Title Issues with a Foreclosure Purchase from an Auction

21 Replies

I am a newish member to BP. I have a little problem and was hoping someone can point me in the right direction. I am in the process of buying my first flip. I won an auction, had a closing date set for this week and now they're saying there is a problem with the title recording with the county (Baltimore City) and closing will be delayed.  

There is a clause in the contract that basically says they can sell us the property with title issues. Is there a way for me to find out what's going on with the title? The title company is not communicating much. It's my understanding they actually work for the seller, right? We're not sure what to do at this point. Is this something not to go through with the deal over? 

Any help would be greatly appreciated!!

Foreclosures are never easy. You could probably walk away but if its a great deal you might hang around. They will just go to the next highest bidder. Its all at your risk with auction deals.

Contact your own title company and pay them to do the search, if you don't trust that other title company ...

That cant be true. No way that u can forced to buy a property that may or may not belong to the seller. Contract or no. Refuse to purchase if problem with title exists where title insurance cant be obtained for yourself. Threaten to sue for deposit.

Thanks so much for the advice, Steve!

I did what you suggested and had ProTitleUSA run a search.The only thing that looked problematic is that it still has an open mortgage against it from the owner who was foreclosed. Does this sound like an issue or will it probably be removed before closing? 

hi senta. during the foreclosure, if the owner had a second mortgage on the house, they would have been notified about the foreclosure from the first mortgage holder. if the 2nd did nothing to stop it, then their position is eliminated. it may not always have been removed from the record, but your attorney should have no problem getting it removed, provided they, the 2nd mortgage holder was properly notified. the seller, the holder of the first mortgage technically had no right to sell the property without having done this themselves and had clear title to sell the property. you could get out on this technicality, but if the house is a good deal, i would have your attorney push to get this 2nd removed. 

@Senta J.

We don't know the auction terms when you bid.  Are you getting a Quit Claim Deed? Do the auction terms state you get clear title?  You need to find out if the "open mortgage" 1) was a junior mortgage to the one being foreclosed and 2) were they named and served?  If you can paste the clause you referred to, that would be helpful.

Yes, this is called a Quit Claim Deed. I was initially told (verbally) that I would get a clear title with insurance and I need to research the auction's terms to verify that to be true. However, the language in the contract states the following:

"...the deed or other conveyance document to be delivered at the closing shall be quitclaim or other similar instrument conveying the seller's interest in the property, if any. The deed and other instruments assigning seller's interest in the property shall contain no express or implied warranty or representation of title, or specifically disclaim any such representation or warranty...buyer may, at its own election and its own cost, order a title report or commitment and obtain title insurance, but the receipt or availability of such items shall not be a condition of the closing..."

I'm not an attorney, but I'm interpreting that to mean they can sell the property without a clean title and that the quitclaim deed is the way they can legally do it. Did I understand that correctly?

Thanks so much for your input!!

@Senta J. Yep, sounds like auction.com.  This is why when you're bidding under these conditions, you order a title search prior to bidding.  But if they are delaying, it seems they are trying to cure the problem.  If you got your title search from an actual title co., ask them to research it, and tell you what needs to be done to achieve clear title.  It may be something simple, may be a reforeclosure.

You seem to understand correctly.  A quitclaim deed is a deed that basically says, "I (seller) am conveying whatever interest I have in the property to you (buyer)".

That interest may not be worth much if anything.  There may be other parties that have interest in the property, mortgages, liens, etc.

Buying a property with these terms is gambling unless you've done your due diligence.

Thanks again for the advice! Yes, it was auction.com. Next time I'll know to run my own search prior to bidding, it's definitely a learning curve. 

It appears that the mortgage is just the primary since it was for the purchase price. Will they definitely clear that prior to closing since the bank foreclosed or is that something I need to remedy after closing? 

Even on Auction.com a bank will usually give a "special warranty deed".

A quit claim I wouldn't feel comfortable buying in those situations. A normal use of quit claim I see is for example where a spouse quit claims there interest to just solely in the partners name alone etc.

