Book: Bulletproof Title Due Diligence

“Bulletproof Title Due Diligence: Protecting Your Investments” By Alex Goldovsky

• “title can be summarized as a bundle of rights corresponding to a specific piece of real estate.”
• “title represents certain rights showing ownership interest in a property. This owner can be a person, trust, corporation or many other types of entities.”
• “Current Owner (Residential or Land) This report is ideal for foreclosure auctions, pre-tax auctions, short sales, tax sales, tax certificate purchases, note purchase transactions, by-owner transactions, refinances and checking for clear title. You will receive a title report on all outstanding mortgages, liens and judgments recorded against the property and the current owner(s).”
• “Mortgage and Assignment Search This report is ideal for verifying the chain of assignments for any open mortgage.”
• “State Statute Search (30-, 40-, 60-Year Searches on Residential or Land) This report covers the following: chain of title search going back over 30 years based on the state statute, which can range from 25 years to 60 years; open mortgage and assignment search on all owners in the chain of title; federal, state and municipal lien information, as well as all owners in the chain of title; HOA (Home Owners Association) lien search on all owners; civil judgment search, including foreclosure proceedings; and tax delinquency status. All of the property-related information is captured on the State Statute Title Search summary page. This type of search also includes easements, restrictions and declarations that affect the property of interest. All relevant document copies are included in this service, including copies of all deeds in the chain of title.”
• “This search is a requirement for title insurance, real estate purchases, title opinions and evidence for a marketable title. If you are purchasing a property or ordering title insurance, this must be ordered.”
• “Two-Owner Report (Residential or Land) This report is similar to the current owner report, but provides all copies of liens and mortgages vs. a list (an abstract of liens/mortgages). This will give you full documentation for all liens and a detailed transaction history.”
• “This search is a requirement for foreclosure attorneys and REO buyers to verify which liens will survive the foreclosure, and will directly impact your investment.”
• “Commercial Title Search Commercial title searches vary greatly by complexity and may be directed toward land development, commercial buildings, condo projects, cell towers, plants, environmental sites, oil and gas projects, or many commercial properties. Due to the complexity of commercial property title search, it’s hard to fix the price of the search without initial review of public records and generating a responsible quote.”
• “Conduct a commercial title search f you need to check all outstanding and unpaid liens, mortgages and judgments, as well as the tax status of the commercial property by owner of the real estate. In the case of corporation or LLC ownership, this is also how you search for liens on known members or partners of corporate ownership structure.”
• “Foreclosure Guarantee Reports A foreclosure guarantee is a type of report commonly used for foreclosing a lien on a property, like when a bank forecloses on a home. The title searcher will perform a full coverage search on the property in default, as well as a search for addresses of the lien holders. The addresses will be used for sending Notice of Foreclosure letters (such as Notice of Trustees sale) to all lien holders. This is a very specific report for foreclosure attorneys working with lenders, services or investors to represent them through the foreclosure process.”
• “An easy way to protect yourself is to pull what is known as an ‘update service.'”
• “Update service is something any title company can provide for a nominal fee. It bridges the time gap from your last title report to the current index date in the county. It is not always needed, but it can provide peace of mind.”
• “There are a number of events that may unsecure the mortgage, including a tax foreclosure deed, an HOA deed (in Nevada) and a bankruptcy court order.”
• “County Assessor: Maintains the legal description of the property, assigns a property parcel number in the county, assesses the value of the property (to be used to calculate annual taxes) and keeps track of the chain of title.”
• “Treasurer or Tax Collector: An elected official to the county office who collects tax payments from residents, maintains records of tax payments, reports delinquencies and typically administers the tax sales.”
• “County (or Township) Recorder (or Clerk): An elected official to the county office who maintains real estate records in the county.”
• “Clerk of Civil Courts: In charge of filing judgments against the owner of the property – in a number of states, judgments are recorded in the civil court, not the county recorder’s office.”
• “A deed is legal title (ownership) of the property itself. This ignores the fact there could be any number of actual liens on the property. If liens exist, you will own the property “subject to” those liens.”
• “Warranty Deed In some states, according to realtor.com, this is also called a Bargain & Sale Deed. Used in most real estate sales transactions, a warranty deed says that the grantor (previous owner) is the owner of the property and has the right to transfer the property to you. In addition, this deed serves as a statement that there are no liens against the property from a mortgage lender, the IRS or any creditor, and that the property cannot be claimed by anyone else. Title insurance provides the financial backup to the warranty deed, and requires a title search to verify that no other claims on the property are outstanding.”
• “A quitclaim deed is used when a property transfers ownership without being sold. No money is involved in the transaction, no title search is done to verify ownership and no title insurance is issued. This type of deed is most often used to transfer ownership within a family. The only exception is in Massachusetts, where the quitclaim deed may be used as a value transfer of the property.”
