Title Insurance on a cash HUD deal?

Question

For those that do a lot of cash HUD deals, do you buy title insurance on each one? What would be the potential title problems that HUD would not wipe out in the foreclosure? I am thinking about getting a title search only in the future. What do y'all think?

Dion DePaoli · Answer

Get title insurance and stop being silly.  Often times you are likely only getting a Special Warranty Deed which only gives warranty during the time of ownership and does not offer warranty prior ownership.  It is possible that unrecorded liens and even ownership interests can emerge.  Those could be costly and without title insurance that cost falls all on you.

David Krulac · Answer

@Randy King

We settle all HUDs with title insurance as stated above, its sort of a forced issue.

I do recommend title insurance, particularly for newer investors.  Obviously

Greg  H. is a seasoned investor and in his situation, he can operate without title insurance.

I have been professionally trained in title searching and so know my way around the courthouse record systems.  But even with that training, I almost always get title insurance.  There are some exceptions for example when purchasing at foreclosure and tax sales, its cash on the barrel-head right at that moment.  At one such sale, they stop the sale after each purchase and the buyer has to come forward and pay 100% of the purchase price before they will move on to the next property on the sale list.  You literally have mere minutes from the time you say you are buying and the "closing". (when you pay the seller all the money)

While extensive search of the records can be made, there are often problems not of record.

Here are some things I've seen:

1.  Municipality has not been paid for trash bill for 8 years.  Trash is lienable here because billed by the municipality, but they never recorded a lien.  Its still a lien and is not wiped out by foreclosure. (substitute any municipal utility, could be gas, electric, water, sewer or trash.)

2.  HOA fees, lienable, not yet of record, no notice given of foreclosure sale.  Lien survives foreclosure.

3.  Town puts in new sidewalks and curbs (substitute any municipal improvement) lien never recorded, never notified, survives foreclosure.

4.  Mechanics lien can be filed up to 6 months after event.  Not of record, not notified, survives foreclosure.

5.  Property has 6 un-recorded deeds in a row covering nearly a 100 year gap in the recorded courthouse records.

6.  Husband murders wife in their home state, not the state the property is located.  Deed is in husband and wife's joint names.  By law the husband can not become the owner of the property because of his crime.  Evidence of this action is nowhere in the courthouse records where the property is located.

7.  Owner is in jail for arson burning down his own house.  There are two mortgages on the house, by law he can not collect any insurance proceeds due to his convicted crime.  The mortgages are very old and by law would be considered paid off due to age.  One of the mortgage holders claims that while in prison the owner made 1 payment which revived the mortgage and extended the statute of limitations.

8.  Owner has 3 mortgages on their personal residence.  The first forecloses on the property and because the second and third have similar sounding corporate names only notifies one of the junior mortgage holders.  The mortgage holder not notified survives the foreclosure and is still a valid lien against the property.

9.  House passes through foreclosure and is sold subsequently twice with title insurance.  Current owner goes to sell and has a contract for the property.  buyer's attorney says that he will not issue new title insurance because a mortgage from 2 owners BEFORE the foreclosure had a mortgage that was never satisfied of record.  Attorney recommends to buyer that they not settle and buyer follows their advice.

10.  Title searches for title insurance are often done going back 60 years.  Its a custom but not a requirement that you stop at 60 years.  In one sale, the buyer's attorney discovers that on an 1898 deeds (that's right 115 years ago) a deed was signed by only 3 of the 4 legal heirs to an estate.  The attorney refuses to issue new title insurance and the buyer won't settle.

11.  Here by law delinquent real estate taxes survive mortgage foreclosure, and the lien does not have to be recorded, and there is no statute of limitations.  Owner went to sell a property and somehow it was discovered that a 1910 tax bill was unpaid.  The tax amount was relatively low, given that it was in 1910 dollars, but there was interest and penalties for 100 years which was more than the original bill.  Again this lien was not recorded at the courthouse and the tax collector from 1910 was not the current tax collector and was unavailable.

Greg H. · Answer

@Wayne Brooks

Most definitely that is what title insurance is for.  My point was that at least in Texas(The only state I have purchased a HUD) the HUD designated closing company does do a title seach/report and/or commitment and on the Buyer Select properties the company I use does this as well.  Title insurance here is +-1% of the purchase price.  So, in a HUD purchase there are safeguards in place to protect the buyer in regards to title.  I would never suggest a buyer not get Title Insurance in a "standard" transaction

Wayne Brooks · Answer

Yes, buy the insurance.

Greg, title insurance is Not for the things we can find in public records.  I recently saw a case where an heir to the third transaction back, popped up because his signature had been forged on a deed transfer.  This, and 187 other unforseeable reasons, is why you get title insurance.

David Krulac · Answer

Greg  H.

Here in PA, HUD has done away with having their own closing agent.  Now the buyer picks their own closing agent.  Title insurance is a regulated industry here and the State Insurance Commission sets even the rates that all title companies charge.  There is a discount if there was a recent sale and issuance of a title policy, but no other discounting allowed. The HUD buyer's closing agent does the title search and even prepares the deed for HUD.  Typically the closing agents do not charge a fee for closing but make there money on the title insurance.  And many licensed closing agents will not close a transaction without title insurance.  I speculate that is because they don't want future liability from a client who declines title insurance and has a future problem.

Also HUD will not allow a closing to occur at an closing agent who is not on their approved list, which requires current licensing and errors and ommsions insurance.

Mark Ferguson · Answer

Greg  H.

You may have been lucky so far.  I list huds and have seen more than a few issues pop up after closing on properties with title insurance. The one mentioned above took 6 months for the title company to sort out due to HUD not having legal title to sell the property. Technically it was still in b of a's name.

Mark Ferguson · Answer

Greg  H. I wasn't trying to say you don't work hard.  In this case they purchased title insurance and the title company missed that HUD didn't have clear title. I'm not sure how I could have found this issue if title couldn't.

Mike H. · Answer

I always get HUD. I had one where HUD wasn't even the owner. They had never recorded taking back the property during the foreclosure process. Still showed as the old owner at the recorder's office.

I'm wondering if the old owner could have put another mortgage on the property if they would have known that? It is first in is it not? I'm sure thats probably not legal but I'd bet it would be a huge legal mess to have to correct and some really tough sleepness nights waiting for things to get cleared up.

Get the title insurance and get your sleep. Thats my 2 cents anyway. :-)

Given all the issues with banks foreclosing on people illegally, why would you want to take any risk at all?

Stan Butler · Answer

We buy a couple of HUD deals every year in cash and I always get title insurance.  I just consider it a cost of doing business.  Its no different than making sure the house is properly insured during the rehab period.  Could I take the chance and not insure the property for the 3 months that I will own it??  Sure, but why take the chance....

BTW, we just closed on a HUD home that had a title issue in between the time the bank foreclosed, HUD took ownership, and then sold it to us.  It took 3 months to resolve the issue, but we finally closed.  We also learned that HUD will not pay bonuses even if they cannot deliver clear title.

Greg H. · Answer

@Mark  Ferguson

I don't think I would dismiss it as luck as I am very diligent it my business dealings and would suggest that someone without experience may want to purchase title insurance.  I know that I have even suggested that is previous posts regarding a non- forclosure purchases or in taking a deed in lieu.   Since I am not in Cali or Georgia it appears I did not win the Lotto last night....now that would have been lucky !

Title Insurance on a cash HUD deal?

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