Clear title is the phrase used to state that the owner of real property owns it free and clear of encumbrances. In a more limited sense, it is used to state that, although the owner does not own clear title, it is nevertheless within the power of the owner to convey clear title. For example, a property may be encumbered by a mortgage. This encumbrance means that no one has clear title to the property. However, standard terms in a mortgage require the mortgage holder to release the mortgage if a certain amount of money is paid. Therefore, a buyer with enough money to satisfy both the mortgage and the current owner can get clear title.
Is a title the same as a deed? A Title refers to the legal ownership and the right to use a piece of property. Deeds are the legal documents that provide evidence of title.
What does that mean for an investor and why is it important? When you’re ready to purchase a property, you always want to know that the property you’re buying has a clear title. Said title should be free of liens, conflicting claims of ownership, or other issues that could result in a big financial hit on your pocketbook. While anyone can research a property to determine if it has a clear title, it can be extremely time consuming and an individual would have to know exactly where to look for each possible issue. In addition to that, an individual would also have to know the legal processes involved in curing any deficiencies that they might find. Hiring a reputable company to do a title search is the best and most efficient way to achieve this goal.
Why would you need a title search? A title search is a process that allows you to determine if the seller owns and can legally sell the property. It allows you, or your title professional, to flush out any liens that might be against the property or the seller. Liens are more common than you’d think in the real estate world and if a lien exists on your property, it will have to be paid off at closing….or there will be no closing. Let’s look at the 5 most common types of liens.
1. Property Taxes. Property tax liens are unfortunately common, mainly because they are prioritized over every other claimant to the property, from the mortgage lender to unpaid contractors. When property taxes go unpaid, the government has the ability to step in and sell the home to pay off the remaining balance — a losing situation for everyone involved. That’s why, in some cases, a mortgage lender will assume property tax payments in order to preserve its first lien position — guaranteeing they get repaid in the case of a sale, voluntary or forced.
2. IRS Tax Liens. It’s not only unpaid property taxes that can place a lien on a property — so can unpaid Federal taxes. The IRS has a process for recouping unpaid taxes, and will typically first garnish wages in the case that there is money owed. However, if the debtor has unstable or insufficient income to satisfy the IRS with wage garnishing, they can also place a lien on a property, including on a home. The problem with these liens is that the IRS is far more aggressive than most other claimants. If significant back taxes are owed with no solution in sight, they will pursue a forced sale.
3. Contractor Liens. Another common source of liens is mechanic’s or contractor’s liens. These are placed on a property when a contractor has done work on the property but has not been paid. Contractor liens are common in the case of foreclosures and distressed properties, as often homeowners who are underwater stop paying for these kinds of services. first. Subcontractors who have been hired by contractors but not paid can also place these kinds of liens, although typically the initial burden of payment of a subcontractor rests with the general contractor and an attempt to collect the debt from the property only occurs if that general contractor is insolvent.
4. Judgment Liens, Child Support, and Alimony. If a homeowner has been successfully sued, the winning party can place a judgment lien on the homeowner’s property should the homeowner fail or refuse to pay the entire judgment amount. This guarantees that the winning party will get the money they are owed. Other legal situations that result in liens placed on a property are unpaid child support and alimony. As with judgment liens, it requires a court action to place these claims on a property’s title.
5. Mortgage Liens. When a mortgage is taken out on a property, the lender has a claim to ownership to offset the risk of lending money. The difference with mortgage liens as compared to the above types is that it is voluntary — the homeowner agrees that the lender has a claim or lien to the property until the underlying debt is paid. (This list is courtesy of Linda Aparo, a leading title insurance and real estate professional with over 25 years of experience).
When it comes to liens, consumers typically have two options: pay it or dispute it. The latter can drag out the process, costing time and money, but in the case of an incorrect claim, the time and effort will be worth it.
In addition to finding outstanding liens against your property, a title search can also uncover other issues that could complicate your purchase such as:
- Errors or omissions in deeds
- Mistakes in examining records
- Undisclosed heirs (This issue arises when someone from the past (possibly a long-lost relative) appears and claims a right, or partial right, to property ownership.
- Covenants of Records (This involves promises that the original owner made to someone else.)
Title companies report that in more than one-third of all real estate transactions they must undertake “extraordinary work” to address title issues. The title company will examine public records — often going back 50 years or more — to look for past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgments and tax records that may be defective or outstanding.
No matter how small a problem it may be, any title issue will need to be resolved in order to offer a clear title to the buyer. The results of the search will be compiled into a preliminary title report that will be given to the buyer, seller, real estate agent, lender, and attorney involved in the sale.
A title insurance policy will be your best protection against the above-listed issue and many other title problems that may become known after you close on your transaction. The cost for the policy is a one-time fee, and the policy will remain in effect for as long as you own the property.
But in order to purchase title insurance, you’ll need a complete title search conducted by a title company.
Buying real estate is arguably the most expensive purchase you will ever make in your lifetime. Bearing that in mind, it just makes sense to do whatever it takes to ensure that problems are fixed before you close on your property. No one wants to be unpleasantly surprised down the road.