Short Sale and Unclear Titles

Wouldn’t it be great if all the properties you wanted to buy only had one lien on them, one owner on the title, a five-minute title search, and immediate insurability? If only the real estate business were that easy...

If you’re new to real estate investing, the title to a parcel of real property says who owns it. A deed is the piece of paper that transfers the title from one owner to another. Don’t confuse the two. The title is not a piece of paper. You have to check your county’s public records for anything that affects the ownership or title of a property: deeds, mortgages, tax liens, mechanic’s liens, court judgments, bankruptcies, foreclosures, probate proceedings, divorce proceedings...you get the idea. If there is any type of action that leaves the true ownership of the property in question, that property has a defective title and its issues need to be cleaned up before the property can be sold.

The short sale business is a great niche, but when you help a homeowner in default on their mortgage, you’re probably going to run into one or more of these problems. Save yourself some grief and learn how to field these issues before you try to close on the sale.

There are two ways of clearing the record of title. One is a release from the lienholder, where that lienholder simply gives up all claim to the property, and the other is by satisfying the lien and resolving the issue.

Your first contact with title issues will come when you schedule that first meeting with the homeowner. Here’s a hint: start by finding out who all the decision-makers are. Most rookies fail to do this and completely regret it later. Deal with ALL the decision makers at one time. It’s easy. Before you set up the meeting, just ask, “Are you the sole homeowner or do you have a partner? Is there anyone else on title? It doesn’t make sense for me to waste your time by having to explain everything to you twice, so let’s make sure we have everyone there, okay?”

If you’re using an option contract to facilitate a back-to-back transaction, you’ll need to stay aware of how the contract affects the title to the property. Once you file the Notice of Option (or Memorandum of Option, as it is called in some areas), it’s a matter of public record and you are now part of the chain of title on the property. When you negotiate a discount that is acceptable to you, you can then choose to exercise your option and go ahead and complete the purchase of the property. If you satisfy the option in this way, you will have a deed transferring title from the original vested homeowner to you, the investor, in your A to B transaction.

The beauty of the Option Contract is the word “option” - you have a choice about whether to purchase the property. If you choose the other path and release the option, you are giving up your first right to purchase, market, and resell the property (probably because something has gone wrong with one or both transactions). One way or the other, that option needs to be released or removed from the public record in order for the end buyer to get it off the record of title and receive marketable, insurable title in their own right.

The Notice of Option Contract needs to be properly completed by the investor and needs to be witnessed and notarized before being promptly recorded at the appropriate County Recorder’s Office. Please be mindful of any state laws regarding the recording of documents regarding pre-foreclosure sales or foreclosure purchases. Various states have timelines regarding when documents can be filed.

At some point, you should also pull your own title report on that property at the county courthouse. Your interview with the homeowner may have gone well on the surface, but you still want to verify that you won’t have any surprises at the closing and give yourself time to deal with title issues before then.

Once you discover multiple liens on the property, negotiate with the other lienholders. They could release their lien outright, which probably won’t happen. They could ask for full payment or satisfaction. If the homeowner is so broke that they can’t pay down their first mortgage, that probably won’t happen either. Most subordinate lienholders will compromise and accept a portion of the amount due - usually 10 percent - in exchange for releasing the lien.

A clean title is your key to a smooth back-to-back short sale transaction. When you set it up so that title vests for even a few moments in your name, you are able to negotiate with everyone, conduct the transactions, and take home the profits. Piece of cake, right? Sometimes. If you’re not already with us, sign up for a free Silver membership in Strategic Real Estate Coach and call one of us if you run into trouble. We’ll talk you through it.