All those small words are  a pain to read but they do mean something in the disclosures!

No legal advice given.

Here, there's no actual "satisfaction" of the mortgage after a foreclosure.  It's simply invalid by operation of law.  You seem to be okay, and should be a able to get title insurance.  You may have some unrecorded liens though, utilities, code violations, etc.

This is all extremely helpful! Since the mortgage is no longer valid due to the foreclosure, they'll have to remove it from the title, right?

So, if there are unrecorded liens, is there a way for me to find out what they are? 

Also, is there a period of time after which a lien can no longer be recorded? Sort of like a statute of limitations for liens? Say, for example, a lien is placed after I close, would the title insurance cover that (assuming I can get one)?

When you use their title co. They usually don't search for these. It takes letters/requests to all the relevant agencies and takes a couple of weeks.  Generally no time limit for them to file liens, and these will be excluded from your title policy under the exceptions.

If there are some of these out there, hopefully the amount won't be too high since there seems to be very little I can do about it now. I don't know how it works but since the property has been vacant for over a year, I would hope that if there was something out there, it would've shown up on the title by now.

Thanks again for all your help. It was a great learning experience and will help me to do better next time!

A couple of clean up ideas.  

First, you absolutely can be forced to close on a transaction.  In residential it is not all that common and the Seller most of the time will be satisfied with retaining any deposit on the contract.  That doctrine is called Specific Performance.  In residential transactions the failure of a buyer to buy does not typically create enough damage onto the Seller for a judge to award this.  That said, it is untrue to say, one can not be forced to purchase/sell/close.  

Joel is correct in that typically a special warranty deed is used in sale from a institutional owner or prior institutional mortgagee.  In addition, I don't see many institutional firms attempting to sell their inferior interest in the open market as it is problematic and bad press.

All that makes me want to conclude this is more of a private firm or person specifically looking to take advantage of an unsuspecting buyer.

There is a little speculation on the existing mortgage which is causing the hold up.  I read it as a superior position not foreclosed.  I am not inclined to think that the mortgage on your search is the position which foreclosed and thus is resulting in the property interest being sold to you.  (The post by the OP is very ambiguous as to what it really is)  So the interest being auctioned is likely from a junior lien and perhaps the senior lien is now finally taking action (foreclosing) which they are concerned will wipe out their ability to convey 'any' title.  In other words, you were about to purchase the property Subject To an existing mortgage. 

The above explains more (IMO) of why the certain QCD is being used.  If the Seller where to use a special warranty deed, they would be warranting title during their ownership which would include warranting the superior/surviving mortgage.  Upon action from that Mortgagee the Buyer would have cause to make claim on the warrant and put back the sale.  

The clause being used in contract is sort of common when REO sales are conducted. However, again, the deed is usually a SWD. In most REO transactions the Seller (prior superior Mortgagee) tends to hold all the power via the contract and addendum used in the transaction.

I could be being pessimistic about the mortgage which is foreclosed and there may not be an existing superior mortgage on title.  Again, the feedback post from ProTitle lacks sufficient detail to understand what is really happening here.  There could indeed be an issue at the county where the Seller does not have proper title yet which 'could' be the sale hold up.  For instance, if the superior mortgage was foreclosed properly and the county has delayed any conveyance of title. The Seller must have title vested to execute the sale.  This is not uncommon, counties are sometimes slow post foreclosure auctions.  

That said, my spider sense leans me to the prior.  

If you are uncomfortable, which you probably should be, then write a cancellation letter and ask for any deposit back now.  Do not wait to see how it works out.  Doing that now would give you a better claim to your deposit.  If they seek to retain your deposit you can ask for the deposit to be inter-pleaded.  This means an arbitration by a third party takes place to see what is fair per the contract and events thus far as to who gets the deposit.  Conduct yourself in writing to protect your interests and so you have proof if needed.  Good luck.

