A partner that I worked with in the past purchased a house with cash. Now he shared with me that the title isn't clean. Is this typical? Would it be wise to do a title search before paying cash for a property? If you buy the house with cash then find that the title isn't clean what can you do? What cause a bad title?

You should never buy a house, or real estate of any type, without a title search. A lender would never loan money in connection with a real transaction without a title search. Buyers should feel the same way about spending their own money.

The title problem could be something minor such as a small judgment lien against the property, or it could be something major like your partner paid money for the property to someone who didn't own it or didn't disclose that it was subject to a large mortgage. 

More info needed.

Thanks for the information. So it appears from what you're saying, let's say I invest in an area with low purchases prices (i.e.: 25k). A property could be purchased straight cash without a lender but then when you do a title search you could find out there is a large mortgage on the property. If you pay cash then do a title search you would be responsible for cleaning up the title? 

Yes.

A couple things worth noting:

1. if your purchase agreement contains a section of representations and warranties from the seller such as a) i own the property; b) it is free and clear; c) there are no outstanding judgments/liens; etc., and anything later turns out to be untrue, you could pursue the seller for breach.

2. You should establish a relationship with a local title company. Spend $150 or so up front for a title search and you can eliminate bad deals before they require you to rely on lawsuits to enforce seller warranties. Also, it's always best to have an attorney or title company prepare deeds or at least review any deed prepared by the seller.

Great information Tom! Thank you for the advice.

The best approach is  to do the transaction with a title company (or attorney, if that's how sales are done in your area.)  Have them prepare the deed, do the title search and issue title insurance.  Just because there's no loan doesn't mean you should skip this key step.

@Steve Boianelli   Yikes.  This could be a real mess.

YES - you, or better yet, a professional title company / attorney should do a title search before closing, and a clear title should be a condition of your P&S.

You should also buy OWNER'S title insurance.

I was informed yesterday about a clouded title on a home my buyers have under agreement.  Here's what caused it:

Dad passes away.  Leaves 1/3 to his wife, 2/3 to his 9 kids.  

5 of the 9 kids assign their rights to the other 4.  1/3 held by wife, 2/3 held by 4 kids.

Mom dies intestate.  Her 1/3 rights flow to the 9 kids.

One of those kids put the house on the market after he rehabbed it, which he didn't have the legal right to do, as the title is not clear until the other 8 siblings assign their rights to the selling sibling.

Worse, we don't even know yet whether all of the other 8 siblings are alive.  If any have passed, their rights flow to their estate - spouse, kids and possibly even grandkids.

That's the kind of thing that can cause a clouded title.  This one is most likely headed to probate court.  We expect an absolute minimum of a 3 month delay, possibly a year or longer.

Just to add to the misery...

We just found out that neither Dad nor Mom were ever probated.

3 of the original 9 siblings have since passed, we believe at this point, intestate.  Those three siblings have three kids each.

There are now Dad, Mom and 3 deceased siblings, all needing to go through probate.

There are now 15 surviving heirs who need to agree to the sale.

Still wonder if you should have a competent attorney or title company do a title search?

I have represented cash investors and always have them do a title search. Make the offer contingent on a "satisfactory" title search. Then review it and see if there are any issues and whether or not you can live with them, how much and how long it may take to fix.

My client does a lot of flips but over three to six months. If there is a problem and it can be fixed within that time, I work on fixing it so then when he goes to sell their won;t be an issue and his buyer can get a mortgage.

@Scott So I'm dealing with a similar situation, but it's an REO.

I called a local title company (actually my realtor did) and we were instructed to purchase the enhanced title insurance as opposed to the standard title insurance, this way you are covered as the all cash purchaser (I.e. New owner).

I'm still waiting on my offer to be accepted but before placing an offer, my due diligence was to make sure I had a contingency in place since there are things like ground rent in my area hat I have to also consider as well as an astringent City Code/Housing office that notoriously places liens that don't show up right away.

Not sure if this is helpful for you on this current transaction but it may be helpful to spend the few extra hundred dollars for the enhanced title insurance when purchasing in all cash or on non-traditional (I.e REOs//estate/divorce) properties.

