When purchasing a new property, often the last things on a buyer’s mind are potential title problems that could arise later on. But the fact is that 26 percent of title searches reveal an issue that can be corrected before purchasing the property, according to the American Land Title Association. If these issues go uncorrected, they can pose big problems for investors when they eventually come to light.
“Title issues present themselves when one attempts to sell a property or to secure a loan using property as collateral,” Jacqueline McQuigg, Esq., of the Law Firm of Salas & McQuigg in Las Vegas, NV, said in an e-mail interview.
A title is a legal document that establishes proof of ownership of a property. Issues can arise if this document is not handled correctly, if there are outstanding problems regarding the property, if there has been outright fraud or forgery or if there are reasons for contested ownership, such as missing wills.
“We frequently see problems arise when people have prepared their own legal documents...and when people have simply signed documents that someone else has placed in front of them,” McQuigg said. One couple added their son to the deed to their property, assuming that the property would be divided into three equal parts. However, they opted to prepare the deed themselves, rather than with professional help. When both the father and son died, the mother discovered that she and her son’s widow each owned equal shares of the property.
“[Father] and son were both deceased by the time we met [the mother] and I advised her that she would just have to settle for half of the property rather than the two-thirds she thought she would own on her husband’s death,” McQuigg said.
Investors are advised to not prepare a title without legal assistance
“Have an attorney advise you and prepare your documents,” she said.
Another case McQuigg encountered involved a man who shared his father’s name. Upon his father’s death, this man sold property held in his father’s name, despite the fact that there was a surviving spouse and other surviving children.
“This was clearly a forgery,” McQuigg said. “We eventually settled the case, with the title company [of the buyer] contributing a good part of the settlement funds.”
Mark, a homebuyer from Seattle who requested that we not disclose his last name, ran into trouble with undisclosed title issues on the purchase of his home. Although the information was not included on the title at the time of purchase, after he bought the property it turned out there was an outstanding issue with the county regarding a driveway that had been built without a permit.
“One month after we moved in, we got a notice from the county that the driveway needed to be removed because it was not up to code,” he said. At first, his title insurance company stated that the issue was not covered, but after he threatened to take legal action, the company agreed to cover the costs, he said. Mark received $15,000, minus a $2,500 deductible, to repair the problematic driveway.
“It cost me a lot of my time, plus the $2,500 deductible. And we had to get rid of the driveway we wanted,” he said. “There’s another driveway, but it isn’t as convenient as the one we had to get rid of. We’ve been able to remove the driveway and fix it, do some landscaping, but we haven’t been able to do as much as we want with that amount of money.”
“I’ve heard that title insurance companies pay out about 4 percent of their premiums in claims, so if your title insurance says ‘no,’ then fight it. They have the resources to pay,” Mark said. “99 percent of the time you don’t need title insurance. But the 1 percent of the time you need it, you really need it.”
“Title insurance is an absolute must for any purchase, sale or encumbrance of property—even between family members—and this is where people often get themselves in trouble,” McQuigg said. “If you are dealing with a conventional lender, title insurance will be a prerequisite, but if you and your cousin are entering into a transaction you may try to avoid the expense of title insurance. Do not do so.”
In Mark’s case, though the information about the driveway was not included on the title, it was listed on the county’s website. He said that if he had known this was the case, he could have looked up the property and seen the outstanding issue, rather than being surprised later on. He recommended that potential buyers do thorough research using such resources, as not all problems will not show up in the paperwork 100 percent of the time.
When purchasing property, consulting with a professional is an absolute must for investors to ensure their real estate is free of title issues. Title insurance is required by most traditional lenders, but it may not be required for those paying cash or entering into a transaction with a friend or family member. Investors would be wise to carry out due diligence on all property purchases and to always invest in title insurance.