.

“Lenders are taking advantage of this environment to unload more of their bank-owned inventory and in-foreclosure inventory at the foreclosure auction,” said RealtyTrac’s Daren Blomquist

Blomquist further states that “as the backlog of distressed inventory available dries up in many of the markets with the most efficient foreclosure processes, namely California, Arizona and Nevada, with Georgia not far behind, overall sales volume is declining and will continue to do so until more nondistressed sellers enter the market.”

“We have seen an uptick in REO offerings, which is a little surprising for this time of the year,” said Rick Sharga, executive vice president at the online auction house, Auction.com.

CNBC reports, that “previously, mortgage servicers had put foreclosed properties up for sale at the full value of the loan, but those usually went back to the bank, as investors sought a larger discount. Ironically, as prices are rising, servicers are discounting the homes more”.

A midst the rush to invest, Fannie Mae has announced it is giving non-investors additional time to review its bank-owned properties before allowing investors to compete.  Fannie Mae’s “First Look” program used to give owner-occupant buyers 15 days to make an offer before investors could bid. That has now been extended to 20 days.  This could be in an effort to give the average consumers the needed time to secure financing.  “The goal has always been to sell to owner-occupants whenever possible,” said Fannie Mae spokesman Andrew Wilson.  RealtyTrac puts the all-cash sales at around 42% of the total distressed sales market.

High-end Foreclosures Skyrocket as National Rates Come Down

Recently released data from RealtyTrac, shows that overall foreclosure rates are trending down 23% through October 2013, but foreclosure activity on homes in the $5 million-plus range is up 61% from the same period last year.  Although these high-end properties account for a tiny portion of the market, less than a total of 200 in 2013, the financial impact on a foreclosing lender can be significant.

“A home selling for $5 million or above represents the ultra-luxury end of the market, and so far in 2013 we’ve had 34 properties close over that price with the average sale being $7.7 million,” said Emmett Laffey, CEO of Laffey Fine Home International, covering the five boroughs of New York. “Any foreclosure properties in this type of ultra-luxury market usually get purchased very quickly since there is one thing all super rich buyers’ want, an outstanding deal on a real estate transaction, and in most cases foreclosures of this magnitude come with several million more dollars of built-in value.”

Even though California high-end foreclosures are down from a year ago, RealtyTrac still reported that “Florida and California together accounted for more than 60 percent of all ultra-high-end foreclosure activity” in 2013.

Leading the market for luxury home foreclosures is Miami, Fort Lauderdale, and Pompano Beach in Florida.  Other national hotspots include Los Angeles and Orange Counties, California; Fulton and Cobb Counties, Georgia; Orange County, Florida; Long Island New York and Northern New Jersey respectively.

Avalanche of money flowing into the real estate market

Big money sources are pouring billions into real estate in the past 90 days. CNN reports that financial institutions are aggressively jumping to real estate investment. “Hedge funds and private equity firms have been rushing in to buy up companies and assets in every part of the housing supply chain, including undeveloped land, homebuilders, and foreclosed homes” Private equity firms are also getting in on the game. Blackstone Group spent $2.7 billion last year to buy 17,000 single family homes, post-foreclosure, around the United States and plans to continue ramping up those efforts in 2013.”

At the same time the Wall Street Journal says that markets are up in many markets. “More and more markets post gains in median home sale prices. The National Association of Realtors reported Monday that the U.S. median home price rose 10% between the fourth quarter of 2011 and the fourth quarter of 2012. That’s the biggest yearly gain in the median price since the fourth quarter of 2005.”

Mortgage News Daily reports that inventories are decreasing as lenders dump foreclosure property into the pipeline. “The unsold inventory of existing homes was at the lowest level since January 2001. “

At TitleSearch.com the volume of foreclosure related title work is up 45%, with many investor clients scrambling to buy properties as many deals are showing up at auction. Foreclosure.com CEO Brad Geisen  is observing a similar trend. “A lot of investors see a short window of opportunity where there’s good inventory on the market at bottom market prices,” said Geisen. “No one knows how long it will last, so these investors are trying to buy as much as they can right now.”

Missing liens using “online” title searches

The worst case scenario on a title search is missing a lien. So how does it happen? One of the most common reasons a lien is missed is because of using “online” sources for title information. I don’t mean ordering a legitimate title search from a website, I mean trying to shortcut the search process by using data to piece together a search, or “online records” as a replacement for an official property title.

Even major title companies run into trouble on this. Several title insurers have been sued for missed liens when their electronic searches failed to discover liens which were actually on file in paper documents in the official land records. In some cases the searches were deficient because all the names or sources were not checked either.

