Three Years Later.... Title Claim Finally Resolved

[Chris Seveney]

When You Think the Deal’s Done… Think Again

In our business, you're often taught to underwrite the borrower, the asset, and the exit. What’s less discussed is the legal risk after you buy the loan—especially when you inherit someone else’s paperwork.

We purchased a first-position loan that had been refinanced. Everything checked out: clean title, updated documents, recorded properly. The borrower later sold the property in 2023, and we expected a smooth exit.

Then came the curveball.

A subordinate lender—who originated a second lien before the refinance—filed a lawsuit, claiming they should still be in first position. They brought a title claim, tied up the sale proceeds, and froze over $500,000 in escrow for nearly three years while the case worked its way through court.

We had title insurance, and thankfully, that policy covered the legal battle. But we still had capital locked up for years, waiting on a judge’s decision. When the ruling finally came down, the subordinate lienholder got wiped out. Over $400,000… gone.

This wasn’t a story of bad underwriting or a broken borrower. It was a reminder that in note investing—and real estate in general—some issues take time. And even when you think your position is secure, you can still find yourself stuck in neutral because of someone else’s mistake years earlier. (As we say, people can sue over anything)

Lessons learned:

• Always get strong title insurance. It’s not just a checkbox—it’s your last line of defense.

• Don’t assume payoff = payout. Escrow can hold your funds for far longer than you expect.

• Legal challenges can delay your return, even when you’re right. Be patient and plan for contingencies.

If you’re investing in notes or considering buying a loan secured by a property with a long ownership history, dig deep. Ask the hard questions. And remember: even with all the right documents, time might be your biggest risk.

[Don Konipol]

Quote from @Jay Hinrichs:

Quote from @Don Konipol:

Quote from @Chris Seveney:

When You Think the Deal’s Done… Think Again

In our business, you're often taught to underwrite the borrower, the asset, and the exit. What’s less discussed is the legal risk after you buy the loan—especially when you inherit someone else’s paperwork.

We purchased a first-position loan that had been refinanced. Everything checked out: clean title, updated documents, recorded properly. The borrower later sold the property in 2023, and we expected a smooth exit.

Then came the curveball.

A subordinate lender—who originated a second lien before the refinance—filed a lawsuit, claiming they should still be in first position. They brought a title claim, tied up the sale proceeds, and froze over $500,000 in escrow for nearly three years while the case worked its way through court.

We had title insurance, and thankfully, that policy covered the legal battle. But we still had capital locked up for years, waiting on a judge’s decision. When the ruling finally came down, the subordinate lienholder got wiped out. Over $400,000… gone.

This wasn’t a story of bad underwriting or a broken borrower. It was a reminder that in note investing—and real estate in general—some issues take time. And even when you think your position is secure, you can still find yourself stuck in neutral because of someone else’s mistake years earlier. (As we say, people can sue over anything)

Lessons learned:

• Always get strong title insurance. It’s not just a checkbox—it’s your last line of defense.

• Don’t assume payoff = payout. Escrow can hold your funds for far longer than you expect.

• Legal challenges can delay your return, even when you’re right. Be patient and plan for contingencies.

If you’re investing in notes or considering buying a loan secured by a property with a long ownership history, dig deep. Ask the hard questions. And remember: even with all the right documents, time might be your biggest risk.

Great post Chris!
People really don’t understand that ACTIVE investing in real estate is nothing like investing in a mutual fund and collecting quarterly payouts.  As you point out, one of the most frustrating aspects of our business is the way interested parties can tie us up with legal action.  Unfortunately, our system can take an inordinate amount of time to conclude because of judges scheduling, allowing attorneys multiple delays, bankruptcy court filings, court jurisdiction issues, requests for irrelevant documents, etc.  we’ve been dealing with a similar situation, a Second lien holder has been threatening to tie us up in court so we can’t complete foreclosure; fortunately we reached an agreement with them whereas they will buy out our position. Actually, they withdrew their lawsuit, we foreclosed, and agreed to sell the subject property to them.  And they’re a rather large outfit, they’re paying us $6.2 million for the property. 

thats a great outcome Don.. I had one similar when we got sued by a Junior claiming priority much much smaller numbers but still .. we got it worked out But had to eat legal fee;s.

