Banks require a preliminary title report on all real estate transactions. The preliminary title report serves many functions, but one that could cause you to loose a great deal on your next investment is the Chain of Title.
Most lenders require a title company to give them a 24 month chain of title. This simply is an overview of all individuals or entities that have owned the property in the last 24 months. Investors should pay careful attention to the property they are buying and who has owned them previous to the sale.
Some lenders and loan programs only allow one other individual to own the property in the last year. Banks look at the flipping of properties very closely. If a property is flipped too many times they may decline the loan. They could also ask their borrower or loan officer to provide documentation that the transaction is at arms length (the transaction is between unrelated parties).
The reason Banks pay careful attention to the 24 month chain of title is fraud. There are markets that the value of homes have been artificially inflated by properties moving from one borrower to the next with $10,000 to $100,000 added to the purchase price each time. There are reported cases of properties being sold to buyer A, then to buyer B, then to buyer C, then back to buyer A, and then to buyer D. All the parties were related in some manner and this fraudulently drove the price and demand up for the property. Although this generally does not happen in a down market, the flipping of properties is closely scrutinized by both lenders and title companies.
In a down market foreclosures can change hands several times in a short period. Unfortunately there are lenders that only allow a property to change hands 1 or 2 times in a year. If your property has changed hands frequently you may be looking for a new lender.
The good news is there are several lenders that only look at the chain of title and do not hold it against you. A couple things they look for is almost common sense. Are the transactions at arms length and what are the increases in purchase price from buyer to buyer? If the transaction is fraud free it will be no problem.
How do you know which lenders and banks have no issues with chain of title? You don’t. Your loan officer or loan broker better, when interviewing your loan officer this is a question you should ask about. Most loan officers that have a track record with investment properties (and fix and flips) know the challenges and answers to chain of title and at arm length transactions.