Real estate deals can be lengthy transactions, even when things are going smoothly. A cloud on a title can further complicate matters -- but there's a way of getting past it, even when liens are involved. Read on to learn more.
What causes title clouds?
A cloud might come up during a property title search for several reasons:
- The property is currently in foreclosure proceedings that could prevent a sale.
- An issue with determining the rightful heir(s) of an estate (probate).
- The deed is fraudulent or incorrect.
- There's a lien, be it an unpaid mortgage or tax bill or money is owed for construction work (mechanic's lien).
Property encumbrances are obstacles for property investors, but they don't always have to result in contentious situations. A quitclaim deed can help clear up title clouds in a situation that does not involve a financial transaction, such as when a property is inherited by a family member and requires a transfer of ownership.
Another option is a quiet title action, a legal procedure meant to clear up or "quiet" a title defect, such as a discrepancy on the deed or if a lien has been paid but there's no record of it.
When a lien clouds a title
Title clouds are a bigger problem when money is involved -- or rather, a lack of money. Liens, particularly mechanic's liens, can cause major delays in the sale of a property. While a single unpaid invoice won't result in an immediate lien, no payment over time can lead to a general contractor filing a claim on a property, preventing its sale until the money is paid.
We talked to Nate Budde, chief legal officer of Levelset, a software company that helps construction companies manage their payment processes, to learn what to do when a property has a mechanic's lien. Essentially, property investors have three options.
Yes, this is an obvious answer, but it will get the quickest results in clearing up a title cloud. Says Budde: "Nobody wants to go through the hassle of trying to enforce the lien, filing a lawsuit, and trying to foreclose on the property. If somebody is going to offer payment, [the contractor] will release the lien."
An investor can challenge a lien by drafting a letter or hiring an attorney to draft one that contests the encumbrance. Having an attorney involved in the communication process is not necessarily a litigious or even hostile move, Budde says. Rather, it's a collaborative effort to clear up confusion and open the lines of communication between the two parties.
Says Budde, "[An attorney's letter is] to try to figure out what's going on, and if [the lien] is legitimate or if it's the result of some miscommunication through these parties that doesn't really have any bearing." If written communication doesn't help, an investor can take it to court and either file a quitclaim deed or attempt to quiet the title -- but this will take time and legal fees.
Avoid it entirely
Of course, the best way to handle a lien is to avoid it in the first place. Budde says it's crucial for property owners or developers to check in with the general contractor and collect all lien waivers, which are evidence all contracted and subcontracted parties have been paid.
Budde explains: "If you collect the lien waiver from everybody that's doing work, every time you make a disbursement or progress payment, you can shield yourself from having to deal with liens in the first place. That makes it a lot easier than having to go back, figure out what went wrong, and correct the problem to get the lien removed."
The bottom line
Title clouds do cast a shadow on a real estate transaction, but they don't have to mean the deal is over. While it's best to avoid liens and other encumbrances altogether, there are ways of removing the cloud from a property title and moving on to free and clear ownership of the property.