pain in the pocketbook

Uninsured Deeds Can Be a Real Pain in the Pocketbook

Sometimes cutting corners to save a buck can be really expensive.

Let’s say you have great neighbors. You’ve known them for years. You have dinner at each other’s homes from time to time and you often chat over the fence. They’re quite a bit older than you, and eventually one of the spouses passes away. The other decides to sell and move to be closer to family, and you decide to purchase the property and make it a rental for a little extra income. This helps your neighbor and your pocketbook.

Because you have years of trust built with this neighbor, you decide to save a little money on all those “unnecessary” expenses like title insurance, escrow fees, and Realtor commissions.

Fast forward five years and you’re in a situation where you need cash quickly. You glance out the window and see your investment property, an asset worth $300,000 that you own outright, and think, “I’ll use my rental as collateral for a loan!”

You make a beeline for your local bank and explain to the loan officer that you need $100,000. You tell him you have a rental property that will certainly support the loan. You have good credit, adequate income, and even the rent on the investment property will cover the loan payment. Slam dunk, right? Should be.

The unreasonably picky loan officer says, “That’s wonderful, but we need title insurance.” So you open an escrow and get a preliminary title report. Shortly thereafter, you’re scratching your head wondering why you didn’t get title insurance when you bought the property from your neighbor.

This is when you discover that the original neighbor purchased the property with seller financing. While not normally a problem, especially because your neighbor did, in fact, pay off the loan, you realize no one thought to get a reconveyance of the loan that was paid off 20 years ago. The sellers who carried the financing have long since passed away. Just to make matters a bit more difficult, two of sellers’ the three children have also passed away. So, before you can get title insurance, you have to do two things: 1. Prove the neighbor’s loan was paid off and 2. Get a signed reconveyance from the original seller’s surviving child and the six surviving grandchildren.

After a couple valiums, you learn that all the heirs still live in town and know this loan was paid off and none of them is the greedy, shady sort who would try to extort money from you. They all sign the reconveyance. Ah, all is right with the world.

That is, until you find out that when the neighbor died, no probate was done. His old ownership must now be cleaned up, which will take additional time and like everything in life, cost a little money. At this point, I hope your need for that cash was not truly urgent because you’re going to spend at least several weeks (and maybe several months) cleaning up this issue.

The moral of the story is this: get title insurance. Have an escrow officer handle the transaction. Retain the services of a Realtor who can help you negotiate a fair purchase price and advise you about how to handle disclosures needed to protect all parties.

Don’t try to save money when cutting corners can cost you so much in the end.
