COMMON TITLE PROBLEMS HOLDING UP YOUR CLOSING (Part 2 of 2)
Prior Owner Mortgage: In my last post, we discussed mortgages taken out by the seller and how to deal with them at closing. Sometimes a mortgage will show up on the title report which predates the seller’s ownership of the property. These are called prior owner mortgages because a prior owner in time took out the mortgage either to purchase or refinance the property. Resolving this can be more complicated for two reasons. First, the seller is not the obligor of this mortgage, making it sometimes difficult to get information or cooperation from the mortgage holder. Second; in the aftermath of the 2008 financial crisis, many small lending institutions that issued mortgages either went defunct, were acquired or merged into larger lending institutions. This can make tracking down the current mortgage holder often difficult.
If you are selling a property and you discover there is a prior owner mortgage indexed against your property there are several things you can do to attempt to resolve this issue. First you should go through your documentation from when you purchased the property. The Closing Disclosure, HUD or ALTA settlement sheet may have information showing that this mortgage was paid off in the prior closing. Additionally, if you purchased title insurance the policy can be presented to the new title agent closing the transaction. Usually, the title company that handled the prior closing did all the investigatory work already. When the prior title policy is provided to the new title agent, the transaction can sometimes proceed by the prior owner mortgage being reinsured (if it is the same insurance company) or by the prior insurer issuing a letter of indemnity to the new insurer.
If you don’t have an owner’s title policy, you may want to attempt to contact the mortgagee directly and request a lien release. When there is an old mortgage showing on title with no evidence of a foreclosure proceeding in the judicial records, it could mean that the mortgage was paid off already but the lender never took the effort to record a mortgage satisfaction. Most mortgage companies have a lien release department which you can submit an inquiry. You may have to do some research as to who the current mortgage holder is if the prior owner’s lender is now defunct. The FDIC’s website has a reliable search engine called “Bank-Find” which can help you track down the current mortgage holder as well. And sometimes a simple google search can find you what you need.
Properties sold by a Limited Liability Company: When you place real estate in a Limited Liability Company the property is legally owned by the LLC. Investors do this for various reasons, usually to limit liability against their personal assets in the case of a lawsuit against the property. Every now and then an investor tells me they want to hide their personal identity or name by using a limited liability company. There may be justifiable reasons for doing so but be aware that you make it more difficult to prove to a prospective purchaser and the settlement agent that you are the owner of that limited liability company. You also potentially make it easier for fraudsters to claim that they are the owner of your LLC if there is no public record attesting that the owner of the LLC is you. Therefore, it is prudent to make sure you have reliable documentation showing you that you are the owner of the LLC. The receipt for payment and original filing of the articles of organization should be retained in your records. You should also hold onto all the documents from when the LLC purchased the property such as your marked up title commitment and final settlement sheet.
Like any individual seller, limited liability companies are often subject to similar due diligence scrutiny. For example, the name of the company is searched to verify that there are no liens or judgments filed against it; that the company is in good standing in the state they are organized or conducting business; and that they don’t owe corporate taxes from the income they generate. Common documentation that is requested at settlement includes a certificate of good standing issued by the state entity that regulates business entities and a lien certificate issued from the Department of Revenue which certifies whether the limited liability company owes any corporate taxes. Usually you are dealing with a competent settlement agent who can order these documents on your behalf. However sometimes you deal with an inexperienced or unresponsive closing professional. In these situations, you can be proactive by going onto the department websites and ordering those documents yourself. In Pennsylvania a certificate of good standing (also called a “subsistence certificate”) can be ordered on the Pennsylvania Department of State website. The corporate lien certificate can be ordered off of the Pennsylvania Department of Revenue website.