For my 200th Post, I thought it would be nice to discuss clouds.
"Partly Cloudy", said my local weather person this morning. Partly Cloudy is good thing if you are laying back after a picnic with your sweetheart on a summer day. Partly cloudy is almost always a good thing. Almost.
Any sentence with the cloud word in it is the last thing you want your real estate professional to utter, especially from your escrow / title person. A clouded title can easily kill a deal.
What's a Cloud?
Generally, a cloud on a title is due to someone owing someone something. Generally, that someone either didn't know about the debt, wouldn't pay the debt, or simply couldn't pay the money. Generally that cloud can be removed by a simple quit claim deed. That's the end of the generalizations.
Why is this important?
When the stock market has a correction to the downside we see the professional traders looking to buy bargains. The same holds true for real estate. There are some great bargains out there. The pro's are already looking and buying real estate. As we continue, the amateurs are going to be tempted to look for that bargain.
Obviously, those bargains can be found in various distress sales. Those distress sales come in three different flavors and have three very different levels of cloud risks associated with them.
- Buying a Foreclosure or home that is has a Notice of Default filed against it.
- Buying a Short Sale
- Buying a REO or Bank Owned Property.
Buying a Foreclosure
This seller has been running behind for a long time now. There's a reason they are in default - they couldn't pay. If they couldn't pay the mortgage, they probably owe other people too. Some of those people have the ability to put a lien on their home. There's a cloud. This lien could be just a little light and fluffy cloud or it could be a thundercloud. Garbage liens = usually light and fluffy. Tax Liens or Mechanics Liens have the ability to seriously hamper a deal.
When you are buying a Foreclosure you are buying from the homeowner. Chances are they are not represented by a real estate professional (can't afford it). Are they going to initiate the title search prior to your contract? Not a chance. in a foreclosure purchase, the cloud is usually discovered after the contract. You can see how that just doesn't work, right?
Buying a Short Sale
This seller usually has a real estate professional guiding the way. They have brought the lender in on the deal. Usually they have had a title company complete a title search and discovered any liens that might be on that title. When you purchase a Short Sale, both parties will usually have a clearer picture of the deal. No surprises. That doesn't mean there won't be clouds. But those clouds will be known and can be dealt with prior to the contract. This is a big difference.
Buying a Bank Owned Property (REO)
The seller is the Lender. The property has been through the grinder. It may have started as a Short Sale. It didn't sell and so the owners fell behind to the point where it became a NOD. Once again, no sale. Finally the Trustee Auction came and due to the lack of equity it didn't sell and was turned over to the Lender.
Here's the bright and sunny on this picture. Chances are all clouds, all liens, all liabilities attached to this home were taken care of as it as it passed from the homeowner to the lender. Buying a REO? You'll probably have a clear day when it comes to title.
If you are looking for deal, no matter which flavor of distress you like, do yourself two favors.
Always use true real estate professionals who are familiar with the type of deal you are considering. As my friend Brian Brady says, "If you thought dealing with a professional was expensive, wait until you find out how much dealing with an amateur costs!"
Always buy the best title policy you can buy. This is not a place to try and save a few bucks. You did know that there were different levels of policies available, didn't you?
Now, just because the REO has the least chance of having a clouded title this doesn't mean you should look only at REOs. The title issue is just one piece of the puzzle. Each version has it's own specific Pro's and Cons. That REO also has the highest chance of being the most abused of the three as well. But that's an article for another day.
This post brought to you courtesy of Mike Mueller.
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