Archive for August, 2010

Title Insurance

August 24th, 2010

The other day someone said to me, “I don’t need title insurance if I’m buying property on a real estate contract, do I?” What I wanted to say was, “You don’t need a parachute to jump out of an airplane either, but it’s better to be safe than sorry.” Whether you buy real estate by paying cash, trading, taking out a loan or utilizing seller financing, you should always get title insurance. Murphy’s Law is real. It is true that prior to about 1985 the sellers on real estate contracts wouldn’t give the buyer a title policy until the contract was paid off. This used to be the language:

It is understood and agreed upon the completion of all the stipulations and agreements herein contained, said Owner will, at the time of delivery of Warranty Deed, also deliver to said Purchaser, abstract of title or title insurance, showing said real estate to be of good and merchantable title on the date of the delivery of the Warranty Deed.

This wording caused all kinds of problems like, Where’s the seller 25 years later? Who’s supposed to squeeze the money out of the seller for the title policy? Were there any liens on the property? Were there any Title Defects?

Here is the currently accepted language:

Title Insurance of Abstract-Seller is delivering a Contract Purchaser’s Title Insurance Policy to Buyer or Abstract of Title to Escrow Agent at the time this Contract is escrowed, showing merchantable or marketable title to the Property as of the Effective Date, subject to the Permitted Exceptions, and Seller is not obligated to provide other evidence of title.

But, how can the sellers give a policy when they are not giving legal title until the contract is paid off? The buyer only has equitable title until then. Good question. I wish I’d thought of it.

Here’s what an attorney told me and you should ask your own attorney. There is this thing-a-ma-jig called the “Relation Back” doctrine.

Since the early common law, when necessary to prevent frustration of the intention of the parties to an escrow, the courts have indulged in the fiction that the second delivery from escrow “relates back” in time to the first delivery into escrow, and is given effect from the time of the first delivery… The doctrine has been invoked to validate a second delivery occurring after the death of the grantor or after the grantor becomes insane or is otherwise legally incapable of making a deed. Also, voluntary conveyances of title by the grantor to other parties after delivering a deed into escrow are of no effect, and judgment liens attaching to the grantor’s interest after the first delivery into escrow are cut off by the second delivery from escrow… In short, as a general rule, after the first delivery into escrow, there is nothing that either the seller or buyer can do, voluntarily or involuntarily, to defeat the title conveyed by the second delivery from escrow… the only exceptions are federal tax liens attaching to the buyer’s interest in the property and in New Mexico, mechanics’ liens attaching to the buyer’s interest when the seller had knowledge of the improvements being made to the property, but failed to post a notice of non-responsibility on the property within three days after learning of the work. Both of these liens survive the second delivery from escrow by virtue of statutory law. The IRS lien can also be released with proper notice.

(I actually lifted this explanation out of Larry Buchmiller’s book, Real Estate Contracts in New Mexico. It’s okay—I own the publishing rights.)

So, you see the title policy is effective to the date of the Real Estate Contract and not when the contract is paid off. A title policy will insure you against any defect in title or any unfound recorded claims or liens on the property.

How do I handle an offer that uses Seller Financing?

August 24th, 2010

I often hear the following comment, or something like it, from fellow REALTORS® throughout the state: “I know how to prepare a purchase agreement on a property that requires conventional, FHA or VA financing, but I’m not sure how to properly handle an offer that uses seller financing; nor do I know the sequence of events after the offer is accepted”. Let me try to address this in 300 words or less.

Most, if not all, RANM Purchase Agreements have a section that pertains to financing. Seller financing is included in this section. Fill out the purchase agreement just as you normally would and check seller financing. Now you need to fill out and attach RANM Form 2402 (Addendum to Purchase Agreement-Real Estate Contract). This is a”mini me” of a Real Estate Contract (REC). The title company and their attorney need this information to correctly prepare the REC and deeds.

Some REALTORS® choose not to use RANM Form 2402, but instead try to cover the terms of the transaction on a blank Addendum Form. This practice leads to a lengthier closing period and leaves the REALTOR® vulnerable to a future law suit. RANM provides these forms for a purpose. Please use them. After the purchase agreement has been signed and accepted, take it to the title company. The title company will then order a title binder. Once that is completed, they will send it with your purchase agreement and the addendum to the attorney who prepares the REC and deeds. The attorney then sends the documents back to the title company. Now, you close. Buyer and seller sign the REC and deeds. The REC is recorded and sent to the escrow company along with the unrecorded deeds. The escrow company now “sets up” the account. They send out a welcome letter, general information, and an amortization schedule to both parties. The buyer will be sent payment coupons. Once the buyer has paid off the REC, the escrow company will send the buyer the warranty deed that it has been holding. Like anything else, it’s pretty easy once you know it.