Thank you for your detailed post, Dion. I tried to attach a screenshot of the title search but it didn't work. The open mortgage is with a company called Dell Franklin Financial, LLC, which was the original mortgage holder when the property was purchased in 2005. Then, it was assigned to Wells Fargo in 2012. Wells Fargo is the seller on the contract. So, I'm not sure why the mortgage would be open for the original lender.

The title company handling the closing said the title recordation is being held up by the county. They said they don't know yet if it was rejected or if's it's just slow. The title report does not show any outstanding taxes, would there be any other reason for the county to reject recording it? 

Is there any reason for me to be suspicious that this is not the reason the closing was delayed? If they know this would be a very bad deal for me, perhaps they wouldn't tell me the real reason so I don't try to walk away?

If there were junior mortgages, would they show up in the title report? I didn't see any indication that there were any other mortgages with that owner but if the property was foreclosed due to a junior mortgage not being paid, could it have already dropped off the report and, like you said, this mortgage is still open?

@Senta J.

Good information.  It is not uncommon for a county to be slow when it comes to issuing a new deed post auction.  It can take up to a couple of weeks.  You say Wells Fargo is the contract Seller, but who is actually vested on title to the real property right now?

If it is not Wells Fargo and title still sits in the prior Borrower/Owner's name then that would imply the new deed issued from the county post auction is pending and that could be the hold up.  That could then cause the statement to be made that the existing mortgage is not extinguished.  The prior mortgage is extinguished once the new deed is issued from the foreclosure auction through the county.
 
It is not clear from the posts when the actual foreclosure auction took place in time. If it was recent, then the delay makes sense but the sale time frame doesn't. It is not common for Wells to auction an REO that fast - so fast that the county has not even issued the new deed. Auction.com is not their first choice for sales either. That doesn't mean it could not happen just that it certainly does not happen all that much.

Additionally, it is not uncommon for a defect to appear prior to sale and then need to be cured.  In that setting, Wells would already have a deed and there is a problem with it that needs to be fixed.  However, revert back to my above paragraph that would mean there should be no existing mortgage as a deed was issued (that needs to be fixed) extinguishing the mortgage.  This could imply a purchase subject to the mortgage you mentioned.  Do not overly assume that a purchase money mortgage was the only mortgage ever placed on the property.  The property could have been purchased and a second mortgage taken out thereafter.  

I do not want to be overly pessimistic about this for you and cause any unneeded panic.  These types of delays and problems do happen semi-often.  Communication through an entity like Auction.com can be less than adequate to explain the whole picture.  (Obviously)

You should be able to discuss all of this with a title company which plans to issue you title insurance outside of the property purchase.  (I am implying you should be purchasing title insurance on this property)  You can purchase title insurance congruently with the purchase.  The insurer would give you a green light to close and then you would wire money for the purchase and then pay the title insurer for the policy.  

    

Originally posted by @Dana Whicker :

You seem to understand correctly.  A quitclaim deed is a deed that basically says, "I (seller) am conveying whatever interest I have in the property to you (buyer)".

That interest may not be worth much if anything.  There may be other parties that have interest in the property, mortgages, liens, etc.

Buying a property with these terms is gambling unless you've done your due diligence.

 Agreed. This is a space we operated in before setting up a formal company this year. I've never seen an auction use anything other than a quit claim deed, hence the term "as-is", especially online, so you have to be getting heck of a deal to purchase under those terms. Your criteria for those purchases should be the same as stringent as your traditional purchases with regards to comps, keep a level head so you have plenty margin to offset surprises. 

Thanks again, Dion. It looks like the home went into default in July, 2014 and was placed at auction in January, 2015. My realtor said they tried selling it first but it didn't move so maybe the auction was the last resort. 

I did as you suggested and contacted the title company. They said they spoke to the county this morning and they are waiting for them to record it any day now and then they can schedule the closing. They also said the title is clean and they will issue an insurance policy. So, big relief to hear that! 

Thanks to everyone who provided input, it has been a great learning experience! I will definitely do better next time on the front end of the deal. 

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