Buying a home today is more complicated than it used to be, as anyone who has tried to do so or who works in the industry can tell you. Foreclosures and short sales present particular challenges unique to those types of closings.
It is vitally important that every participant in the closing process, from lender to title agent to buyers and investors, understand these unique challenges. It is also necessary to understand the best industry practices for ensuring that the title is executed properly. This helps all parties avoid the hassle and expense of title insurance claims later on.
Particularly if you are investing in a distressed property, you need to understand how title insurance works. In a traditional real estate transaction, there are two main parties involved: the buyer and the seller. The buyer and seller negotiate a price and contract terms for the sale of the property. Unless he or she is paying in cash, the buyer is responsible for obtaining title insurance to protect the bank that lends the money for their loan.
This becomes more complicated when a distressed property is being sold. In a short sale transaction, a new party enters the picture: the mortgage lender (usually a bank.) In this instance, after the buyer and seller have negotiated a contract, the mortgage lender must approve it before it goes through.
In the case of a foreclosure, bank-owned or real estate-owned (REO) transaction, this becomes yet more complicated. In this case, the two major parties are the homebuyer and the mortgage bank, which is the seller in this case because they own the property.
In this case, the homebuyer submits a normal “as is” real estate purchase contract to the listing agent, who usually represents the bank. Then the listing agent submits the terms to the bank, which will typically come back with a “counter offer” intended to give the bank the upper hand during the closing process.
In the case of all of these types of real estate transactions, a title company or title agent will oversee all closing details. They will serve as a communicator and facilitator between the homebuyer, the seller or bank, and the mortgage lender (assuming the buyer is seeking a mortgage.) They may also act as a liaison with the condo or homeowner’s association, surveyors, pest control companies, and various other service providers. Title agencies also frequently hold and manage escrow money for the parties, as well as researching the status of real estate taxes, utility bills and association fees.
In most instances the most important duty of the title agency is to research the ownership history of the property. This includes looking into association fees, utility bills, real estate taxes and the “chain of title.” The chain of title lists previous owners of the property and any liens, complications, encumbrances or claims that might be levied against the property. Once these issues have been solved, the title agent issues title insurance and gives the document demonstrating evidence of ownership (called the “title”) to the new owner of the property.
Essentially, there are two ways to convey title. Titles can either be marketable or insurable.
A marketable title is a traditional title, issued to the buyer after the title agent has solved all outstanding liens, issues or encumbrances against the property.
An insurable title, on the other hand, is issued when there is a possibility of complicating issues with the property title. These issues may include unreleased liens, deed related matters, unpaid fees or any number of problems. In this case, the title company will assess risk and decide whether to assume that risk. In some cases, this may result in diminished coverage for the title holder (buyer.) In the case of foreclosure and REO real estate transactions, unless a buyer wants to pay for title costs and insurance, they will normally receive an “insurable” title.
This may sometimes lead to complications later on if buyers decide to refinance or sell their property. In most cases, any title defects left on the property will need to be cured before a new real estate transaction or refinance can be closed.
Bay National Title is an expert in REO and foreclosure transactions. We pride ourselves on thorough title searches and effective insurance for all involved parties. Additionally, our experienced staff can walk you through this process, explaining all of the details, whether you are a buyer, seller, lender, investor or any other stakeholder in the real estate transaction.
To learn more about Bay National’s REO and foreclosure-specific offerings, give us a call at 727-449-8733.