Cloud on Title

A title plays an important role when you buy a house. Before a deal can close, the current homeowner must prove that the property is legally owned and he can sell (or rent). When the seller has unresolved title issues — precisely, what is famous as a cloud on title — it might complicate closing, and you may not be able to buy the house.

 

Real Estate Title Clouds: An Overview

In real estate titles, clouds occur by ambiguities, public record errors, or other legal problems that obscure property ownership. If parties to a prior real estate transaction did not use a title company, there may still be loans, liens, and easements on title records.

The seller may also have taken out a second or third mortgage on the unpaid property. These issues can prevent the complete property ownership transfer from going smoothly.

Removing a lien or cloud from the real estate title is still necessary, regardless of whether all parties agree that the creditor should have released the lien years ago. If the lienholder does not remove it, the lien will remain on the property, and the lienholder can execute and foreclose on the property. Your future property ownership could be in dispute if you do not resolve the cloud on the title.

 

Cloud On Title: How Does It Work?

An individual’s claim to the property becomes invalid and disputable due to clouds on title, which impair the title of real property. It describes uncertainties and irregularities associated with real estate titles, and we can call it title defect.

Because title searches are essential to getting a mortgage loan, real estate agents or homebuyers can detect a cloud on the title during the title search. Conducting a title search on every real estate transaction is necessary to ensure the property is free of existing claims, liens, or encumbrances.

 

What Causes Your Title to Be Clouded

 

Recording error.

A few common mistakes in the courthouse result from past property sales that did not appear in prior deeds. The deal can suffer if this crucial document contains incorrect or faulty wording.

There was a discovery that wrong numbers in the public records listed my client as the owner of the unit next door to the one she had been living in for several years when she tried to sell her condo!

Courts will sometimes recognize a simple typo and fix the record quickly. However, sometimes they will need to find previous owners and have them sign new documents to rectify the error.

 

Liens.

The IRS can also place a lien on your home if you don’t pay them in full. When you hire a contractor or other vendor to work on your home, they may place a lien on the property.

A real estate attorney can help you release the lien by agreeing with the lienholder(s). The lien may remain in the records erroneously even though all the payments were made years ago. A similar issue to liens is open permits on a property that never closes, even if the project is complete.

This fix requires the lien holder to agree to remove the lien in writing. Ideally, the vendor will still operate and perform the work well; a city or county inspection will then declare the permit closed. You may need a different contractor to complete or inspect the job if it still needs to work or check.

 

At least one deceased owner.

The surviving spouse of a family can inherit the house, but the surviving spouse may only get permission to do so once the court agrees through probate.

The probate process can take several months if a deceased individual is still listed on the home title. In addition, living trusts are becoming increasingly popular, making this a concern.

For example, I have a client with a living trust, but the assets must go into it. After the owner passed away, the successor trustee prepared to sell the home but discovered the estate would have to go through probate first.

 

Foreclosure errors.

Often, foreclosures cloud a title if they don’t proceed precisely. This can mean describing it correctly in foreclosure papers or other errors that occurred during this process. Often, these errors are due to recent foreclosures or those that happened several owners ago but were just discovered. To get an amended judgment, it may be necessary to submit the required paperwork or reopen foreclosure proceedings.

 

Fraud during the mania for real estate.

There was a lot of fraud during the mania for real estate in the early-to-mid 2000s, including recording forged deeds. A forged deed might create an ownership break that can take time to resolve legally.

 

Cloud Identification on Titles

Before closing a real estate transaction, it is best to hire a title company to research the property’s title to identify any clouds on the title. An experienced real estate lawyer can review a title insurance policy that the title company will provide and a report produced by the company.

 

 

The lender will always require you to purchase title insurance when buying a house with a mortgage loan or other financing. Obtaining title insurance is still a good idea, even if you do not use funding or purchase the property with cash.

 

Clouds and Title Consequences

It can be challenging to sell a home when the title has a problem, and if the issue arises after closing, it can create significant problems for the home buyer.

 

For sellers

Cloudy titles decrease the value of a home and make it more difficult to sell. Many buyers will not purchase a home with a clouded title. You may have to postpone your sale while you clear your title of liens and other legal costs.

 

For Buyers

There is much risk involved in purchasing a property with a cloud on the title. If the title is clouded, financing may be complex, or the sale may delay. Even more problematic are title problems that only get discovered after closing.

You may have to pay a great deal of money if you are a new homeowner to resolve the clouded title, and you may face significant difficulties if the seller does not have the right to transfer the property. The property could even have to sell in extreme cases.

 

A Seller’s Guide to Resolving Title Issues

It’s important to remember that a title defect sometimes means the sale of a home will fall through. Although available options may vary by state, the current titleholder usually has the following options:

Pay off outstanding debt to lift the lien. If you have a mortgage lien, mechanic’s lien, or other unpaid debt, you can clear it by paying off it and filing the necessary paperwork. The seller can remove the title with the sale proceeds, just as they might do with a tax lien. A buyer’s level of interest may determine whether he paid off the debt(s) during the sale negotiations.

If the defect originates from a clerical issue, filing the proper documents may solve the problem.

When these steps are unavailable, the potential buyer may cancel the sale. If the seller doesn’t adjust the sales price, the buyer will likely cancel the sale. Purchasing a home with a cloud on the title might make getting title insurance difficult, and mortgage lenders won’t finance it.

To encourage a buyer to proceed with the sale and take responsibility for resolving the cloud on the title themselves, you may offer a lower price as the seller.

 

How Buyers Can Remove Title Clouds

If you are considering purchasing a property with a cloud on the title, you have some options, even though most need sellers’/current titleholders’ action.

 

Lien payment:

Buying a property with a lien and filing the proper paperwork to clear it can be an option if you’re motivated to do so. To cover your out-of-pocket financing to remove the title yourself, you may need to negotiate a lower price to cover your out-of-pocket costs. Investors and house flippers commonly use this strategy to buy burdened homes.

 

Deeds of reconveyance:

In most cases, the lender/tax authority can execute a deed of reconveyance if a lien exists on the title but that debt is current. It may be possible to facilitate the sale if the seller is willing to take action on this option.

 

Quitclaim deeds:

You can clear defects on a title by transferring the legal rights to the property through quitclaim deeds, which transfer legal rights to the property (usually, relatively straightforward defects like misspellings or unwanted easements). Despite clearing the title, it offers the lowest level of buyer protection among all types of deeds.

 

Quiet title action:

Upon submitting a petition to the court, the seller is legally liable for all property liens, and the title to the property is transferred to the homebuyer, giving them full and unencumbered ownership rights. Depending on the circumstances, you may need a quiet title action to clear the title. You must pay off any outstanding debts before the title earns.

No matter which option is pursued, the seller or buyer may benefit from legal advice before proceeding, no matter what steps they take. Consider title insurance to protect yourself if defects appear during your purchase. This will ensure you do not have to pay to fix the defects after purchasing.

 

A Guide to Removing a Cloud from a Title

You don’t need to let defective titles get in the way of your purchase. There are ways to remove a cloud on the title. Be sure to consult a real estate lawyer before you take any legal action.

 

Resolve liens by paying debts.

A seller may have yet to be able to pay a debt due for several reasons. In some cases, it could have been a clerical error. In other cases, it could have been a lack of funds or a legal issue.

You should either pay off the debt or negotiate with your creditor if you have a lien on your property.

 

A quitclaim deed

Quitclaim deeds are legal documents enabling someone with a claim to ownership to “quit” their claim and give the property away. This can often resolve a cloud on the title. Quitclaims rarely settle legitimate ownership claims, but they help fix clerical errors on deeds or remove easements that cloud ownership.

 

Quiet title request

The property owner will request a judge in a quiet title action to determine a dispute related to ownership. Quiet title actions often occur when there have been forgeries, ambiguous quitclaim deeds, or easement disputes.

 

The Best Way to Avoid Title Clouds

You’ll want to avoid clouds on your title once you own property, as resolving problems with your title is generally more complex than preventing them.

 

Taking steps to protect your property

Ensure you keep up with your mortgage payments, taxes, and HOA fees. Make sure you complete all paperwork carefully and accurately. Consider consulting a lawyer if you are facing any complications.

Be sure to understand the contract terms before hiring a contractor. If your general contractor uses subcontractors, ensure you know how to pay them and take precautions to protect yourself. It is possible to produce a contractor in stages rather than upfront, and you can pay them and their subcontractors separately.

 

A clouded title is not a good investment.

If you plan to buy land, you should do a title search to ensure the seller is entitled to transfer the property. Title companies conduct investigations to ensure the seller is entitled to do so. Many sources help to perform a title search, such as deeds and county property records.

Lenders require owners to undergo a title search as part of the mortgage origination process. Title companies also offer mortgage title insurance.

 

Unexpected legal fees and other unforeseen expenses.

A cloud on the title can result in unexpected legal fees and other unforeseen expenses. Resolving title issues quickly will ensure that you can sell your property quickly. Getting a title search and resolving any title defects before purchasing a home is essential.

 

Bottom line

Any unresolved issues in a property’s title record are called clouds on the title. Several clouds exist in the property’s title record, and their presence can make selling more difficult. A cloud of title can be as simple as paying taxes or as expensive and time-consuming as paying taxes. To help their clients make decisions, agents review the title record of the property with them.