Predicting the Unpredictable: How to Deal with Title Issues
As an experienced real estate investor and wholesaler, I sometimes think that I’ve seen it all—every possible title issue imaginable—but then something comes and surprises me. Multiple heirs, children given up for adoption, homesteads, disease, no will – there are too many unpredictable factors to count when determining who will actually inherit a house.
In this article, Brian Spitz offers some information and advice to make sure that you are prepared for any title issue you may encounter…
(Brian does nearly 400 wholesale deals a year. Needless to say…solving title issues is his JAM.)
The most important thing you have to know about title issues is this: What are the seller’s rights when it comes to inheritance?
You need to have some idea of the future person entitled to the house, because you’ll talk to people who don’t know if they will end up with the full title of the house or not. If you know who is legally entitled to the house, then you can think ahead and focus on what to do next.
In some states, you need to know whether or not the house classifies as a homestead. A homestead property will be handled differently than a residential property. There are all sorts of things you need to know so make sure to do your due diligence.
At the moment, we’re buying a house in San Antonio. The owner passed away. The house has a reverse mortgage so it is going into foreclosure. This woman owes half of what it’s worth. There is a lot of equity in it. Since the owner passed away, now the heirs own it. There are nine heirs. I did a nine heirship affidavits and that is a LOT in any circumstance. Two of the nine heirs are dead. One of those two has a son, but he has three IRS liens against him. So we are trying to do nine (yes, NINE) heirship affidavits plus heirships on the other two who are dead. So it’s really 11 affidavits. We have to keep them from foreclosing on the house and settle with the IRS.
I will most likely make $25,000 on this deal. I wouldn’t press so hard if it wasn’t worth it. I’m calling the IRS, sending them the paperwork, doing what I can do. They are not easy to negotiate with. They’re only entitled to 1/11th of the total sale price of the house.
Asking the Right Questions
You need to make sure to ask the right questions from the beginning.
When someone calls you and says, “I need to sell my mom’s house,” you need to ask, “Who are you and how did you become entitled to the house? Who owns the house?”
Make sure to ask about the father as well. If the mom was married when they bought the house, there would be an interest for the father’s interest. If the father had children from another marriage, those children would have an interest on the house. You need to start backwards. Figure out how your seller got into the title and then work your way out of that.
Importance of Networking
Here’s a crazy story…
We had a property set to close on the last Friday of January. Foreclosure was scheduled for the first Tuesday of February.
The day before closing, we found out that there was one more heir. That heir lived in Indiana with a PO box and an unlisted phone number. At the time, it seemed like there was no way to get a revised heirship affidavit and to get a closing, since Monday was a bank holiday.
I called up Sonya, who is someone I was introduced to about three years ago through an investor. She works with the city and has the ability to stop foreclosures at the VERY last minute, but I’d never called her before.
I told her my situation and she goes, “Sure, I’m happy to help.” Right then and there, she gives me the file number and the seller’s name and any other info I need. She then goes, “I’ll stop the foreclosure for you.”
Boom. It was as easy as that.
This is a huge victory for me. I told her that I had been trying to stop this for two days!
This story isn’t the norm, but it proves an important lesson: You HAVE to talk to people and network. Even if you are an introverted investor, you can’t avoid meeting people and making connections if you want to succeed…
You never know when you’re going to hit a tough spot.
Difference Between Title and Deed
The title insures the deed. The deed is the transfer of ownership and the title insurance makes sure that the instrument of transfer ownership is correct.
If you wanted to give me your house, you deed the house to me, and then I would go file a HCAD and my name would be on record. But if I turn around and sell the house, the title company is going to do the same thing. They are going to ask me questions like how I got the deed to the house, and a lot of times they will want to go back and understand your interest and what happened to you. Did you have debts and liens against you that you didn’t take care of? If you have an IRS lien against you and you deed me your house, then the IRS lien is not going to go away. Title companies are going to want to make sure that you had a clear title to give me.
Title VS Deed Example
So I have this seller in Dallas. He knew he was going to get in trouble with the IRS, so he deeded the house to his mother six years ago. That’s the crazy thing: people don’t realize the difference between title and deeds. He deeded the house to his mother, then his mother deeded it to his son…
When sellers tell me anything like “Oh, we did that deed or we did this heirship”, I’m like “Send it to me, let me see.” Because a lot of people go online and print this stuff out…and it’s wrong. They don’t know what they’re doing. So, title companies oftentimes will not recognize the paperwork people prepare themselves. They will make you go back and re-do it in a “recognizable” format.
Back to our story: This guy is desperate for money. He needs an advance, and he wants $2,000 on that advance. And it’s not even his house, since the mother gave the deed to his son… His son is going to sell it for him and give him the money. He thinks he’s avoiding the debt just by passing his asset around. We took all of his documents and we sent it to the title company and asked them to do a rushed title search to tell me.
The title is now vested in the son… But they have not accepted the deed. This is where we are as of now. When we dig further, we’ll find out what information they want. They could go back and say that this deed was not executed in the right way, or that it’s not named the right way, or it’s missing some piece of information. Then you have to go back and correct it. After you correct it, then you pull the title and name searches on people.
The thing that the seller doesn’t get is that this house would have been his homestead. He would have had homestead protection on the house. But he deeded it over even though he is still living in it. His son has the deed now. Now, there is no homestead exemption on it anymore because his son lives there.