What I all the back end of real estate IE title insurance functions are so foreign to 99% of investors they have no clue on how any of this works if there is a water landing. jsut because you have title insurance does not always dictate a fast pay out or a payout at all.. This is insurance and insurance companies hate to pay as we know.

My longest one was also 3 or 4 years and had to do with being landlocked title company defended and finally worked out a LICENSE to cross state lands to a public road so we could sell but that was not easy.. Also because I got great buy on the property and did some value add my title policy was for 140k and the market value or sale value when I did sell was 600k. If they had to pay me off I would have only gotten the 140k and not the 600k I eventually got and it was at least 5 years from purchase.

AS a side note with all these wholesalers out there looking for cash buyers.. I dont think most cash buyers understand that when they buy UNLESS they know how to ask or negotiate for title insurance.. lets say the deal is 100k and the wholesaler has an assignment fee of 30k  pretty common. title only insures for contract amount 70k you have a buggered title and your only going to get 70k.. your 30k is long gone to the nice wholesaler who is NOT going to just give it back LOL.. Then let’s say you do another 50k in improvements out of pocket and you only find out about the bad title when you are in escrow to resell now you have lost 80k. Although keep in mind you own the home but a home that cant be sold with title insurance. !!!!!  I fight with wholesalers and title insurance companies on these issues all the time.. Not that I have claims all the time but to get proper insurance when I close.. Most closing companies just say NO we cant do that so we have to shop for the right closer to get the appropriate insurance.

Here’s how title companies operate now, based on 5 title claims I made in the last 15 years

1. If claim is from a principal and not their attorney the claim is automatically rejected with a generic letter merely stating that the claim is not covered with no specific reason as to why.

2. Attorney contacts title company on behalf of client.  Title company agrees to send the claim to their attorneys for review  - apparently initially they rejected the claim without running it past their attorneys - perhaps the 19 year old receptionist was the person who rejected the claim.

3. Title company issues a new letter stating they are reviewing the claim, reserving all rights, and will inform you of the results of their review within 3 weeks. 

4. If the claim is under a predetermined amount the title company will just go ahead and pay the claim.  If the claim can be “fixed” relatively cheaply the title company will go ahead and “fix it”.  If neither, the title company will make an “offer” of a relatively small payment “in full settlement” of the claim.  

5, Attorney for the insured informs title company that their offer is unacceptable, and is making a formal claim for the full amount and or resolution of the issue.  Further, attorney will inform title company that he is sending copies of all correspondence to the state insurance board. 

6. Title company responds with letter stating that they are not the party that insured title - title was insured by one of 236 companies in which the title company has 49% ownership.  Further, title was closed through an independent fee office, and title company had uncovered that in 1907 the legal description of the subject property contained an incorrectly spelled word, so there’s question as to whether the property is even insured.  Title company hereby offers to refund cost of title insurance if claimant agrees to sign affidavit waiving all claims against tile company. 

7. Claimant attorney answers with letter sarcastically thanking title company for their generous offer to refund $1,600 cost of title policy in lieu of paying $350,000 claim, but due to the fact that settling a legitimate $350k claim for $1,600 is not a good business provision, will have to decline.  Further, the 49% owned position of responsibility was settled in Federal Appeals court in 1972 with the title companies universally losing; and if the 1907 legal description farce is actually an issue, then the claimant is covered under a different provision of the title policy. 

8. The title insurer now realizing they won’t be able to bs the claimant into either “going away” or accepting a greatly reduced settlement, send a new letter stating that they are accepting responsibility for the claim, and will either rectify the situation satisfactorily or provide compensation up to the limits of the policy.