A “Big and Fluffy” Cloud on Title: What Real Estate Investors Need to Know About Proactive Due Diligence

A Client Walks In… I recently had a client who, along with his partner, had owned a Detroit investment property for many years. He had come into my office very excited about a recent purchase offer they had received. They owned their investment property for decades, weathering numerous Michigan economic cycles, but with all of the sales activity happening in and around Detroit, they could finally realize a significant return on their investment. “This is the year!”, he exclaimed. “We’re going to finally sell this baby!” Happy for them, I began the typical due diligence work which included, among other things, pulling title work. Three days later, the title came back, showing several items affecting the partner’s title interest. Nothing was too severe except for one lien showing an old security interest still on title. This old lien had to be addressed or the partners could not complete their sale. “Oh, we paid that off years ago”, the client explained. But when asked to produce a copy of the signed lien release, the partners after days of searching, could not produce one.

Excitement Turns Into Panic. And so it began…by “years ago,” my client meant he and his partner had paid their loan off in the late 1980s. A further investigation revealed that this old lien was formerly owned by three partners, and as my clients’ luck would have it, all were now deceased. We would soon learn that their accountant was deceased. So, too, was their lawyer. Only one of the partners had a surviving spouse. My client’s excitement quickly turned into frustration, slowly deteriorating into panic and, without proper legal intervention, was on a clear trajectory to major disappointment. Suffice to say, it was only several months later—after much anguish and additional legal expense—that the deal thankfully closed.

Conclusion

My real estate law practice is almost exclusively based on clients who are reactionary. Most real estate investors are not proactive in their approach to their business. But it doesn’t have to be that way in real estate. Ensuring a property’s marketable title is but one example. A property has marketable title when it can be sold without any encumbrances, liens, or “clouds” affecting clear title. A cloud on title prevents a buyer from taking clear title to a property, and, with few exceptions, why would they? Unless your buyer is taking a quit claim deed (a deed without any representations as to ownership), your deal is dead until you clear the cloud on title. A cloud on title may arise when there is no recorded lien release for an old interest in a property such as a mortgage lien, tax lien, judgment lien, or any other claim of interest by a third party. It can also occur when a deed or transfer document has not been recorded or was improperly signed.

Before you list your property for sale, perform your due diligence, which includes, but is not limited to, ordering title work beforehand. If you are not “clear” about any issues that affect your ability to transfer your property, it’s best to consult with a real estate attorney.

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