How Investors Can Identify Potential Issues
People do a lot of do-it-yourself stuff when it comes to title transfers or other serious things. It is very easy to screw up.
Long story short, as an investor, you have to know where the big deals are. The big deals are behind whether the deals are in the big issues or if the biggest work is around those issues.
There are two crucial questions you need to ask sellers when you’re gathering information about the house and attempting to identify potential issues:
#1: Is the house a homestead? If the house is a homestead, it eliminates a lot of problems. Credit card companies can’t make you pay them to sell your homestead. Liens are not enforceable.
#2: How did you come to own this house? There is a very simple way to go about it and see whether or not the person you’re talking to understands how they became entitled.
Identifying Issues Examples
Example 1: Outstanding Debt and Judgements
We have another couple who inherited a house. But they didn’t pay their probate attorney and the attorney sued them for $20,000. Now, the couple needs to pay an outstanding judgement of $20 grand against the estate. On top of that, the couple has medicare and MERCs that are due.
We have to go settle with Medicare now. They think they’re selling this house for 55k and that it has no debt on it. But really, the house has all the debts from the people they inherited it from. The two big questions in this case are: 1) How did you come to own it, and 2) is it a homestead? You need to get rid of a lot of problems.
Example 2: Marriage Issues
The craziest story we had was about two years ago. These people called us and told us that their brother had died. The brother had no children and his wife was dead too. The people thought that they owned his house.
The wife had children from another marriage. The way it works in Texas is if you are married to someone and one of them dies without a will, then you will get the interest and not the children. Now if one person dies and if they had a child before they met their current spouse, half of the entire interest goes to that child.
Usually, everything goes to your spouse if the case doesn’t involve kids.
For this particular case, each of them married someone else before. He had no kids but she had a daughter. She died and her interest went to her daughter. He continued to live in the house until he died. Naturally his siblings thought that they would inherit. They would have and we waited for the whole transaction until towards the end, someone said, “Well, he did have a child that he gave up for adoption.” This happened in the state of Virginia. Now in Virginia, if you put a child up for adoption, then they don’t have the right to inherit. The state cuts the child off completely from your inheritance.
Legally, the adoption was done in Virginia, but the law follows the dirt.
Because the house resided in Texas, Texas law applied. In Texas, the kid you put up for adoption still gets their right to inherit. Towards the end we found her. We had to track her down. No one had ever met this girl since her parents gave her away at birth. The siblings that thought they inherited half the house got nothing. The were not an heir. The girl in Virginia got the other half of the house.
The siblings were angry. They made a huge deal about it. They went to the title company screaming and saying that we were committing fraud and other accusations. Once the title company hears something like that, whether it’s true or not, they will shut down the file because they don’t want to take on something if there is a risk coming. I took the case to an attorney who also owns a title company because he knew the law was on his side and he was willing to take the risk. We ended up giving the house to the girl. The house was worth a whole lot of money to her.
Example 3: UnderAge Heirs
We also had another one last year where this guy drank himself to death in his house. He died in the house and no one found him for a while. The man was behind on his mortgage and was planning to foreclose. He had had a son with his ex-wife. The ex-wife called us and contracted us to buy the house. Then as we got into it, we found out that he didn’t have a will and his son was only 17. You can’t legally sell the property by yourself at that age.
We needed to go to court, hire an attorney to represent his interest, and ensure that the court accounted for his interest in order to get the sale approved. Luckily, everything worked out and the court covered his interest.
Through that process we also found that the guy had left one of those mortgage insurance policies. So half of his mortgage got paid off. The kid was at first going to get next to nothing and then all of a sudden he got $50,000.
Example 4: Fatal Illness
I have another story. This one is awful, but we had this guy who was going into foreclosure. The closing date was set for Friday and we received a call Thursday morning. On Thursday he went into a coma from an accident. In that case, there is no power of attorney.
While we were extremely sensitive to the seller’s family and their needs, we were constantly and carefully asking, “Do you think he’s going to come out of it? Is this short term or long term?” Luckily, we were able to close on the house.
The nurse had told us that he was not going to come out of it. We went ahead and did all the heirship work before he passed away. As soon as it had happened, we dated, notarized, and closed all of the paperwork.
They did not lose the house to foreclosure.
Example 5: No Legal Ownership
We have this woman right now and she had another wholesaler on a contract for a whole year and they could not clear the title. When I called her, she was so distraught. She truly believed that no one could help her. I calmed her down and let her know that I could.
The story is that her parents died and left her this house and she had what she thought was the deed. It turned out to be the deed of trust which is just a mortgage instrument and not an actual deed of ownership. Her parents bought the house 62 years ago but her parents and her seller never filed a deed together. We could prove that her parents had a mortgage on the house, but we could never prove who sold it to her.
She could not sell this house because there was no deed of ownership. The people before her parents owned it 70 years ago. This is a $17,000 house and title companies don’t make money from these kinds of deals. This was just a victory thing. We used Facebook and Skip Trace to track down the two liening heirs of the people who owned the house 70 years ago. We found a great grandson and a nephew who have never met each other. The two lived in different parts of the country.
They did the heirship affidavits on the deceased people who should have deeded the house to our client’s dead parents.
We eventually got them to transfer the title over to our client.
The point is…dealing with title issues can be incredibly messy.
There’s confusion and grey area and you just can’t predict what will happen. But you can be as prepared as possible and make an effort to understand the common title problems to at least minimize any surprises.