“The key to success is to focus on goals, not obstacles.” – author unknown
When you’re buying a property, the first thing you’ll need to know is who legally owns the property being offered for sale. And while a seller can present themselves as the owner, this may or may not be the case, so to protect yourself, a title search needs to be conducted. Subsequently, a clouded title can be an unexpected obstacle you have to overcome along the way when you’re looking at transferring home ownership from one person to another. Let’s take a look at common clouded title problems and solutions!
What is a title?
A title document is evidence and recognition of an individual’s right to ownership of something.
What is a title search?
A title search is a process of going through public records, regarding a piece of property to ensure that the current owner has the legal right to transfer ownership. If you’re applying for a mortgage with a bank or mortgage lender, a title search is mandatory. However, if you’re paying cash, you and the seller can agree to waive the title search but this is never recommended as you could risk losing the property entirely if there’s a title problem or scam being pulled.
According to WashingtonPost.com, “Title companies report that in more than one-third of all real estate transactions they must undertake “extraordinary work” to address title issues. The title company will examine public records — often going back 50 years or more — to look for past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgments and tax records that may be defective or outstanding.” Once a title company has done its investigation, a completed title report is then given to all parties involved in the potential sale, including the buyer, seller, realtor, mortgage lender, and attorney.
What is a clouded title?
Also known as a cloudy, defective, or cloud on title, a clouded title simply means there’s some sort of title defect that’s uncovered after a title search has been done. The clouded title can be in the form of any claim, document, encumbrance, or unreleased lien on file that could possibly impair, invalidate or make a property’s title doubtful.
Common clouded title problems.
Title errors can range anywhere from minor details that can throw off your closing date to egregious errors that can cause a property to be unsellable with the current title information on file. The implications of a clouded title can include financial issues that need to be resolved, along with the emotional toll it could take if your dream home slips away. Here are some of the most common clouded title problems:
- a deed is given under fraud or duress
- an alias or fictitious name was used on the title
- clerical errors in the properties legal description, including the address and/or boundary lines, that could affect the overall size of the property
- deeds in the name of a deceased person
- deeds in the name of a missing person who later resurfaces
- divorce, if a married couple purchased a property and then divorces, an ex-spouse’s name could remain on the deed
- easement, which are property access rights given to non-property owners, including for utility companies, conservation, and neighboring property rights
- encroachments, where a neighbor has violated property rights by building on a neighboring property or land not belonging to them
- foreclosure
- forgeries
- illegal deeds where a previous owner may have sold the property illegally
- liens, as liens follow property and not people, if you purchase a home with a lien in place, you’re responsible for the debt as soon as the title is transferred into your name; some of the most common liens are from unpaid government taxes, general contractors, bankruptcy situations, past-due spousal support, missed mortgage payments
- probate/ownership disputes
- right of way access was erased by foreclosure on a neighboring property
And while it seems like no one would ever want to find a clouded title, depending on the situation, a clouded title can actually lower a property’s value, which is bad news for the seller but good news for the buyer, as they may be able to negotiate down the buying price. But keep in mind that the clouded title defects must also be worked out before the sale can take place.
You should always buy title insurance during a home purchase and title protection once the sale is complete.
Wealthfit.com provides a great example of what can happen when you’re buying a property, and why you should always, always buy title insurance to protect yourself. They cite the following common scenario:
- a buyer finds an investment property being sold by a child of the deceased previous owner
- the buyer purchases title insurance just to make sure, even though the title came back as clear
- the buyer renovates the property and finds a new tenant who’s about to move in
- the seller’s sibling comes forward stating they have a new will proving they have a stake in the property, which now becomes a clouded title
- the tenant can no longer move in as the ownership of the property is now in question; it’s a severe hardship to them, and a financial one for the buyer
- the insurance company is now liable to resolve the clouded title as per the buyer’s insurance policy; they’ll need to work with the seller and sibling to fix the situation
However, if the buyer didn’t purchase title insurance, they could face a lengthy and expensive court battle that could go on for years to come. So again, always purchase title insurance when buying any property!
Once the purchase of a house is complete, title insurance is null and void. To protect yourself against title fraud, HomeLock™ is the best defender. Scammers could try to alter your title, or forge a deed transfer, but with HomeLock™ you will be notified before, during, or immediately after the fraud occurs.
Clouded title solutions.
What happens when a clouded title is found? Many times title companies can clear up title defects by filing one of the following documents:
- a deed of reconveyance shows mortgage payments made under a deed of trust
- a quiet title can be filed in court to demand that the seller of the property be legally liable for any existing property liens, instead of the buyer
- a quit claim deed can remove an heir and clear up titles among spouses or co-owners
- a release of a lien/judgment can remove a spousal/child support or paid mortgage lien
- file a civil lawsuit against the previous owner who failed to disclose the clouded title
- or by paying off any liens; which could be costly, but a buyer can choose to pay off any liens, such as to government agencies, debt holders, or relevant lien holders
How to prevent a clouded title.
Of course, the best way to prevent a clouded title is to do your due diligence as a homeowner. All property owners should check their local public records offices to ensure that:
- all liens are paid off
- property descriptions and information on your title are correct
- property easements are recorded
- take advantage of our DomiDocs® home documents feature where you can upload, organize, and categorize your vital homeowner paperwork in our highly secure home management platform so you’ll have everything at your fingertips when needed
- you secure your property with HomeLock™, our premier home title theft and property fraud monitoring service (see below for more details!)
Whether we’re providing educational resources on real estate or how to weather natural disasters, DomiDocs® is committed to simplifying home management by offering functional tools designed to help save you both time and money including streamlined document organization, real-time market value tracking, and more! In addition, our next-level HomeLock™ fraud protection system provides 24/7/365 monitoring against home fraud, unpaid bills, missed payments, and misfilings, giving you the peace of mind to just relax and enjoy your home! Visit HomeLock™ today to watch our introduction video and check out our FAQs. As a bonus when you sign up, you’ll receive a comprehensive 7-year home history report and scan free of charge.
For more information related to accounting and financing, read:
How Liens Can Affect Homeownership
