Beware of title issues in Short Sales and Rehabs

This article was reproduced with permission from Attorney Meghan Grugnale, Esq.  No portion of this article may be reproduced without prior written consent.

Short Sales and Rehab Properties:

In the current real estate climate, many investors and rehabbers are taking advantage of the deals that can be found and in the process, they are adding to the quality of many neigborhoods by taking an ugly home that is bringing down values and turning it into a gem. For the investor who is considering purchase of a property out of a short sale transaction with the intention of selling it months later, there are a couple potentiall issues to keep in mind and prepare for.

1.  Insurable Title versus Marketable Title: After weeks and maybe even months of carrying a property and putting work into it, the investor will get it under contract. Then title is pulled by the buyer or buyer’s lender’s counsel. Because of the short time between acquisition and sale, there may still be mortgages on title that were paid off upon the purchase but have not been discharged of record yet. This situation is called insurable title- the investor likely can produce proof of payoff and title insurance that covers or indemnifies the new owner and their underwriter, but the new owner or their attorney may reject this approach and require the title be marketable, or completely clear of liens. In this situation, the investor gets stuck carrying a property for longer then they had planned while they wait for the paid off shorted lenders to get a discharge to record. The investor that is aware of this issue up front can alert their buyer and the buyers attorney of the situation so the investor knows before an offer is accepted whether the buyer will take insurable title and close on time.

2.  The Anti Flip Provision: Sometimes an investor will make an offer on a property that is in the process of short sale negotiation, therefore, no final payoff has yet been obtained. The investor has to understand going into this situation, that they may wait for months for the payoff to come and only at that time learn that the shorted lender will make the investor sign an agreement not to sell the property within a certain time period or for a certain profit. The smart investor would therefore be wise to put very little money down, include provisions in the contract alerting the shorted lender that they intend to resell, and avoid putting any money or time into the property until the final payoff is in hand.

Generally, the more an investor discloses to everyone involved what his or her plan is with the property, the better off they will be. The more attorneys, agents and buyers deal with short sales and learn from prior mistakes, the smoother the process will be all around. Short sales will perhaps lose their bad reputation as scary transactions, and be treated for what they are, a process that allows a property to be used for its best potential while allowing a seller in a bad situation to see light at the end of the tunnell.

Meghan Grugnale, Esq.

Grugnale Law Office, PC    and   Phenix Title Services, LLC

400 West Cummings Park          30 International Drive

Suite 6600                               Portsmouth NH 03801

Woburn, MA 01801

P: 603-498-4601

F. 800-863-3488

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