When you buy or sell a home, a title search is conducted as part of due diligence. This search is done to ensure chain of title is proper and there are no defects with the instrument, also known as “clouds.” Should a title search uncover deficiencies or defects, the sales transaction can be delayed or outright abandoned, depending on the scenario. For sellers, title clouds can mean having to reconcile what’s wrong and for buyers, it can mean being unable to purchase the home. Regardless of what defects are found, these must be cured before title can be passed from one owner to another.
Common Title Defects and Clouds
What makes title problems so difficult is these can be very hard to fix. To remedy title defects, it usually requires several parties, which can include a title agent, attorney, seller, and even an appraiser. Another problematic issue is the fact any defects can’t be overlooked. For instance, if the appraisal comes back slightly higher than the agreed purchase price, both the seller and buyer can proceed under the original agreement because the lender isn’t absorbing additional risk.
“Title defects have become a major cause for concern within the real estate market in recent years, ‘which some feel cause wrongful foreclosures and others feel contribute to stagnation of what would otherwise be a smooth transition of assets within the secondary market.’” —Realty Times
However, if there are encumbrances on the title, it won’t meet legal requirements and is not able to be passed from the current owner. When you list your home for sale or have found a property and have an accepted offer, the last thing you want to face is unexpected problems. Title defects come in many, many forms, however, there are some which are the most common and can typically be cured. Here are the most common title defects and clouds:
- Inaccurate or missing property information. Mistakes happen and clerical errors can wreak havoc with a real estate transaction. It could be an easement, improper property line recordings, and other “technical” problems.
- Liens against the property. There are different liens which can be attached to a property: judgment liens, mechanic’s lien, and tax liens. A judgment lien is one that is placed against a property by the prevailing party of a lawsuit to ensure payment of judgment when said property is sold. A mechanic’s lien is an instrument which also prevents title transference, generally recorded by a contractor for unpaid work. A tax lien can be recorded by the local government or by the IRS.
- Unclear chain of title. A previous seller might not have disclosed a spouse, or, an unidentified heir in a will can be very problematic. Whatever the problem, the chain of title must be clear in order to transfer from one person to another.
- Fraud and forgery. While it might be unpleasant to think about, fraud and forgery present large problems. These can be fake documents or forged signatures on deeds, wills, conveyances, as well as other false representations.
The good news is, that not all title problems rise to the level of causing defect. Some are minor and titles with these small issues are referred to as, “good and marketable,” meaning, they aren’t perfect, but are still transferable. However, other issues might need to be addressed and this can cause a transaction to be substantially delayed. This is why title insurance is such a valuable protection and will help to resolve certain issues so the home can be sold and title transferred from the current to the next owner.