Foreclosure Due Diligence Q & A

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Foreclosure Due Diligence Q & A

Terry Portier
Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes

In looking at a bank owned REOs, courthouse steps or online auctions like auction.com, HUD, etc, or just wanting to understand basic REI principles, please provide some insight and correct me if I am wrong so far.

1. Register of Deeds (ROD) office, all mortgage activity (1st, 2nd, 3rd), but not mechanic liens, is made legal by public record. Caution here recent activity may not be shown online always a good idea to call. You can get a legal description at the clerk’s office ROD will need

2. Civil court is where foreclosure takes place there is a public auction at the sheriff’s office. It is important to understand redemption rights; value and when the redemption period ends or basically when the person foreclosed on gave up there interest to the property. I’m not sure how you determine value since ROD list mortgages assigned and do not reflect what’s owed? The court can also give the attorney’s name, and identify any mechanic liens. You will need a name which can be obtained at the ROD site on the mortgage, to obtain a case #.

3. Some sellers may issue a “Quick Claims Deed” that does not mean title is free and clear, a “Warrantee Deed” does. I’m not sure what this means, if there is a problem the deed is a contract under warrantee or not? Is there a third party involved here?

4. Title insurance protects the buyer in any law suit if title is not free and clear? So regardless of due diligence if you miss something you are covered?

5. Find out back taxes at the appraisers office.

I learned all that yesterday lol after almost bidding on auction.com. I have read you have to be a seasoned investor that understands due diligence, so I thought if anyone cares to educate us noobs feel free. I backed out because I don’t feel I am educated enough.

Thanks! :)

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y

Terry, as to #1, the name of the office varies, in all states for any lien or encumbrance to be perfected or enforceable public notice must be given and that is accomplished by filings in the property records to the subject property. And, you are correct that due to the physical filing process a lien may not be shown when you search title. When properties are sold a "final clearance" is given which entails searching title records of the property sold after settlement but before filing documents of that settlement. This is to ensure that no lien was filed, say a few minutes prior to the closing transaction. Such a filing could become superior to the liens filed from that transaction, so they ensure there is clean title. With a foreclosure, generally such liens, with the exception of some like taxes, are wiped out from such sale. But after the sale a new lien could be filed after you buy it. I'll mention this later.

#2. There are two types of foreclosure, a judicial foreclosure which is a matter before the court and no-judicial foreclosures where the power of sale is vested in a Trustee by agreement. A njf, may be taken to a judicial proceeding if either party files suit. In either case, you can obtain the entry bid or payoff required by a lien holder. Understand that the value of the property has nothing to do with what is owed on any lien. Property values are determined by the analysis of the market to the subject property.

#3. Never, never, never buy a property using a Quit Claim Deed. A CQD only conveys that interest the grantor MAY have in a property and gives no warranty of any kind. I'll be happy to sell you the Empire State Building for $1,000 on a QCD! A General Watranty Deed is what you want in any sale, which warrants good and merchantable title. Sometimes a seller will not give such a warranty or sells a property that is subject to another lien, inwhich case a Special Warranty Deed is used, it will generally give full warranty but excepts out certain matters that are not covered, like a first mortgage. There are other deeds as well that fall under the category of Special Deeds, these are used for estate planning, granting easements and specific matters that put requirements on future owners or uses of the property.

#4. Title insurance insures the fnancial interest of an owner or lien holder as to good title up to the date the title is insured, not beyond. The American Land Title Assocition governs title practices and title insurance companies use a standard policy. The policy will have a section BII, Exceptions, which needs to be read carefully. There are standared exceptions, like liens and encumbrances not shown of public record and claims from such are not covered. There may also be special exceptions, such as an unrecorded easement for a driveway or road. Title coverage also insures the settlement or closing when the closing is accomplished by an "insured closing agent", so the acts and omissions or errors inhe settelment will be covered. This would be a function of running that final clearance I mentioned above, if a lien was filed minues prior to closing was not found with the deeds and new liens being filed, coverage would be afforded. Title insurance does not insure the market value in the future, it only protects you to the limit of coveage obtained and is set at the sale price from the transaction. If you purchase a 15K property and put 60K in it, you need additional coverage (if you intend to hold it) as our verage would only be 15K.

