Title Issues on Foreclosed Claremont Homes

The problems that ruin a distressed purchase are rarely the ones you can see. A cracked slab is expensive and obvious. A surviving senior lien is neither, and it can cost the entire investment.

Title is the record of who owns a property and what claims exist against it. On a foreclosed home, that record has been through an event, and the event does not treat every claim the same way.

This article explains where the risks sit. It is general information, not a title opinion. Verify current law with an attorney and get a professional title search on any specific property.

Priority, in one paragraph

Claims against real property generally rank by when they were recorded, with statutory exceptions. That ranking is called priority, and it decides two things: who is paid first from sale proceeds, and what survives a foreclosure.

The general principle is that a foreclosure by a lienholder extinguishes interests junior to it and leaves senior interests in place. So the crucial question at any distressed purchase is a simple one that buyers routinely fail to ask: WHICH LIEN IS BEING FORECLOSED?

If a first mortgage forecloses, junior claims are generally wiped out. If a second forecloses, the buyer may take the property still subject to the first, which is a very different transaction from the one they thought they were entering.

What commonly survives

Several categories deserve specific attention, and each is a reason to have a professional examine the record rather than rely on a summary.

Senior deeds of trust. The situation above, and the most expensive mistake available at an auction.

Property tax obligations. Taxes attach to the parcel and run on their own county track. They are a separate process entirely, described in the article on tax defaults, and they do not simply vanish because a lender foreclosed.

Certain government liens. Some public claims are treated differently from ordinary recorded liens, and the treatment varies by type of claim.

Association assessments. In a common interest development, assessments and the association's rights involve their own statutory framework, discussed in the article on HOA assessment liens. What survives depends on priority and on the specifics.

Easements and covenants. Rights of way, utility easements and recorded restrictions typically bind the property regardless of who owns it.

Mechanics liens. A contractor's claim arising from work performed can have its own recording and priority rules.

Defects in the process itself

Beyond existing claims, the foreclosure may itself be challenged.

California's nonjudicial process runs as a sequence of stages with statutory notice and recording requirements at each one, and a failure in those requirements can become the basis of a dispute over the sale. Questions about the chain of assignments, the authority of the party that acted, or the sufficiency of notice can surface after the fact.

Most sales are conducted properly. But a buyer who acquired a property with a defect in the underlying process may face litigation, and that risk is precisely what a title professional is paid to evaluate.

Why title insurance behaves differently here

On an ordinary purchase, a title policy is so routine that buyers barely notice it. On distressed property it becomes a live question.

Coverage may be offered with exceptions carved out for the specific risks in the record, it may be offered only after a waiting period, or it may not be offered at all. Each of those outcomes tells you something about what the insurer sees.

Treat the availability and the terms of coverage as information, not as a formality. An insurer that has read the record and declined to insure an item has, in effect, given you a free professional opinion about that item.

The buyer who does this well

Experienced distressed buyers are not braver than everyone else. They are simply more systematic. They pull the recorded documents before they get attached to a property, they know which lien is foreclosing, and they walk away from anything they cannot explain.

How to actually check

Order a title search before you commit. On an REO purchase you receive a preliminary title report; read it, and read the exceptions, which is where the substance lives. Ask your title officer to explain any item you do not understand. That conversation is free and it is the most valuable half hour in the transaction.

At an auction, the research happens beforehand. There is no contingency period and no preliminary report. A property profile or a professional search ordered in advance is the only protection available.

Identify the foreclosing lien specifically. Do not infer it. Find the recorded documents and confirm which deed of trust the sale is under.

Ask about insurability, not just condition. Whether a title insurer will issue a policy, and on what terms and exceptions, is the single most useful signal available about a property's title. An insurer declining coverage is telling you something.

The one-line version

Condition risk can be measured with an inspection. Title risk can only be measured in the record, and the record has to be read by someone who does it professionally.

If you are weighing which type of distressed purchase suits you, the three stages are compared here, and the wider landscape starts at the foreclosures guide.

Legal questions belong with an attorney and tax questions with a CPA. Anthony Grynchal has been licensed in California since November 2009.