Foreclosed Purchases…There Is No Free Lunch!

I am certain most everyone is familiar with the age-old adage “if it sounds too good to be true…” yet buyers purchasing foreclosures are falling for this trick every day.

I am certain most everyone is familiar with the age-old adage “if it sounds too good to be true…” yet buyers purchasing foreclosures are falling for this trick every day. Just because the lender/seller is offering to provide a free title policy does not mean the buyer is protected! Many times there is a reason for it.

Would you put the fox in charge of the hen house? Yet every day countless buyers are getting slaughtered with excessive closing fees, useless title policies and many times deeds signed where there is a complete lack of visible authority of the individual signing.

If you are buying, be sure of what you are getting. If the bank did not have the authority to foreclose, they clearly do not have the authority to convey a clear title.

According to Bloomberg Financial News, Fidelity National Title shares dropped 10 percent last month and First American dropped 5 percent as a direct result of increased title claims. In fact, American Land Title Association reports there has been a 14 percent increase in the title claims this past year alone. The only way to truly protect a buyer and assure them they will receive a clear title is to have an independent title search and review of the foreclosure file. The potential for mistakes is plentiful ranging from improper service upon the previous mortgage holder, invalid or improper mortgage assignments, and errors in legal descriptions just to name a few.

Today, many new title companies utilized by the banks have sprung up. They are not household names like Chicago Title, Old Republic, First American, Fidelity Title, etc. The policies they offer provide little protection as they are often riddled with countless exceptions (exclusions) which are glaringly missed by an untrained eye. Insurable title does not necessarily mean marketable title and all Bank/Seller Addendums simply mandate the bank is only responsible to deliver insurable title. Insurable title may come with a host of defects. However, despite these defects, a title insurance underwriter weighs the risks involved and allows the title agent to issue a title policy even though there may be blemishes and potential problems down the road. Ironically, should the value of the property increase dramatically, the buyer is only protected to the extent of the original purchase price.

Another issue to be aware of is that many times bank controlled title companies charge excessive settlement fees. Banks seek to lure buyers in the door by offering to pay for the cost of title insurance. I recently had a closing where the title insurance was approximately $600.00 however, the bank’s title company charged the buyer in excess of $750.00 in search fees, settlement fees, escrow fees, and related expenses. Buyers need to be willing to challenge these companies on “exorbitant fees.” Many times when challenged, the bank’s title company will reduce their fees dramatically. Mistakes in the closing statement to an unfamiliar eye can be plentiful. Ironically these mistakes never seem to benefit the buyer.

Recently, I reviewed a closing statement whereby the title company provided a credit of slightly over $1,000.00 for a tax proration for a closing scheduled to occur in November. (However, on page two of the closing statement they attempted to collect nearly $2,500.00 from the buyer to pay the 2010 taxes).

In a time when foreclosures are looked upon with great scrutiny from the concern of the wide use of MERS(Mortgage Electronic Registration System) and whether they actually own the mortgage and have the ability to enforce it to the issue of robo signers involving temporary help signing off on foreclosure affidavits to title policies from an unknown underwriter filled with exclusions of coverage, it would be insane not to have an independent examination before closing.

Whatever the search and review fees a buyer may encounter would be less than the title insurance they typically would be buying in a third-party transaction. A few dollars spent now may save your buyer thousands of dollars in headaches. Protect your buyer, protect yourself, and don’t let your buyers kid themselves into thinking because the Bank/Seller is providing a free title policy to accept it. There are no free lunches and it may be time to look at other choices on the menu.