5. Not the appraiser's office, the Assessors office. :)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Terry, as to #1, the name of the office varies, in all states for any lien or encumbrance to be perfected or enforceable public notice must be given and that is accomplished by filings in the property records to the subject property. And, you are correct that due to the physical filing process a lien may not be shown when you search title. When properties are sold a "final clearance" is given which entails searching title records of the property sold after settlement but before filing documents of that settlement. This is to ensure that no lien was filed, say a few minutes prior to the closing transaction. Such a filing could become superior to the liens filed from that transaction, so they ensure there is clean title. With a foreclosure, generally such liens, with the exception of some like taxes, are wiped out from such sale. But after the sale a new lien could be filed after you buy it. I'll mention this later.

    #2. There are two types of foreclosure, a judicial foreclosure which is a matter before the court and no-judicial foreclosures where the power of sale is vested in a Trustee by agreement. A njf, may be taken to a judicial proceeding if either party files suit. In either case, you can obtain the entry bid or payoff required by a lien holder. Understand that the value of the property has nothing to do with what is owed on any lien. Property values are determined by the analysis of the market to the subject property.

    #3. Never, never, never buy a property using a Quit Claim Deed. A CQD only conveys that interest the grantor MAY have in a property and gives no warranty of any kind. I'll be happy to sell you the Empire State Building for $1,000 on a QCD! A General Watranty Deed is what you want in any sale, which warrants good and merchantable title. Sometimes a seller will not give such a warranty or sells a property that is subject to another lien, inwhich case a Special Warranty Deed is used, it will generally give full warranty but excepts out certain matters that are not covered, like a first mortgage. There are other deeds as well that fall under the category of Special Deeds, these are used for estate planning, granting easements and specific matters that put requirements on future owners or uses of the property.

    #4. Title insurance insures the fnancial interest of an owner or lien holder as to good title up to the date the title is insured, not beyond. The American Land Title Assocition governs title practices and title insurance companies use a standard policy. The policy will have a section BII, Exceptions, which needs to be read carefully. There are standared exceptions, like liens and encumbrances not shown of public record and claims from such are not covered. There may also be special exceptions, such as an unrecorded easement for a driveway or road. Title coverage also insures the settlement or closing when the closing is accomplished by an "insured closing agent", so the acts and omissions or errors inhe settelment will be covered. This would be a function of running that final clearance I mentioned above, if a lien was filed minues prior to closing was not found with the deeds and new liens being filed, coverage would be afforded. Title insurance does not insure the market value in the future, it only protects you to the limit of coveage obtained and is set at the sale price from the transaction. If you purchase a 15K property and put 60K in it, you need additional coverage (if you intend to hold it) as our verage would only be 15K.

    5. Not the appraiser's office, the Assessors office. :)

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  • Terry Portier
    OP
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    13y

    Bill Gulley

    Thanks so much for your response and education, it's obvious you really know your stuff. I had to read that couple times to get my head around it :) Karen Margave offers some good advice in her latest blog understanding transaction basics I am trying but kinda confusing.

    So if I understand correctly, in a foreclosure, all liens must be public record to be legal, don't worry about mechanic liens they get wiped out, but check back taxes I might be responsible for. Not totally sure but I don't think mechanic liens are made public, need to check on that since I don't see them @ ROD and I had to call the court.

    It's a good idea to get title insurance because liens can still occur after the sale. I checked into that about $600 for $100K home, but I should value it correctly read my policy and understand exemptions.

    "Redemption value" I take is what the person being foreclosed on owes, is different that value of house perhaps. If I can find out what is owed it may be useful in a action. Not that I know how to do that?

    Sounds like I should be glad I backed out of that QCD auction, last I looked the nuckleheads had a $85K bid in on a $110K home that has not met min reserve. I'm guessing if I am going to bid at a auction sherriffs office would be better than auction.com. I heard from state offices the lender was there of course to bid on it, I wonder if investors can negotiate with them there?

    I was introduced to the term "Special Warranty Deed" yesterday while inquiring about HUD closing process. Lady at the title co said HUD will warranty the deed up to the time they got it. Here again say if someone did some work along time ago, or did not file a lien for any reason, but did after I purchased, HUD will not be responsible? Thats where title insurance comes in and is worth getting always? That term should raise red flags since it may be being sold with liens?

