Broken Priority: When "Free and Clear" Isn't Good Enough for the Bank

By
Mortgage and Lending with SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) NMLS 223495

  Broken Priority: Mike in Tucson, AZ mortgage lender

The retired couple sitting in my office were incredulous.  They had:

  • photos, 
  • architect drawn plans, and a
  • loan denial letter from a local bank.

"We own the property free and clear," said the husband.  "We bought it as is, and we also bought the rights to the plans."

He was a builder from out of state who knew a good deal when he saw one.  The couple had paid $95,000 for one acre of property with a partially built home. 

The work that had been completed to date was sound.  (My photo illustrates the situation; this is not their home.)

"I don't understand why the bank turned us down for a loan to complete the house." The wife was clearly frustrated.  "When our home is finished, it will be worth more than $300,000, and we need less than $125,000 to make that happen." 

"Did you purchase a title policy?"  My question.  "Didn't need to," was the answer.  "We did our own research at the assessor's office."  And that was the problem.

"Broken Priority" is the legal term in Arizona for the situation this couple was describing to me.  A title officer would have explained to them that under Arizona law, a Mechanic's Lien (a lien for labor or material supplied to a property) can be recorded against a property within 120 days of the completion of work, and the lien takes priority from the date the work began.

Banks and other lenders want a secure first lien on a property.  When there's the possibility of an unknown future lien taking priority over the bank's lien, they're going to keep their hands in their pockets.

We do a lot of private money, but that wasn't an option either, for the same reason.  The solution was to get a notarized release from each licensed contractor and supplier (mechanics liens must be recorded, and only licensed contractors can record a lien) to satisfy the title company.  This is no easy task, and in this case it was all the more difficult because the seller had not kept good records.

The moral of this story:  It pays to buy title insurance. 

 

Mike Jones (Tucson Mortgage Company, LLC): Loan Officer in Tucson, Pima County, Arizona

_____________________

I'm Mike in Tucson, your preferred Tucson Arizona Mortgage Lender.

NMLS #223495

SUNSTREET MORTGAGE LLC ~ Correspondent Mortgage Bank
Offices in Mesa, Tucson, Sierra Vista & Nogales

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Rainer
70,478
Jan Wood
None - Gallatin, TN

Mike:  Title insurance doesn't always cover "future liens". 

In other words, once you have bought a newly constructed home, if the builder hasn't paid all the subcontractors, a lien can be still be placed against your home after you have already purchased and closed on the home.  Just finding that out here in Tennessee. 

Jan 20, 2008 03:21 AM #14
Rainmaker
137,737
Bonnie & Terry Westbrook
Westbrook Realty - Ada, MI
Grand Rapids MI Real Estate
A great illustration of the need for title insurance, after the fact, unfortunately. The money they saved is a pittance against the obstacles they face to get a clear title. Good information for consumers.
Jan 20, 2008 04:03 AM #15
Rainmaker
386,684
Mark Horan
Resident Team Realty, LLC & Toni's Property Management LLC - Saint Cloud, FL
"The Resident Chef" - Resident Team Realty LLC &
Mike in Tucson- Great topic. To many people do not understand the need for title insurance. This is a great illustration. Thank You
Jan 20, 2008 04:37 AM #16
Rainer
68,842
Judy Tuscano
Prudential Verani Realty - Nottingham, NH
NH Real Estate Professional
I was not aware that Title Insurance would cover you for leans not in existence yet. I thought it covered free and clear title from the date of closing back? Interesting.
Jan 20, 2008 04:38 AM #17
Rainer
202,907
Richard Lecinski
Long Realty Company - Oro Valley, AZ
we all must Dot the i's in real estate and as agents, its our job to do this for all clients
Jan 20, 2008 05:44 AM #18
Rainer
209,246
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker
Mike,  "Didn't need to," was the answer.  "We did our own research at the assessor's office."  You got to love it.  Obviously they have an idea of what they are doing, but...
Jan 20, 2008 06:24 AM #19
Ambassador
2,688,826
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services
Mike- The dangers of going FSBO! I would never allow a client to buy property without title insurance! Katerina
Jan 20, 2008 08:42 AM #20
Rainer
136,482
Gayle Balaban
The Best Spot Realty/Waterfront Real Estate/Ooltewah Real E - Chattanooga, TN
E. TN Waterfront Real Estate
Don't you just love the ones that know how to do everything by themselves without professional assistance?
Jan 20, 2008 11:10 AM #21
Rainer
195,279
Elizabeth Nieves
The Elizabeth Nieves Realty Group - Durham, NC
Bilingual Raleigh - Durham North Carolina Real Estate Team
I'm really glad I read this. Of course, I always recommend title insurance, but this gives me another reason and example to use. Hope this works out for them. GBU!
Jan 20, 2008 11:44 AM #22
Rainmaker
218,087
Joan Mirantz
Homequest Real Estate - Concord, NH
Realtor, GRI, CBR, SRES - Concord New Hampshire

What a shame for those people!

Good information to know though...I never would have known about that! Thanks!!

