As the popularity of real estate investing, and particularly foreclosure investing, continues to rise, more and more people are spending big money, without really knowing what they are getting into.
Learning to understand and perform preliminary title research can save some big headaches down the way and provide an edge over the less-informed competition.
You can, of course, pay for title searches, but the due diligence still falls on you. Knowing how to perform preliminary title searches to get the details before you even sign a contract will save you valuable time and money.
You may be asking, "...but don’t I just need to see who is on the tax bill or deed?"
Just because someone’s name is on the tax bill or on a deed, does not always mean that they legally have the right to transfer ownership of that property to someone else, or that they are the sole owner.
It may sound odd, but a person can actually end up with their name on the tax bill, or even on a deed, but somewhere in the historical chain of title, the property wasn’t transferred correctly and they don’t actually own it. Additionally, someone may not appear on a deed, but due to inheritance, or other unique circumstances they may actually have an ownership interest in the property that would need to be addressed, prior to sale.
Also, knowing who has ownership interest in the property is only a piece of the puzzle. Once you know who the owners are, you will then need to see what encumbrances (claims), such as liens, may be attached to either them or the property. This brings us to the next question...
What ARE you looking for when you perform a preliminary title search?
When performing a title search for a property you would like to purchase, your main objective is to determine how to obtain clear title.
Why Clear Title Matters
A title is usually referred to as clear when it can clearly be shown who the rightful owners are, without any question marks, and there are no unpaid liens, encumbrances, or other restrictions against the property. If you purchase a property with clear title, that means you are free to legally transfer that title at any time, without worry of any unpaid debts or of other people coming forward with ownership claims against your property.
The path to this objective is twofold:
- Obtain accurate title history in order to determine who really is on the title.
- Determine what liens and/or other encumbrances(claims) there may be against the property or the owners.
In any situation, and particularly as a real estate investor, you want to be 100% sure that the person you are buying from legally has the right to sell you the property.
A person can't sell something they don't legally own – and while it sounds obvious, you would be surprised how often someone may need to be reminded of this in the real estate business.
Most of the time, people are not intentionally trying to misrepresent a situation, but may be acting under an assumption that is not legally supported. A few examples: In some cases, people may inherit real estate from a parent or relative and somewhere along the way, the proper paperwork was never filed to give them the “legal right” to sell the property. Another case may involve two siblings who own a home together, and since one of them is in jail and has never paid a dime on the property, the other thinks that she should be able to sell it by herself (unfortunately that is not how it works!). And yet another scenario may involve a couple who divorced, but since they bought the house together, the estranged spouse’s consent would still be needed to sell the house.
So, when purchasing property, it is imperative that you have the skills to discover these types of situations and determine who is legally on the title and able to sell the property.
The word encumbrances refers to liens and any other interest in the property that burdens the property’s and/or owner’s clear title or usage of the property. These can prevent the transfer of the property and greatly affect your ability to sell the property. These could include:
- Property Use Restrictions
So, next time you go to sign a contract, make sure your perform your own preliminary research and go to the closing table with all the facts. I usually like surprises, but not when I'm doing real estate deals.