Limits on Title Insurance Available to Buyers of Distressed Residential Real Estate Properties
Real Estate Owned properties, or REO properties, are real estate properties that are owned by a Bank or Lender following a foreclosure. A Lender can become the owner of property through foreclosure by sale (if the Lender is the only bid on the property at auction), strict foreclosure (if the owner does not redeem within 30 days) , or by deed in lieu of foreclosure (by agreement between owner and Lender).
Once the property is owned by the bank or lender, they want to sell it as fast as possible to get cash on hand. After all, the bank is in the business of lending money, not holding, leasing or selling real estate. Therefore, Buyers can get great deals on bank owned real estate. However, buying bank owned real estate does not come without risk. One of the considerations when buying bank owned real estate is the type of title insurance available.
When buying real estate, the buyer’s lender, in addition to a title search to show that Seller has proper title, will require the purchase of Title Insurance. Title insurance covers the unknown and undiscoverable defects which might eventually lead to another person making a claim against the buyers ownership of the property and therefore the lenders collateral on the loan. There is also an Expanded Title Insurance policy available only to owners which in addition to the standard policy also covers:
- Cost of moving or repairing a house forced by zoning violations or lack of building permits;
- Costs of removing structures because they encroach on neighbors;
- Claims that the property is not properly zoned for single family residential use;
- Expenses if neighbor builds structures on your property;
- Expenses created by violation of restrictions on the property; and
- Expenses if your house is not located on the property described in the title.
The purchase of an expanded policy requires the execution of an Owners’ Affidavit by the Seller as someone ‘who has personal knowledge of the property’. Since a bank or lender cannot have ‘personal knowledge’ of the property, and cannot provide Buyer with an Owners’ Affidavit, Expanded Title Insurance policies are NOT available for Buyers of bank owned real estate.
While Buyers of bank owned real estate might be getting a good deal, a safer bet is buying properties that are in pre-foreclosure, where a lis pendens has been filed but the title to the property has not yet passed to the lender, or buying property as a short sale, where the lender agrees to accept less than the full amount of the loan for the property. In both pre-foreclosure and short sale real estate transactions, the Seller is still the homeowner, and can satisfactorily execute an Owners’ Affidavit, allowing the Buyer to get Expanded Title Insurance protection.