Three examples of missing liens using “online” title databases:

“a title examiner at Guaranty Title, performed a title search of the Property (the “Second Search”) using the Orbit search engine. Id.at 8:3-9:10. Edgeton’s title search did not reveal the federal tax lien, nor did it reveal the four judgments and the state tax lien found by West Title.” Link to case.

“Columbia failed to report the earlier sale to Dr. Khan in the commitment or the policy.  Cambridge and Columbia in performing the title search and failing to discover and report the Khan deed,” Link to case.

“The land was burdened with an easement that was publicly recorded but was not indicated on numerous versions of a title commitment issued by Chicago Title Insurance Company” Link to case

A thorough title search uses official land records to abstract the title, and industry best practices to run the search.

The videos below describe how liens can be missed on title searches as well.

 

Real estate title document fraud continuing to be a problem for property owners

The reality of real estate title fraud is not over.  There are still criminals out there committing fraud on real estate title documents, and being prosecuted. The problem is that even after prosecutions the title defects remain for the legitimate property owners. Liens, wild deeds, and false transfers can create clouds on title and problems for owners.

In one example, over 10 homes in Missouri were found to have documents who’s signatures had potentially forged notaries.  One notary compared here records with the title documents on file. “I don’t know what’s going on,” said a stunned Victori Vessel. “Obviously, someone is doing something with my stamp and my signature because if they were here to get something notarized, it should have been in this book.”

A California investigation is working on uncovering other mortgage and foreclosure frauds on consumers. “Many people think that these are civil problems that have to be sorted out in court,” investigator Karl Anderson said. “While that is sometimes the case, other times these people truly are the victims of a crime.”

For decades these schemes have been appearing in title forensics investigations. It does not look like they are going away.

Due diligence prior to foreclosure auction purchases

happybuyerAs more foreclosure properties are released from inventories, new opportunities exist for investors. At TitleSearch.com our investor clients are seeing increased volume of available deals and even higher margins on purchases.

However although foreclosures are priced much cheaper than retail/Realtor/MLS deals, they come with the responsibility to perform appropriate due diligence before bidding at auction or dealing with REO’s. This can include a proper title search, inspection of structure, and legal analysis of the purchase.

Not only will the due diligence reveal any remaining liens on the property, it will also show if the foreclosure is on a primary debt or subordinate instrument. If a bidder wins an auction but later discovers that the sale was for a second mortgage or other secondary lien, the property is still subject to priority recordings. In one recent case, a buyer purchased what turned out to be a homeowners association lien at auction, and was still subject to a first mortgage from Wells Fargo.

According to the Miami Herald article on risks of buying at foreclosure, “Establishing clear title and control of the home, which some cash buyers have never set foot in, can mean sorting through a thicket of foreclosure filings, fraud allegations, bankruptcies, other mortgages, association liens, creditors and combative tenants.” In one example from the story, a foreclosure buyer found that the delinquent borrower was properly foreclosed, but was using a complex set of legal maneuvers to avoid eviction. The court filings, emergency motions, and bankruptcy should have been discovered in the due diligence and would have cautioned the buyer to determine how to resolve the issue before purchase. Now the buyer has a house he can’t access because the foreclosed owner is still living in it.

The buyer is in a difficult situation.  He thinks the prior owner is finding ways to stall eviction so she can live rent-free in the investment property. “This is a sophisticated squatter. She’s playing the system,” he said. Attorneys say more horror stories come from the clerk’s foreclosure auction in Miami-Dade, a county where there is a backlog of 53,000 foreclosure cases.

In neighboring Fort Lauderdale, there are stories of unresolved open permits encumbering properties. Board-certified real estate attorney Gary M. Singer answers a question about how open permits can be a problem for a new owner: “A homeowner who gets certain work done is required to get a permit and pay a fee to the city or county. Usually, the contractor takes care of this. After the work is completed, the permit must be closed, often after an inspection by the building department. This final step often is overlooked as the contractor rushes off to the next job, leaving the open permit in place, sometimes for years.

The problem comes in when the new owner goes to pull another permit and now has to deal with getting the prior permit closed before the building department will issue the new permit. To close the old permit, typically a new contractor will have to inspect and possibly fix the old work, and the building department will have to come out and inspect. This can cause quite an expense for the new owner and it will become your headache after you move in.”

Higher profits come with foreclosure properties, but investors need to do the extra leg work of performing good due diligence, and having a team of qualified professionals to get them good title info, property research, and legal advice.