So you want to buy a bank-owned (REO) property? Well they can be a great deal for buyers and the buying experience does not have to be comparable to getting dental work done without Novocain.
You put in an offer on an REO property and eventually the lender comes back with an addendum that includes the “requirement” that the buyer must use their own title company. Many agents at this point do not challenge that “requirement” for fear that the lender will simply not ratify the contract. A legitimate concern of course but here are a few things to keep in mind.
Is your buyer getting “Insurable Title or “marketable Title” to the property? Is there really a difference and if so why should we care? Let’s start by defining those terms:
Insurable Title – Title to the property may have issues such as unreleased liens, this can include deeds of trust and other money related matters. Even if those liens have been paid off, the public records may not reflect that since a Certificate of Satisfaction or a Release has never been recorded. Other matters may encumber title as well, and those are what I call “Title Baggage”. The lender will find a Title Insurance company at that point who is willing to assume the risk and insure the transaction without cleaning up the baggage. Buyer is then acquiring “Insurable Title”.
Marketable Title – Title to the property may have baggage but the settlement agent handling the transaction insists on clearing up those messes. For example, we may track down a prior lender on a loan that has been paid off but no one bothered to record the release in public records, we will obtain that release and record it. Of course there are times when tracking down a lender is not possible. For example, a loan made by a private individual who has since “disappeared”, retired on an island somewhere and cannot be found or has long departed our planet.
So why should a buyer care? Why should a Realtor care? Let’s start with the buyer. Once the buyer acquires “Insurable Title” and say he wants to refinance a year or two later, guess what is still on title? You got it, the “baggage” we talked about earlier. This can cause delays and in some cases we’ve had clients’ interest rate lock expire since cleaning up the mess, known as “Title Curative Action” can take a while. Of course the borrower can always go back to the same company that insured it to begin with but that can also be challenging on many different levels.
Or worse, we’ve had situations where the buyer goes to sell at some point in the future only to find out that the “baggage” is still there, delayed settlements can be frustrating and in some cases costly.
So should a Realtor care? Well now that we know what we know about the difference between “Marketable” and “Insurable”, who wants their name associated with a transaction where the client may have issues down the line, not good for referrals. Perhaps a previous buyer now comes back to you as a seller only to discover the baggage, once again it can be costly.
In short, if and when possible, it is usually a good idea to have your own settlement agent review the title, address curative matters, and settle the transaction. So what about the “free” owner’s policy the REO lender entices the buyer with? Experience has shown us that in a lot of cases when you compare a preliminary HUD1 from the REO lender’s preferred settlement company vs. a settlement company that’s going to make every attempt to clean-up the “baggage”, the cost is nearly the same and not to mention that the buyer will acquire “Marketable Title” to the property. Happy closing!!