No one wants to put time, effort, and money into a real estate transaction just to have it unravel when it's time to sell because of a title issue. Clean title is an extremely important part of real estate investing and something all real estate investors should understand before buying an investment property. Learn what is a clear title in real estate and how it can impact an investment deal.
What is a clear title?
Clear title means a property is free of any lien, encumbrance, or title defect that could cause dispute about legal ownership. Defects or liens such as a mortgage, unpaid property tax, municipal lien, code violation, discrepancy in legal description, or mispelled or mismatched owner names, among other issues, can cause questions over legal ownership. When there's a clear or good title, there are no legal defects, and the current property owner is evident and clear.
Why clear title matters for investors
When a property is sold, title is transferred from the seller to the buyer. Typically, this is done with a title company, who orders a title report to determine if there is a title problem and rectify any issues discovered in order to close with a clear title. However, having clear, marketable title isn't required to buy or sell a property. Investors can purchase or sell a property with title issues, but those defects transfer to the buyer, making things like getting a mortgage or purchasing a title insurance policy impossible until rectified.
Times when purchasing without clear title makes sense
There are times when it may make sense for an investor to purchase a property despite having a cloud on the title. A tax deed sale or distressed homeowner that has code violations, outstanding taxes, or an existing mortgage are often sold at a discount. The better pricing can compensate for the cost and effort the buying investor will need to clear the title while still being able to renovate or rent the property in the meantime.