Congratulations! You’ve found an investment property you like. But before you even think about entering an offer or a bid, do your due diligence. And one of the most critical steps in the due diligence process is a preliminary title report, especially if the real estate property is a foreclosure, bank-owned property or short sale.
Quite simply, a title is the right to own a property, and a title report is a record of that ownership. The title report will also contain other crucial information you need to evaluate your potential real estate property investment—such as liens against the property, easements, and CC&Rs. That’s why it’s so important that you review the report carefully. Take your time going through this preliminary report and do not skip or rush this step.
How to Get A Preliminary Title Report
If you’re bidding on a property listed on an auction site like Auction.com, be sure to review the Foreclosure Property Report on the Property Detail Page. But because many foreclosure properties are sold “as-is,” it’s your responsibility to contact a local title company to do a full title search of the public records concerning the property. The title company or a real estate attorney can help you review the preliminary report.
Why You Need a Preliminary Title Report
1. The title report confirms that the seller has the right to sell the property.
When a property changes hands, the transfer is recorded in the public records. As the home is sold over time, the prelim report will list the date of each sale as well as the names of the parties in each transaction.
Why it’s important: You want to ensure beyond a shadow of a doubt that you have a “clear” title and that the property is really for sale. You don’t want a long-lost relative to step out of the woodwork claiming ownership of your investment. Even worse, during the 2008 housing crisis, people sold properties they didn’t own.
2. The title report lists any liens against the property.
A lien is a legal interest in a property. It applies to—and stays with—the property itself, not its past owner. If you’re wondering how to read a preliminary title report, it is important to understand that a title report might list several different liens:
- Property taxes: When property taxes become delinquent, the local taxing authority can place a lien on the property in the amount of the past due taxes, plus interest and penalties. Property tax liens are issued a so-called “superior” status, which means that if the property is sold, property taxes must be paid before any other existing liens.
- Mortgage liens: This is perhaps the most common form of a lien. The buyer may be listed as the owner, but the mortgage company has a legal interest in the property as well. That interest must be paid in full when the property changes hands.
- Mechanic’s liens: This is a lien formed when a contractor begins work on a home. It ensures the contractor will get paid. If the owner and the contractor get into a spat and the owner refuses to pay what’s due, the contractor will leave the lien in place.
- Income taxes: If a property owner falls behind on income taxes, a lien will appear on the title report, even if the owner makes a payment arrangement with the IRS.
Other legitimate liens include liens for unpaid child or spousal support, or judgments filed as the result of a lawsuit.
Why it’s important: When you buy a foreclosed home, you could be responsible for settling any remaining liens after the lender who foreclosed on the home recoups its mortgage. This could be very, very expensive.
3. The title report lists easements.
An easement (also known as a right-of-way) gives access to third parties other than the owner. Someone with an easement can cross your property line without receiving prior permission. When understanding how to read a title report, recognize that a title report identifies an easement’s location as well as the person or entity to which the easement was awarded.
Why it’s important: Most easements are issued to utility companies; the easement grants the utility company access to its equipment. That doesn’t sound like a problem—unless the equipment is buried in your backyard. The utility company can dig up your yard to reach it and isn’t required to compensate you for any damage. In another case, you might discover that your neighbor has the right to use your driveway.
4. The title report describes any CC&Rs.
CC&Rs (Covenants, Conditions & Restrictions) are rules that property owners must follow if the home is part of a homeowners association (HOA) or planned unit development (PUDs). CC&Rs can limit anything from the size of a driveway to how tall you can grow the grass in your front yard.
Why it’s important: Most CC&Rs are relatively harmless, but don’t take them for granted, especially if you’re buying an investment property that you want to resell or rent. Some buyers won’t buy any property that’s part of an HOA. And if you have tenants, you’ll be responsible for making sure they follow the rules, or you risk getting fined, or worse.
The Bottom Line on Preliminary Title Reports
The preliminary title report exists for a reason: to make you completely aware of the current legal status of the real estate property and whether or not a sale can take place during that time. It helps you make sure there aren’t any hidden liens or encumbrances on the property. It’s also one of the best ways to avoid nasty (and expensive) surprises down the line that could harm the value of your investment. So take advantage of it!
About the Author: Cynthia Badiey
Cynthia Badiey is a writer and author who has written about everything from real estate to cloud computing, private aviation and educational technology. She has written blog posts for Ten-X, Auction.com, XOJET, NetSuite and Sun Microsystems. An experienced marketing professional, Badiey is the principal of Comma Writer, LLC, which specializes in content creation and strategy, marketing communications and writing. You can reach her on Twitter at @cynthiabadiey.
