Seller unable to close escrow due to 2nd lien

14 Replies

Hello,

I am a first time homebuyer and have had a house under contract in Texas for one month. The close date is next week (5/30). Late last week the title company informed my realtor and I that the seller has a second lien on the house, and if unresolved, will not be able to sell it.

The contract we used mentions a return of only earnest money if the title is not cleared. However I've been told that the seller failed to inform their agent that there was a lien. Therefore the house should not have been put for sale in the first place. I've fulfilled everything on my end of the deal and spent $1,500 in inspections, appraisal, etc and would want to get that back in addition to earnest money should the deal fall through.

The house is vacant and the seller has already moved out, so it seems it would be in their best interest to close this deal. But with the close date approaching it does not seem like they will. In the event the title does not clear, what options/legal options are available? What would you do?

Thanks.

Do you happen to know if there would be enough funds from the sale to cover the first and second lien? I have bought homes with multiple liens before but there has always been enough cash going out to cover both liens. My guess is this won't be and issue and the title company will just seperate out funds. They would need to get the seller's consent to do that and that could be what they are waiting on right now. As far as I know, this should not hold anything up.

As to your recourse on the money you spent, I don't think there is any way to get your inspection and appraisal fees back. Those will probably be a lost cause should you not close on the house. You will get your earnest money back assuming it was handled correctly and put into an escrow account.

Sorry to hear about the troubles but I hope you are able to close on your new home soon.

May need a demand letter to title company, but yes, unlikely you will recover due diligence costs. You can hire me for $10,000 and sue the Seller to recover $1,500 if you like.

Originally posted by @Alex Na:

Hello,

I am a first time homebuyer and have had a house under contract in Texas for one month. The close date is next week (5/30). Late last week the title company informed my realtor and I that the seller has a second lien on the house, and if unresolved, will not be able to sell it.

The contract we used mentions a return of only earnest money if the title is not cleared. However I’ve been told that the seller failed to inform their agent that there was a lien. Therefore the house should not have been put for sale in the first place. I’ve fulfilled everything on my end of the deal and spent $1,500 in inspections, appraisal, etc and would want to get that back in addition to earnest money should the deal fall through.

The house is vacant and the seller has already moved out, so it seems it would be in their best interest to close this deal. But with the close date approaching it does not seem like they will. In the event the title does not clear, what options/legal options are available? What would you do?

Thanks.

 Alex,

That is a tough situation. Sorry to hear you are going through the headache. First questions, and I am guessing that you have already crossed this bridge, but have you already checked to find out if the seller of the home is going to clear enough to be able to pay off the second lien?

On to your questions:

1) Earnest money back should be easy.

2) Extra expenses will be a hard sell. First, if it comes to the point that closing cannot happen, then I would request that of the seller first and see if they are willing to play ball. If not, then that will likely be a hard sell because those inspections are not technically part of the contract. You could try to take legal action, but that is really going to be a whole headache in its own. 

3) Is the lien a small enough amount that you can take care of whatever the seller cannot and still have it be a good deal?

Best of luck!

@Alex Na. If there is insufficient funds to payoff both liens, and Seller cannot raise additional funds, IMO, the only CLEAN option is for Seller to do a "Short Sale". if so, be prepared to wait another 6-Months for closing.

If it appears, this is something that can be rectified in a short time (whatever a short time means to both parties), you might propose renting the house from Seller until the Liens can be satisfied. 

This would fall under the seller not being able to deliver clear title and is covered in paragraph 15 as I recall.....the full remedy is return of the EM.
As a habit, I always did a public record search, takes about 10 minutes, to check for mtgs/liens before making an offer. You can’t determine exact loan balances but you can usually get close, assuming they’re not in default. If it looks questionable, a call to the listing agent to investigate is in order.
While not required to be done by a listing agent, I think it is negligent, and self defeating, for them not do this themselves before listing a property.

Thanks all. It turns out there are four liens, with the 2nd being about 25% of the sales price. The title company is still trying to figure out amounts of the others. My understanding was that by law the seller must disclose any liens prior to putting the house on the market. I guess they knew of two but did not officially disclose them. At this point it appears the sale will be unlikely from the seller not having enough funds. I’ll try to get reimbursement for expenses since taking this down another road by going to court for specific performance and forcing the sale of the house would likely leave them in bankruptcy.

Is a short sale on the table? Seller wants to sell, you want to buy. With these 4 liens, seller is underwater. If you are OK with waiting a few more months, I would talk to the seller’s side about getting a short sale submitted to be reviewed by the lien holders ASAP.

Sorry, for some reason I thought this was in Fl, and have no idea what your contract says about this. Without doing a short sale you could never force them into a sale. Your contract should specify what options you have, if any, for remedies.

Originally posted by @Wayne Brooks :

This would fall under the seller not being able to deliver clear title and is covered in paragraph 15 as I recall.....the full remedy is return of the EM.
As a habit, I always did a public record search, takes about 10 minutes, to check for mtgs/liens before making an offer. You can't determine exact loan balances but you can usually get close, assuming they're not in default. If it looks questionable, a call to the listing agent to investigate is in order.
While not required to be done by a listing agent, I think it is negligent, and self defeating, for them not do this themselves before listing a property.

not to rag on how closings are handled in other states.. but on the west coast when you open title you get a pre lim in 48 to 96 max.. at that point seller and sellers agent would know of this issue.. and buyer as well. as the perlim is mailed to each realtor the buyer and the seller for their review and approval.

In states were they have to abstract or they wait until very close to close date to run title this happens a lot.. therefor when i am the purchaser in say SC i make my attorney order title day one... as it takes a week or longer when you have to hire abstractor I personally pay for this.. I had to many deals and mine are all new builds were we have to spend significant money on due diligence only to find out their was title defects mortgages etc..  had it happen like 2 or 3 times right out of the gate so that's how i handle this.

now to be fair many times buyers, sellers and agents have no clue how title and escrow works and just wait.. and like you said a quick search of public records would also find this..  sellers sometimes just hope it wont be found LOL

Originally posted by @Alex Smith :

Thanks all. It turns out there are four liens, with the 2nd being about 25% of the sales price. The title company is still trying to figure out amounts of the others. My understanding was that by law the seller must disclose any liens prior to putting the house on the market. I guess they knew of two but did not officially disclose them. At this point it appears the sale will be unlikely from the seller not having enough funds. I’ll try to get reimbursement for expenses since taking this down another road by going to court for specific performance and forcing the sale of the house would likely leave them in bankruptcy.

first rule of law you dont Sue people who have no assets or equity LOL

@Jay Hinrichs

#Truth

@Alex Smith

None of us wish the school of hard knocks to wack you on your first deal !  It happens sometimes.  You are never going to collect the money you are out on this deal.  Stay with it and make up for it on your next deal is the best advice I can offer

The second lien would was surely noted on Sch. C of the title commitment which you should have received within 5 to 7 business days after the title company received the contract. My guess is your agent missed it. If that lien is not resolved, you're not receiving clear title and the deal won't close. If you used the TREC or TAR contract form, you'll need to terminate and request the earnest money be returned. If the seller refuses to sign, you'll have to send a demand letter. If the seller still refuses, you'll have to file in small claims court in the precinct where the property is located.