COMMON TITLE PROBLEMS HOLDING UP YOUR CLOSING (Part 1 of 2)
We often rely on our closing professional to perform due diligence on the property we are purchasing before we consummate the transaction. Even with competent professionals guiding us through the experience, it is useful to have a basic understanding of common issues that may arise throughout the closing process. This will be the first of two posts which discuss several common issues that can delay a real estate transaction.
1. Mortgages on title: This is probably the most common issue that comes up in a real estate transaction. Financing often goes hand in hand with home buying. When you borrow money from a bank or lender to finance the purchase of your home the creditor secures a financial interest in the property by having you (the borrower) sign a mortgage. This document becomes a public record and puts the world on notice that the lender has a lien against your property.
When you go to sell your property, if the loan hasn’t been paid in full already, the existence of the mortgage will show on the title report and hold up your closing. Rest assured this can be easily taken care of. You usually need to contact the bank or lending company that originated the mortgage and obtain from them a payoff. The payoff is a document which will show the outstanding balance of the loan with all applicable fees and interest. Provide this to the settlement agent handling your closing. They generally will pay off the balance in full at closing through the sale proceeds.
2. Dead property owners: When the owner of property dies (with or without a will), an estate is opened to settle their affairs and distribute the income, assets and property to the heirs. A personal representative is appointed as the fiduciary who will manage the estate. Often the personal representative is a close family member who is given legal authority by will or state law to enter into contracts and to convey real estate. If you are the personal representative of an estate there are some basic documents that you want to have available before selling the property.
First, you need to provide proof the owner is dead. The most common evidence of this is a death certificate issued by the Department of Health. Second, you need to provide proof that you have legal authority to sell the property. Letters of Administration (or Letters Testamentary) is the legal document granting such authority. Third, if the owner died with a will you may need to provide a copy of the probated will to the title agent. The title agent will review it to determine any conditions that need to be satisfied to sell the property. For example, if the will indicates that the property is to be devised specifically to an heir, that heir will also need to sign off on the deed along with the personal representative. Finally, you will need to resolve any potential estate and inheritance taxes that might be due. If you have not filed an inheritance tax return the settlement agent customarily requires a certain amount of the sale proceeds to be held in escrow. The escrow is held until the tax has been paid in full and accepted by the Department of Revenue. If you have already paid the tax, you may be able to avoid an escrow by showing documentation to the title agent that the Department of Revenue has accepted your return and there is no further balance due on the estate.
3. Judgments against a person with a similar name: This usually comes up with sellers that have common names such as “John Smith” or “Jane Smith”. Under certain circumstances, judgments and liens filed against a seller become “attached” to property they own in the county of the filing. In other words, those liens become a financial liability against the property. To address this, part of the real estate due diligence process is to run lien and judgment searches against the sellers so that any liens can be addressed before closing. Since judgment searchers are run by searching the names of the property owners, multiple individuals with the same name may show up.
If a judgment shows up on the title report that you are confident is not against you, objective evidence should be gathered to show that the judgment is against someone else. Generally, the best way to clear this up is to contact the creditor and get confirmation from them it is a different person. Alternatively, the title company may be able to accomplish this themselves by running more advanced database searches or even by comparing addresses that the seller has lived against addresses that the judgment debtor has lived. Sometimes the title agent may also accept a certified statement from the seller attesting that the similar named person in the judgment search results is not the seller.