Buying Foreclosed Property Beware the Flawed Title!

on 13 June 2016

There are some really great deals out there in the foreclosure market, but buyers need to ask whether owning a property with an unmarketable title is what they really want, because that’s what buying a foreclosure could very well translate into.

In recent years it has proven, virtually universally, that sellers (banks) demand that buyers close with the same attorney that the sellers had used in the foreclosing process. This is a really bad idea for the buyer. The problem is that the foreclosing attorney usually does only a limited title search, which is the norm for big banks. As implied by the name, limited searches invariably yield limited results. The bank does a limited search because it wants to avoid the cost of a full title exam, and it doesn’t really care if the title is marketable or not, as long as it can transfer title. After transfer, the bad title then becomes the buyer’s problem. The Bank doesn’t really want to know, because if it knew the title were flawed, it would be unethical to sell the property until after the bank had cleared up the problem. But whatever the bank's motivation, one thing is for certain. When buyers sign at the closing table, they assume any and all problems that may have existed prior to, as well as those created during the foreclosing process. This is true even if title insurance is purchased by the buyer.

Why doesn’t title insurance protect the buyer? Well, in the long run, it may protect either all or part of their equity, but what it does not do is magically make the title clean. That is to say, a process still has to happen, and it may be a lengthy one. If the insurance company decides to litigate, it could take years before a resolution is reached. Meanwhile, the buyers are stuck with a property that cannot be sold, unless they find an unsuspecting buyer, and have no scruples about selling a property with a blemished title without disclosure.

So, what can buyers do to protect themselves? The first step is to demand that an attorney of their choice, someone other than the foreclosing attorney, do the closing, and that a full title exam be performed. There was once a time when dispassionate resistance from banking institutions made attempting this a losing battle for buyers, but not as much so today. Recently, FANNIE MAE and FREDIE MAC have relaxed on this demand. FHA has always been flexible on this count. Since these three sources probably represent better than 90% of the loans in the marketplace today, you should put this demand in your offer to purchase, and remain firm in the negotiations.

But what about those banks that are holding and servicing the notes. They are still pretty aggressive about demanding that buyers use the bank’s closing attorney. They will tell you it is either their way or the highway.  If you really want the house, the highway is not an option. In my next BLOG I will suggest a solution for the problem of dealing with these contentious banks.

Daniel R. Wilhelm
Managing Broker
3 Options Realty, LLC.

The author of this Blog is not an attorney. Nothing written should be construed as legal advice. Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances.