Most everything we read in our quest for knowledge about foreclosures (and whether investment in this market can be successfully made by novices) stresses that a title search must be made early in our investigations. No adequate assessment of the true amount of equity required for the targeted foreclosure property, and therefore of potential profit, can be made until the actual amount of debt registered against the property is known. Although this is common knowledge, there is little available to explain what the uninformed majority should be looking for.
A search of the Title or legal description of the property is undertaken in most real estate transactions by the buyer’s attorney or a title company. It is a way of assuring the advisor to the buyer that the party offering this property for sale has the legal right to do so, the correct legal address and description of the property (for property tax purposes), and that there is nothing preventing the buyer from owning exactly what he intends to purchase.
This public record gives the details of who has previously owned the property and when (aka the Chain of Titles).It includes a tax search, which reveals if any real estate taxes are owed and also any charges against the land itself. Any unpaid property taxes rank above all other liens registered. If you were to purchase a pre-foreclosure without knowledge of a tax lien, then you face the loss of your new investment unless you settle the debt. Title insurance could have protected you, but there’s no going back…
Just as important in the review is to pick up any unsatisfied judgments against the owner/seller or any of the previous owners. Real estate becomes security for money owed as stated in the judgment. Mechanics liens, judgment decrees, and unpaid federal income taxes are just a few examples of liens which all have rights ahead of lenders rights. It is not unusual for a property in foreclosure to have debts owed on second or even third mortgages (aka junior liens). Junior liens rank after the first mortgage holder when it comes to allocating the proceeds of the trustee or auction sale.
Any prospective buyer seeking the foreclosing lender’s approval for a short sale is going to have to negotiate a settlement with each of the junior lenders on behalf of the seller.
Remember, a lender’s title insurance does not protect the buyer. Your attorney will request that the seller removes any defects in the title so that you, the buyer, have no risk and can obtain title insurance. Why chance paying market value by mistake for a foreclosure? It is vital that you have the complete picture before calculating the maximum offer to be made to the seller of the property in pre-foreclosure, or commence to bid above the reserve at auction.
In other words, if you are looking to invest in the foreclosure market, take the extra step and minimize your risk.Get title insurance.