Understanding the Issues and Challenges
by Radian Title Services
Distressed properties can pique the interest of many real estate investors. Foreclosures, short sales, and auction listings are great opportunities to acquire assets at a discount, potentially unlocking significant value.
As appealing as it may be to seize these opportunities, deals of this nature can come with unique challenges.
Understanding Clouds on Title
Potential hurdles investors face when pursuing distressed properties are issues with the title, which can lead to what’s known as a “cloud on title.” A “cloud on title” is a term of art to describe uncertainties around who truly owns the property and what rights they have to it. This can occur when a property title has unclear, disputed, or multiple claims about rightful ownership, which may create barriers to acquisition or sale. On the other hand, “clear title” references a property title that is free from liens, substantial encumbrances, or other issues that may jeopardize ownership.
How Titles May Become Clouded
Clouds on title can stem from various issues, including unrecorded deeds, errors in public records, boundary disputes, or undocumented transfers, among other factors. This can be especially problematic in distressed property scenarios where properties have been abandoned or neglected, or where owners potentially lack the resources to resolve various legal issues.
We’ll dive into two title issues that real estate investors should be aware of, which can create clouds on title:
Liens and Judgments
A prevalent title issue for distressed properties is the presence of outstanding liens and judgments. For a clean title to be produced and transfer of ownership to occur, these outstanding claims or encumbrances need to be resolved. Such liens and judgments can happen when a homeowner falls behind on mortgage payments or other financial obligations. Creditors may place liens against the property to recoup what they’re owed. Examples include when the property may be burdened by judgments from lawsuits, unpaid taxes, or mechanic’s liens.
Investors who don’t exercise due diligence risk inheriting these liabilities, which may reduce their profits or even ruin a deal altogether.
Undisclosed Heirs
Another issue that may put a cloud on title includes undisclosed heirs. This issue can arise if a homeowner passes away without a will or without disclosing all beneficiaries. The property rights can quickly become murky as the ownership is disputed among family members. This can create a web of claims and counterclaims that can be difficult to unravel. Undisclosed heirs can also appear after a property has already changed ownership.
The presence of undisclosed heirs can be a deal-killer, introducing legal risk and the potential for litigation down the line. Thorough title research is recommended to help identify and address these issues before closing.
Tips for Clearing Cloud on Title
The first step in clearing a cloud on title is finding it. Working with an experienced title insurance and settlement services provider can be an invaluable asset in this process. Clouds on title can be revealed during title searches, helping you to mitigate these issues before closing, and title insurance helps safeguard against other title issues that were not identified prior closing. Companies like Radian Title Services have the experience and resources to help provide protection and peace of mind to pursue these opportunities. Some title issues may only be cleared through legal action.
The Bottom Line
Don’t let title issues scare you away from acquiring distressed properties, but keep potential cloud on title issues in mind. Exercising due diligence and curating an experienced, reliable team are valuable when tackling cloud on title challenges.
Understanding some of the common issues — from undisclosed heirs emerging years after purchase or hidden tax liens — can help you stay ahead of less informed investors rushing into seemingly attractive deals.