• “Sheriff’s Deed This type of deed gives ownership rights to property bought at a sheriff’s sale, which is basically a foreclosure sale. A sheriff’s sale is conducted upon the order of a court after a failure to pay a judgment or lien. In non-judicial states (more on this later), the foreclosure is held by the trustee and, therefore, the deed type is sometimes called a ‘trustee’s deed.'”
• “In Florida, it’s called a ‘Certificate of Title.’ In South Carolina, it’s called a ‘Master-in-Equity Deed.’ In Georgia, it’s called a ‘Foreclosure Deed.'”
• “When the property owner voluntarily transfers the deed (ownership) back to the lender instead of having the property foreclosed upon, a deed in lieu of foreclosure is used. This usually happens when the property owner knows they can no longer make the mortgage payments, or are in over their head. This can save the lender the time and money of a foreclosure, while helping the borrower save face – and sometimes their credit.”
• “Tax Deed This is a form of deed that gives authority for the property transfer free and clear of any liens to the treasurer of the county or township. This happens when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property, allowing them to collect the delinquent taxes and transfer the property to the new purchaser.”
  “Remember, a lien holder does not own the property; the deed holder does. A lien holder only has a claim to the property for a specified dollar amount.”
• “When you see any lien on a title report, ask yourself three questions: What type of lien is it? Is it a mortgage lien, tax lien or something else? What position is it in? Liens recorded first have priority over other liens. This means that the very first lien (assuming it’s still valid and unpaid) will be paid first in the event of a sale. Knowing the position of your lien on the title report is essential. What date was it recorded? Again, this goes back to determining your lien position. If you think you are buying a first lien, but see on the title report that it was recorded after another lien, then you really are buying a second lien. These details matter.”
• “A mortgage may also be called a “deed of trust,” depending on the state where it originates. This document secures a lien against the property title in favor of the lender, securing the lender’s interest in the event of default. This means if the borrower stops paying, the lender can legally foreclose – take ownership of the property – and sell it to recover the funds lent. Mortgage documents are recorded in public records and stay attached to a property until the loan has been paid in full or satisfied.”
• “A promissory note spells out the terms of the loan, much like an IOU. It outlines exactly how the mortgage is supposed to be repaid. The note will specify, in detail, items such as the repayment schedule, rate of interest, due date, any prepayment penalties and, ultimately, the date by which all funds need to be paid in full. In layman’s terms, it is a promise to pay from the borrower. The note document may not show up on ordinary title searches. When you hear investors talk about “buying a note,” they are referring to both the mortgage and the note.”
• “People who provide private lending tend to prefer short loan terms – often one or two years, but they can be as short as six months. Private lenders have their own criteria for lending and prefer certain types of assets.”
• “MERS stands for (according to Nolo.com, Mortgage Electronic Registration System, a company that was created by the mortgage banking industry. MERS maintains a database that tracks mortgages for its members as they are transferred from bank to bank.”
• “Assignment of Mortgage This is a document representing a change of ownership of the mortgage only.”
• “Allonge This is a document representing a change of ownership of the note only.”
• “A subordination agreement is an agreement between the lenders on the position of liens against the property.”
• “A real estate tax lien is a senior lien – often referred to as a ‘super lien’ – and will not be wiped off by mortgage foreclosure, in most of the cases.”
• “The property may be subject to township taxes, school taxes or personal taxes. In Pennsylvania, for example, there are always three tax jurisdictions collecting separately for each property – county, school and township. If your title search reports only county level taxes, you may be at risk of losing the property for unpaid school or township taxes.”
• “Once an investor finds a tax lien in a title search, the very first thing that investor needs to do is to verify that it’s against the property of interest. If the tax lien is a recorded document in the county records, verify that the legal description, address of the property and/or parcel number in the document matches the subject property. If the tax sale is mentioned through the tax card or tax status, verify that the tax card is, indeed, for the subject property by matching the legal description and parcel number. Once verified, the investor should raise the flag on the property to run further research and verify that the property is not scheduled for tax sale. If it is scheduled for tax sale, make sure you have enough time to redeem the delinquent taxes before it’s too late and the investment is lost.”
• “If you are a beginning investor buying a few loans, I always recommend calling the treasurer yourself and asking these questions (I will explain the reason for these questions later): Are the taxes current? And are there any delinquent taxes on the property? Who pays the taxes? The tax lien investor or the lender/escrow company or borrower?”
• “There are 22 super lien states where an HOA lien is considered a higher priority lien than the mortgage, making it possible to foreclose on the property out of position.”
• “In a number of states, the HOA balance (not yet a lien) must be paid off at the time of the foreclosure by the lender. Many investors or lenders pay the face value of this balance, although some investors are successful in negotiating the payoff. My suggestion: negotiate first, pay last.”
• “City or township liens that are outstanding against the property are called municipal liens. Municipal liens are considered a superior lien, and always have a higher position than the mortgage. This means that, in the case of a mortgage foreclosure, municipal liens will survive and need to be paid off by the property owner or lender.”
