Preparing a home for sale includes dozens – or even hundreds – of steps choreographed between seller, agent and other key individuals. But the transaction likely will fail to succeed if issues are found with the deed of trust, better known as title.
That’s why it’s critical for a competent real estate professional and title officer to review the title as soon as possible and help identify any potential concerns. The industry calls it “clearing title,” somewhat like to when people may need to clear one’s name. In both cases, when there are doubts proof must be provided to set the record straight.
Here are 10 potential red flags usually tied to title that may impact the sale of a home if not resolved before completing the transaction:
BANKRUPTCY: When the liabilities of an individual, corporation or firm exceed the assets.
All open bankruptcies require the debtor to get permission from the court to sell an asset (the property) or to take on new debt. A letter from the bankruptcy court will be required to close the deal on a home sale when debts are linked to the title.
COVENANTS, CONDITIONS & REGULATIONS: Better known as CC&Rs, they are a declaration of rules and restrictions on property owners – typically seen within a shared living community such as a condominium.
CC&Rs prohibit certain types of improvements to a residence, for example. A Homeowners Association can take legal action against an owner and win legal judgments for damages if rules are flouted – proceedings that may slow or prevent the sale. (Buyers should read CC&Rs and all related HOA documents to understand the rules and potential risks of purchasing the home.)
COURT ORDERS: An official proclamation from a judge that a party must do or abstain from doing.
It is common to see liens – or “holds” – placed on the title for failing to follow a judge’s order, particularly when money is involved and can be claimed at the time of the property sale. This typically occurs when a person (homeowner/seller, in this case) fails to pay child/spousal support. These judgments can take several weeks to clear – usually through the district attorney’s office where the judgment took place.
EASEMENTS: An irrevocable right to use some part of another person’s real property for a particular purpose.
Most easements are routine, in which a utility company needs access to the property to maintain service of its electricity, water or internet. However, some easements may be more complex and require closer examination, particularly when a buyer wishes to make changes to the property that may not be allowed under the easement. This could include wishing to build a detached accessory dwelling unit or a pool in the backyard when easements – or potentially non-title issues such as zoning rules – forbid such a change.
ENCROACHMENTS: A physical intrusion onto neighboring property, usually from a mistake regarding boundary lines.
This can be a big deal if not remedied with documentation on the title and – in many cases – revisions to the boundary agreed by the affected property owners. A lender typically will not offer a mortgage where a building or septic system creep on a neighbor’s land without clear documentation signed by both owners.
NOTICE OF PENDING ACTION: Also known as the Latin term “lis pendens,” it is a notice stating that there is a lawsuit pending that may affect title or ownership.
This is a huge concern and should prompt buyers to either get an attorney or walk away from purchasing the property. Pending actions are typically seen in divorce situations, which can often take a lot of time to resolve, particularly when both parties in the divorce are named as property owners.
NOTICE OF VIOLATION: A written communication from a regulatory or enforcement agency – possibly the fire department or health board – that notes a violation(s) of the law.
This is one of the more serious matters when they are linked to a title. The violation(s) must be corrected before the agency can release the notice and allow property owners to move forward with a sale.
STATEMENT OF INFORMATION: Known also as a Statement of Identity or Statement of Facts, it is a questionnaire that the title insurance company will request from either the seller or buyer (or possibly both) to confirm the identity of individuals involved in a transaction.
This is a common issue for people who have common names and need to differentiate themselves from other people who may have a shadier history. A “John Smith” may have a lien against the title for unpaid invoices but the person selling the home is not the same. The title company will take the seller’s statement of information and eliminate the other John Smith(s) through an ID verification process.
TAXES: A compulsory contribution to local, state or federal government on income, business profits or a type of goods and services.
The tax man will eventually catch up to homeowners who fail to fulfill their obligations. The government will take what it is owned at closing, assuming it is less than the sales amount. On the other side of the equation, certain properties can qualify for partial or full tax exemptions in Washington. This can result in a reduced tax bill and, at times, lower tax assessed values of the property. Those exemptions usually expire with the transfer of ownership – but it is wise that buyers and sellers alike understand the impact before closing. (Consult with a financial advisor and/or lawyer to get the right answers.)
TRUST DEEDS: An instrument that creates a voluntary lien on real property to secure the repayment of a debt.
This is often a routine step at closing in which the escrow company will pay off any outstanding debt held against the seller’s title. That includes liens for non-payment of municipal services or to clear mortgage debt on the home. Matters can sometimes be complicated by poor county records or the original mortgage lender is no longer in business – but escrow generally sorts out most issues.
In many of the above scenarios, the title and escrow teams can help sellers and buyers navigate these uncharted waters. However, if there is any potential issue or delay in clearing the title or in getting to the closing table, it is extremely advantageous to have legal counsel represent you in these matters. It’s only one of the biggest transactions of your life – well worth the investment of a trusted representative.
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This story was researched from a variety of sources, including information provided by Fidelity National Title.