    Thanks again. I'm teaching all this to my kids so they get into this earlier than I did. :) Gosh the everyday life things they don't teach in school is killing me lol!

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Terry, redemption rights usually require owners to post bonds to keep the rights to redeem, that's known before a sale, but each state is different. They are rarely taken. Generally you won't negotiate with a lender at the steps, they do have an obligation to get the highest price. It would be different if you represented the borrower with a payoff request, but that gets into other matters. HUD is only responsible during thier ownership, see the title insurance issue above. There are times when TI could be skipped, but not for new folks, I suggest you not assume the risks and obtain coverage. :)

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  • Terry Portier
    OP
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    13y

    Bill Gulley

    Thanks again Bill. I had an agent ask if I am REI today for the first time....must be all the fancy terms I am learning on BP. She acted intimidated....lol!

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  • Terry Portier
    OP
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    13y

    Bill Gulley

    Bill sorry to bother you again need your help. I don't understand the difference between having a warranted deed and title, are those two different docs or the same thing?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Terry,no bother at all, no, they are not seperate documents, but the same. In RE, we don't have a title as we do with personal property, like a title to a car, the evidence of ownership is by deeding the property. There are different types of deeds which convey the warranty of title. A General Warranty Deed is the highest degree as it warrants good title or ownership without restriction, except to those encumbrances that run with title to that property. Then there are Special Warranty Deeds, various types for special circumstances, but they all provide good title with exceptions to warranty for matters that are stated in the deed. When a bank sells, they may use a SWD and state they only warrant good title during the period of time they owned the property, otherwise they pass whatever rights there may be with ownership or title. You'll hear alot about Quit-Claim Deeds, they are used for specific situations to pass title, but without any warranty at all, they only pass that title or rights of ownership that were held by the party granting or giving the deed.

    Long ago, title to real property was evidenced by an Abstract of Title. You may hear someone say they hold the abstract thinking it's proof of ownership. The abstract is the history of the property's conveyances but is no lonnger the standard as proof of ownership. They do contain, sometimes, a history that contains family names and restrictions, that no longer are enforceable, title insurances comapnies will try to get those out of circulation as they may provide information that could become a claim to title, but I'm getting off track. You may, in some areas, have an attorney who will close a transaction and see or hear that the attorney has "run the abstract" and warrants some aspect of good title, what they have done is researched the history and are giving a legal opinion as to good title.

    Title insurance replaced the abstract method by insuring title. You will see sale contracts say the seller is to convey good merchantable, insured title. Today, we pass insured title, so that takes the place of a seller having to guarantee themselves that good title is conveyed. You'll find that title insurance will be required in purchase transactions where lenders are involved, with a lender's policy.

    This is the quick low down of sorts, that title, the rights of ownership are conveyed by deeds and warranty is guaranteed by the issuance of title coverage by title insuance. How this is accomplished will vary from state to state or even by location, as to who pays for title coverage. While title can still pass without title being insured there may not be a way to "Ensure" the warranty is any good as claims would then become a personal guarantee of a seller, may not be able to collect for any loss.

    For more info, you can google ALTA, the American Land Title Association who governs title conveyance methods and aspects of settlements.

    There is much more to it, but hope this helps you see the differences, basically.... :)

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  • Terry Portier
    OP
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    13y

    Bill Gulley

    Got is thanks again Bill. I have another question. I have a deal I am looking at to go in with an all cash offer on a short sale. Agent/owner said she split closing cost with me and issue a Warrantee Deed. Is the title insurance part of it or does she purchase it or do I?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    It's usually the buyer as it is thier policy, but it could be the seller to provide insured title, it goes by local custom. If we are geeting off on short sales, let's do it in the SS forum. No matter to me, but others won't find SS stuff by searching the foreclosure forums. :)

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  • Terry Portier
    OP
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    13y

    Bill Gulley

    Ok Bill I put it up here: https://www.biggerpockets.com/forums/103-short-sales/topics/87357-major-rehab-in-short-sale

    I value your help thanks again. :)

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