Real Estate Investors: Beware of Haunted Houses

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Be careful. That distressed property you have under contract to buy may be haunted. No, it’s not time to call an exorcist, or the Ghostbusters. While the guys in the beige jumpsuits and proton packs are proficient with eradicating those little green slimy ghosts they are no match for the demons that lurk in that smoking hot foreclosure deal you just tied up. In the title insurance world these demons are known as defects, or clouds. I like to think of them as apparitions, or skeletons buried beneath the foundation of the house.

These clouds vary in size, shape and form and include:

  • Back property taxes
  • 2nd mortgage holders
  • 3rd mortgage holders
  • Mechanic’s liens
  • Homeowner’s Association liens
  • State income tax liens
  • IRS tax liens
  • Child support judgments
  • Civil judgments
  • Municipal liens
  • Bankruptcy
  • Lis Pendens (lawsuits pending involving the property or owner of the property)

It helps to think of a house as a magnet. Now regard all the yucky stuff I just listed as metal. When a homeowner gets into financial trouble their home mortgage probably isn’t the only bill that’s past due. Creditors eventually start recording collections down at the county courthouse. And then they attach themselves to the house – permanently (well, permanently until someone pays them off).

Here’s the funniest part about these defects – most of the time the distressed home seller doesn’t know they exist. Or, more likely, they know a demon exists but don’t disclose it to you because of short-term memory loss. Or, even more likely, the distressed home seller just lies about it. Maybe you’ve heard the expression that buyers are liars? Well, sellers are worse.

Not to worry though. Your friendly neighborhood title insurance company has what it takes to blast the ghosts away. And the title agents don’t need to cross the streams of their proton packs to do it either. A simple preliminary title search done prior to closing will uncover any dark, scary objects lurking in the shadows. If there are any liens, judgments, or lawsuits you’ll know. Depending on the numbers you can pay off the debts as part of the deal. You may even be able to negotiate with the creditor for a reduced settlement. Of course, if an outstanding balance is too high you can just walk away from the deal.

Don’t ever, ever, ever, ever buy a house without reviewing the preliminary title report. Some investors I know don’t buy houses at all without a full-blown title insurance policy that protects against any past clouds, or problems that could materialize in the future. I agree it’s wise to purchase an owner’s coverage policy. However, when buying houses at the auction it’s not always possible. Nor does it work if you’re working directly with a homeowner in foreclosure and their sale is 24-72 hours away. A preliminary title report will have to do.

Most title companies will provide these reports to investors for little or no cost and usually within 1-2 business days. Without knowing the title history you could wind up with a house that would scare a poltergeist away.

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About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.

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