The retired couple sitting in my office were incredulous. They had:
"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.
And that's the real estate opinion of this Tucson, Arizona mortgage lender,
Mike in Tucson
I show up ON TIME. I do WHAT I SAY I'm going to do. I FINISH what I start. If I mess up, I 'FESS UP & I fix it. In the mortgage business, these 4 things are why you'll want to do business with me.
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Here's another example proving how dangerous shortcuts can be in real estate. Take nothing at face value.
Good morning Mike. Thank you for the story and information this morning. It's scary out there!
I would be willing to bet that f thehome was only partially completed, then most likely some of the subcontractors are still awaiting to be paid for their work.
Sean Allen
Of course it pays to buy title insurance, did they not use a Realtor to find this property ?
Sad but true and most likely the case in all states... Excellent information
Your friend in Charlottesville
You can say that again. So much too for consumers "doing their own research". title insurance has got to be cheaper than any lien that would have to be paid or any loss caused by any defect.
Lenn,
Testify, sister! LOL
Charles,
The time frames may change, but as a builder back in the 80's, this was certainly the case in NJ
Missy,
No. They were too smart to waste money on a REALTOR. LOL
Sean,
That's what worries the bank.
Susie,
And a good morning to you!
Rosario,
Thanks for being the first to comment. Caveat emptor!
Mike in Tucson
Ouch! It would probably be an understatement to say that these people wish that they had purchased title insurance or had gone with a Realtor to aid in the purchase of the property. 8-}
Perhaps I should add this scenerio to my .. why you should use a Realtor.. portfolio? I can't think any Realtor worth his/her salt would have let a client NOT buy a title policy. Insurance is only good when you need it.. sounds like it is a need in this case! Just in order to get a loan, that is the need.
Mike, Title Insurance is cheap compared to what not having it might cost someone. Good point.
Pay for title insurance and get someone that know the rules so you don't get into a mess like this. Good luck.
Juat another example of smart people making dumb mistakes.I make sure agents of my company can actually read and understand something as simple as a title report.Been in this same situation before with clients who are looking for help after the fact. So frustrating." And look how much we saved by not using an agent."
Mike, Great post. I bet your clients wish they would have found you before they bought that property and listened to you then.
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.
Mike in Tucson- Great topic. To many people do not understand the need for title insurance. This is a great illustration. Thank You
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.
we all must Dot the i's in real estate and as agents, its our job to do this for all clients
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...
Mike- The dangers of going FSBO! I would never allow a client to buy property without title insurance! Katerina
Don't you just love the ones that know how to do everything by themselves without professional assistance?
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!
What a shame for those people!
Good information to know though...I never would have known about that! Thanks!!
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
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
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.
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? ;-)
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
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?
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.
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
Mike - what a headache that turned out to be! And a good lesson for all of us on another reason for title insurance!