Originally posted by @Charlie MacPherson :

Just to add to the misery...

We just found out that neither Dad nor Mom were ever probated.

3 of the original 9 siblings have since passed, we believe at this point, intestate.  Those three siblings have three kids each.

There are now Dad, Mom and 3 deceased siblings, all needing to go through probate.

There are now 15 surviving heirs who need to agree to the sale.

Still wonder if you should have a competent attorney or title company do a title search?

Sounds fun!

But even more so it sounds like one to walk away from.

You know that of those 15 heirs at least one of them is going to object to the sale price, and at this point you have no contract.

@Tom Gimer   I agree and I've advised my clients as much.  

There's an outside chance that we'd execute a lease with an option to purchase at TODAY'S sale price, but we need 15 signatures to accomplish that.

I'm pretty ticked off that my clients have spent almost $1,000 on a home inspection and apprasial though.  I'm suggesting that we try to get the seller to reimburse them or take the seller to small claims court.

Originally posted by @James Lewis :

@Scott So I'm dealing with a similar situation, but it's an REO.

I called a local title company (actually my realtor did) and we were instructed to purchase the enhanced title insurance as opposed to the standard title insurance, this way you are covered as the all cash purchaser (I.e. New owner).

I'm still waiting on my offer to be accepted but before placing an offer, my due diligence was to make sure I had a contingency in place since there are things like ground rent in my area hat I have to also consider as well as an astringent City Code/Housing office that notoriously places liens that don't show up right away.

Not sure if this is helpful for you on this current transaction but it may be helpful to spend the few extra hundred dollars for the enhanced title insurance when purchasing in all cash or on non-traditional (I.e REOs//estate/divorce) properties.

Do you mind elaborating on what your agent says an Enhanced Owners Policy does for you in this type of situation? 

@Tom Gimer I don't recall the details exactly but to elaborate on the details -- Code violation on record with local municipality....bank denies being the culprit....wants me to sign a hold harmless and I refused. I asked my agent to check with her contact at the Title company that she works with often....I was informed that if I didn't sign a hold harmless, offer is accepted, an issue arises once Title search happens, Bank would not be able to avoid taking care of the issue in order to close the deal with me.

Please feel free to elaborate as a point to further educate as I'm new overall to real estate investment. I see that you work for a Title company and I'm wondering if you have something to add that would benefit everyone on this thread. If so, I'm all ears -- Thank you in advance.

@Tom Gimer this was my first post by the way every on BP....really excited to get your feedback. Thank you again.

Originally posted by @James Lewis :

@Tom Gimer I don't recall the details exactly but to elaborate on the details -- Code violation on record with local municipality....bank denies being the culprit....wants me to sign a hold harmless and I refused. I asked my agent to check with her contact at the Title company that she works with often....I was informed that if I didn't sign a hold harmless, offer is accepted, an issue arises once Title search happens, Bank would not be able to avoid taking care of the issue in order to close the deal with me.

Please feel free to elaborate as a point to further educate as I'm new overall to real estate investment. I see that you work for a Title company and I'm wondering if you have something to add that would benefit everyone on this thread. If so, I'm all ears -- Thank you in advance.

Sounds like there is an item on the lien cert -- a large unexpected item -- that the seller doesn't want to pay.

Anything that arises before a buyer takes title would ordinarily be the seller's responsibility UNLESS the buyer agrees otherwise. Such a scenario sometimes arises in the auction or foreclosure setting where a buyer might agree per the auction terms that all issues, known or unknown, are the buyer's problem. In other words, hey buyer... do your research but also cross your fingers. This doesn't happen in a typical REO purchase with brokers involved.

But title insurance, like any insurance, does not respond to a problem that is already known. The element of accident, occurrence, or however you want to characterize a loss that triggers coverage to respond, is missing.  Title insurance wouldn't respond, regardless of coverage type, to a known loss. 

Sounds to me like REO seller is just trying to shift liability for this payment to the buyer side of the settlement statement.

If I understood the facts correctly, whatever it is, it's going to be paid by one of the parties... not a title insurer.

Thanks for this info @Tom