• “A homeowner, Mr. White, rebuilt his house without a city permit and took out a construction mortgage that you are planning to buy as a note investor. The city found out that the construction took place without a city permit and labeled the property as an unsafe living structure. They slapped a fine or issued a permit violation on the property, then scheduled regular inspections to verify that the issue was being resolved, during which time the fine continued to accrue interest. Suddenly Mr. White moved out, leaving the property vacant. He also stopped paying the mortgage, taxes and utilities. The city filed a suit against Mr. White to fix the permit violation or they would have the right to demolish the building. Since Mr. White was gone, no one contested the order, so the city scheduled the property for demolition.”
• “In some cases, the city will have a record of the suit in the civil courts, but a common investor mistake is buying a note without making a call to the township offices; it’s not always possible to see these types of issues through a title search report alone.”
• “One of the large hedge funds bought a note based on the title report alone, which did not include a search of the Environmental Control Board (ECB) and Department of Building (DOB) violations in the city of New York. After the note purchase, the DOB lien was converted to property taxes and assumed a higher lien position over the mortgage the client bought, costing them a lot of money.”
  “Don’t skip the step of calling the township to speak with the department responsible for code violations and demolition.”
• “California: When unpaid charges are added to the assessment on real property pursuant to Water Code section 36726 and filed with the tax collector, they are automatically secured by a lien on the land pursuant to Water Code section 36825. The lien of the assessment has the same priority as the lien to secure real property taxes and, therefore, takes priority over private liens. The district’s lien remains intact regardless of the foreclosure action, and the purchaser takes title subject to the lien. After the filing of all parts of the assessment book with the tax collector, the assessment on each parcel of land is separately assessed and any penalties for delinquency added thereto, plus any unpaid charges for water and other services added to the assessment under the provisions of Section 36726, is a lien on the land and impart notice of the lien to all persons.”
• “Washington: If you do not pay the water bill for your home that receives water/sewer service, that unpaid bill can become a lien on the home. That lien, if not paid, can be foreclosed upon. The relevant statute states that a water/sewer district may claim a lien for the unpaid balance, and that the unpaid balance shall be a lien against the property upon which the service was received, subject only to the lien for general taxes. The lien is given greater priority than even a mortgage. This lien is second only to general property taxes. This rule applies even to a home with renters leaving an unpaid water bill. In short, if the renter does not pay the unpaid bill, the homeowner is stuck with it. This is not the usual policy for other utilities like cable or electric services.”
• “When you buy a real estate asset, you must run a bankruptcy search on the property’s owner. As the investor, you must know whether or not the owner is in active bankruptcy, or you cannot proceed with any foreclosure.”
• “It should be a part of your standard note or property due diligence not only to verify if the second lien was stripped, but to also find out if any of the unsecured judgments were removed through a bankruptcy proceeding.”
• “The borrower can use bankruptcy to remove any unsecured debt, such as credit card, personal judgments or junior position liens, while the first position lender can benefit from bankruptcy to force a favorable modification with the borrower ordered by a judgment with a very strict payment plan. Once the borrower pays the modified amount for a period of six to nine consecutive months, the price for the performing note/asset will be much higher than the price for a non-performing note before the bankruptcy.”
• “Foreclosure is a great exit strategy on your note investment, as it eliminates unsecured debts like credit card judgments, hospital liens, any junior position mortgages and any junior position liens. Therefore, when an investor flips the property after the foreclosure, those judgments and junior liens would not attach to the property. Liens that are considered senior over the mortgage would always survive the foreclosure and would attach to the property. These liens will need to be paid off to remove them from the title and create a free and clear property.”
• “One of the more popular unconventional options for investors has become an investment into contracts for deed (also called ‘rent-to-own’).”
• “A vesting defect on a title is when you see that the borrower on the subject mortgage is different from the current vested owner of the property.”
• “The title search report (an O&E report, in this case) would be an ideal tool to discover these defects.”
• “Inter-Family Deed Transfers – Whenever a husband and wife have different last names, or there is an in-family (gift) transfer between relatives at zero ($0) value, the subject mortgage still attaches to the property, even though the owner’s name and borrower’s name don’t match.”
• “Standard Transfers into Land Trusts – A very common transfer in the states of California, Nevada, Illinois and Washington is a property transfer into the family or land trust. Again, while the name of the owner and borrower do not match, the subject mortgage would still attach to the property.”
• “If you are buying properties at bank-owned auctions or in foreclosure, trustee’s or sheriff’s sales, the title search report is a must-have due diligence tool to verify whether the property is worth the investment. In fact, you – the investor – must understand which liens would survive the foreclosure and which liens would be wiped off the property.”
• “In some cases, the property under the laws of the HOA declaration will prevent a new owner from renting the newly-purchased property for a fixed period of time, which can vary anywhere from six months to three years.”
• “As a part of your title due diligence, if the first position lien is recorded after the second, always verify the presence of the subordination agreement.”
• “A QWR is a request for production of an original note signed in blue ink.”

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