Jan 20, 2008 12:57 PM #23
Ambassador
754,103
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

All,

Thanks for commenting.  I guess I wasn't clear.  They could NOT have bought a title policy under the existing circumstances for the reason explained in the post, but HAD THEY TRIED to purchase title insurance, the Title Officer would have explained this to the buyers before the buyers plunked down the money.  A good REALTOR would have kept them from making a mistake as well.

Mike in Tucson

Jan 20, 2008 01:23 PM #24
Rainer
85,510
Lance Winslow
The Car Wash Guy - Malibu, CA
Wow, that is a heavy story indeed, I just hate to see these issues come up, you hear about stuff like this. Its good when you can bring your expertise to the table to remedy such situations, great points, its a real problem. Lance
Jan 21, 2008 02:53 AM #25
Rainer
29,042
Martinelli Caputi
Martinelli Caputi & Associates, Ltd. - Warwick, RI
& Associates, Ltd.
Mike:  Amen.  Thanks for throwing this one out there.  Title Insurance is almost always worth it (unless your family owned the property since the days of the Mayflower... and even that could be subject to issues!).  The benefit received far outweighs the minimal cost.  :)  Great post.
Jan 21, 2008 04:42 AM #26
Rainmaker
416,436
Mesa, Arizona Real Estate Mesa Arizona Realtor
Homes Arizona Real Estate LLC - Mesa, AZ
AzLadyInRed

This story reminds me of my trying to do surgery on my husband in order to save money for a gastric bypass........well, maybe just the removal of the appendix! Geesh.......when will people learn. We all need to work with someone that knows, is qualified, specializes in what we plan to do. We simply cannot be an expert in everything....or can we? ;-)

Pepper

Jan 21, 2008 11:35 AM #27
Ambassador
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Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Teri,

I think the fact that the husband had been a builder in his home state weighed heavily in his decision to bypass what would seem to be a common sense decision to me.  So you actually do surgery to save money?  LOL

Richard,

Thanks for stopping by to comment.

Lance,

Unfortunately, the horse was already out of the barn.  I couldn't help them.

Mike in Tucson

Jan 21, 2008 12:53 PM #28
Ambassador
251,212
Jesse & Kathy Clifton
Jesse Clifton & Associates, REALTORS® - Fairbanks, AK
Retired
Ok, well.. I'm late to this post... so I'll just say hi... and say I'll bet this is a lesson they won't soon forget.  Btw, how's the weather in Tuscon???  Want some snow?
Jan 21, 2008 05:21 PM #29
Rainmaker
291,304
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

Mike, wow.  Why would a builder not buy title insurance, they should understand lien law. Educate me here Mike, doesn't this mean that no one can ever finish the house?  that makes no sense?

a Mechanic's Lien (a lien for labor or material supplied to a property) can be recorded against a property within 120 days of the completion of work, and the lien takes priority from the date the work began.

Or are you saying that title insurance would have protected the bank?

Can you go back and buy title insurance after the fact?  In California Title Insurance is simply part the transaction, it never occurred to me that you could bypass it.

Jan 21, 2008 08:43 PM #30
Ambassador
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Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Kate,

They will be able to get title insurance and financing, but not until and unless he 120 day period expires.  Even then, the title insurance company will almost certainly require a release of lien / lien waiver from both suppliers, contractors and subcontractors. 

The request for title insurance would have brought to light the broken priority situation, and they (the buyers) would likely have bought something other than this property, or would have structured the contract such that the burden fell on the seller as a condition of closing.

Mike in Tucson

Jan 21, 2008 09:37 PM #31
Rainer
130,599
Billnulls Blog Florida Realty Professional
Charles Rutenberg Realty - Clearwater, FL
AHWD
Mike - what a headache that turned out to be! And a good lesson for all of us on another reason for title insurance!
Jan 24, 2008 06:29 AM #32
Anonymous
Nadina Cole-Potter

First of all, property records in Arizona are not in the "assessor's office", they are in the recorder's office in most counties.

Second, it is true that title insurance won't uncover unknown liens.  However, there are workarounds:  1)  the Seller obtains lien releases from all the licensed contractors and subcontractors and they are recorded; 2) for a extra amount of premium and additional research, the title company may issue a lien endorsement; 3) estimate the last date that work was performed and close 121 days after that -- or however many days after 120 it takes to have an up-to-date record available in the recorder's office or in the title company's document plant.  In Maricopa County, it is next day; in other rural counties, it may take a couple of weeks.  A search of the county court records should be done as additional assurance there is nothing outstanding against the seller having to do with the property.

Third, without their own title insurance, it will be more expensive for them to purchase title insurance for the buyer if they ever sell the property and the buyer may not be able to obtain a loan either because of title issues.

I am a commercial agent:  broken priority is a big factor in the purchase of stalled-out developments and partially completed construction.  Contractors with lien rights include suppliers and pre-development vendors such as surveyors, architects, etc.  And the fastest way to lose a construction loan commitment on land development is to begin clearing the land or even unloading materials on the land prior to the closing of the loan.

 

Mar 11, 2011 02:44 AM #33
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