A few weeks ago, I received an e-mail from a reader who thought she was given title to a valuable lot worth several hundred thousand dollars by her late father before he died. But the recorded title evidence shows he died while still owning that lot.
Even worse, her father died “intestate,” without a written will. The result is she inherits only one-third of that lot with her two siblings after the estate goes through probate court costs and delays.
Purchase Bob Bruss reports online.
A simple recorded quit claim deed for that lot from the father to his daughter would have avoided the difficulty.
VERBAL TITLE TRANSFERS ARE WORTHLESS. Amazingly, many otherwise very smart property owners don’t realize virtually everything affecting real estate titles must be in writing to be legally enforceable. The legal reason is the Statute of Frauds, which dates back to our common law heritage, requires written real estate conveyances to prevent fraud and misunderstandings.
Verbal real estate gifts, even if there are several witnesses, are worthless. As shown by the example above, a written quit claim deed would have transferred title to that lot, as the father intended.
In most states, recording a lifetime title document is required to complete a transfer title. However, in some states, even properly executed unrecorded title documents discovered after the grantor’s death have been held to be valid title transfers. But recording a title document is far safer.
RECORDING LAWS GIVE CONSTRUCTIVE NOTICE. In addition to satisfying the Statute of Frauds, recording of documents affecting real estate gives “constructive notice” to any buyer or lender dealing with a specific property.
Suppose you own a vacant lot evidenced by a properly recorded deed. I agree to loan you $10,000 secured by a mortgage (or a deed of trust) recorded against that lot. If you sell that lot, the buyer will be obligated to pay my $10,000 recorded mortgage according to its terms.
However, if I failed to record my mortgage, and you sell that property but forget to tell the buyer about the $10,000 loan, the buyer would take title free of my unrecorded mortgage.
The legal reason is that buyer is a BFP (bona fide purchaser) without notice of my unrecorded mortgage.
Examples of recorded documents that can affect property titles include deeds, mortgages, deeds of trust, easements, homeowner association CC&Rs (conditions, covenants and restrictions), judgment liens, income tax liens, mechanics’ liens, and even a “lis pendens” (notice of pending litigation affecting the property title).
TITLE INSURANCE PROTECTS OWNERS AND LENDERS FROM RECORDING ERRORS. Because most individuals are not capable of searching the county or city title records affecting a specific property, title insurance has evolved to insure owners and lenders against many title risks.
Virtually every mortgage lender insists on title insurance; smart property buyers also insist on receiving an owner’s title policy to protect their equity.
Title insurance insures “marketable title.” Just because a title insurance policy is issued to a buyer or lender doesn’t mean the property title is perfect. But it does mean title is insurable and any known encumbrances or liens have been disclosed by the title insurer’s research of the title.
If the title insurer makes a mistake, such as failing to discover a recorded city sewer easement through your back yard, the title insurer must either pay to have the sewer moved or reimburse you the reduced value of your property.
Many other risks are also insured by title policies, such as forged signatures in the chain of title (the biggest cause of title insurance losses), and claims of undiscovered heirs to the property.
QUIET TITLE LAWSUITS SETTLE TITLE DISPUTES. In cases of conflicting or uncertain title claims to a property, title disputes are usually resolved by quiet title lawsuits. The court then determines the title status.
For example, several years ago I was the real estate broker representing the seller of a large apartment building. Just two days before the sale was scheduled to close, the title insurance company officer phoned to tell me the seller’s ex-wife appeared to still own half of the property. Oops!
The seller insisted he received title to the apartment building in the divorce settlement. But he couldn’t prove it. The title still showed the ex-wife might have a possible interest in the property.
If worse came to worse, a quiet title lawsuit would be necessary to determine if she still owned half of the property. But a quiet title lawsuit would take months.
So I asked the title company to prepare a quit claim deed for the ex-wife to sign. In my most charming voice, I phoned her to ask if I could “drop by” to have her sign a quit claim deed to clear up the title to the apartments. Fortunately, she was very cooperative, agreed to sign the quit claim deed in front of a notary public, which was quickly recorded, and the sale closed on schedule the next day.
TITLE PRIORITY IS DETERMINED BY RECORDING TIME. In cases of title conflicts, the general recording rule is title priority is determined by the time of recording.
For example, suppose I sell you my free and clear vacant lot for cash. I give you a deed in recordable form. But you forget to record it. A few months later, being in dire need of more cash and knowing you didn’t record your deed, I sell the same vacant lot to another buyer for cash. She promptly records her deed from me. Then I leave for Tahiti with the money.
Who owns the vacant lot?
The answer is the buyer who records his/her deed first without having notice of the other conveyance.
In the example above, the second buyer who records first wins the race to the courthouse. She holds valid title because she is a BFP who recorded her deed first without any notice of my prior sale of the same lot to the first buyer who failed to record his deed.
Of course, if the first buyer who was defrauded can find me, I would be liable to him for fraud. But this simple example shows the importance of promptly recording all documents affecting title to real estate.
SUMMARY. Recording laws protect real estate buyers, sellers, lenders and lienholders against unexpected title pitfalls. The best way to eliminate or at least minimize title risks is to always insist on receiving an owner’s (or lender’s) title insurance policy.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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