MARKETABLE VS. INSURABLE TITLE
A Follow Up to "15 Issues to Consider When Buying Bank Owned (REO) Property"
In response to our blog last week, most of the feedback we received involved questions pertaining to the quality of title that one might get if they acquire REO Property. The answer to this question is not simple. In a non-REO setting, the requirement is generally for the seller to deliver marketable title (i.e. title that is readily marketable and thus easier to convey). Marketable title contains "standard" or "customary" liens and/or encumbrances that most individuals would willingly accept. Marketable title is the form of title that best insures that there will be no issues when one goes to sell the property.
However, in a normal REO transaction, the lenders will not commit to conveying marketable title, but instead endeavor to provide what they refer to as insurable title. Insurable title can be the same as marketable title or it can be drastically different, depending on the circumstances. Insurable title essentially means that a title company (usually at the urging of their lender/seller client) is willing to insure some form of title to the property, but that title can be subject to virtually any qualification that they might choose. In other words, in a worst case scenario insurable title could contain so many exceptions/caveats/qualifications that title is not marketable, and therefore not easily capable of being sold to a third party. Moreover, the title insurance coverage is limited to what you paid the lender and not what the property is worth after you sink money into it for improvements and property appreciation.
With all of that said, this last week, we have been made aware of a third option being offered by some lenders, no title at all. A client advised our office that the lender/seller on their transaction was unwilling to even convey insurable title, let alone marketable title. Instead, that lender (through their closing agent) offered the buyer the unique "opportunity" to accept a quit claim deed for the property with no title insurance at all. Fortunately, this particular buyer had the good sense not to take the closing agent up on this proposal, who clearly did not have the buyer's best interest in mind when making this surprising suggestion.
The moral of the REO story, it is well worth the investment to hire an experienced real estate attorney, particularly when dealing with REO transactions where the type of title that is being offered by the lender can be suspect. In many cases, it is not at all clear, and the closing agent who represents the lender is clearly not the person to properly advise a buyer as to what is in that buyer's best interests. Bad title is not something that generally goes away, and will rear its ugly head when the property is eventually marketed for sale down the road. Don't be fooled into thinking that a seemingly smooth closing resulted in the conveyance of marketable title.