An update on title insurance in short sales transactions. Title insurance is often overlooked in all real estate transactions and especially short sales. Many owners do not have title insurance and what is worse is that they are not even aware of it and they purchased something that they invalidated without even knowing it.
Many short sale investors purchase short sales in one name and then transfer the legal entitlement of the property to a business entity, trust or via quit claim. These investors are unaware that they just voided their title insurance. ANY divestiture of title…even a Quit claim from a husband and wife to just the one spouse will void a policy.
I recently blogged about a case decided by the Massachusetts Supreme Court in which the court invalidate a foreclosure sale acquisition by Bevilaqua. The Court concluded that the foreclosing lender could not prove that it was the real party in interest because it was unable to produce the original note. Cases such as this exemplify that title is more important than ever. What is worse, is that many title policies have been invalidated and the owners are unaware of this.
Many buyers incorrectly assume that if they close escrow and pay the title insurance premium, that they have fill coverage. However, it is frequently the case that they HAD coverage and lost it buy actions taken shortly after close of escrow.
In purchasing real estate it is important to read the title policy. Ask questions and perhaps even tell the representative the nature of your future plans. Also, at all times, realize that title companies are extremely conservative and risk averse. If there is the slightest chance of exposure, they will reject the risk.
The title insurance industry has very astute risk managers that assess risk. They tend to over-react to trend that may expose liability. Short sale addenda and affidavits are creating additional exposure to title insurers and they are now refusing to provide coverage in many short sale transactions.