S.E.C. Real Estate Observer

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Many years ago I was returning from a real estate exchange marketing session in Acapulco, Mexico. An exchangor from San Jose California told me about a policy his firm had developed concerning new listings. Their listing agreement required the seller to provide their firm with a current Preliminary Title Report (Prelim) in many states called a Commitment To Insure, at the time they listed the property. This report shows any liens of encumbrances on a property, items which are vital to know about when marketing or transferring title to the subject property. Some of these items can affect the priority of a mortgage on the property as well. In California most title companies will honor the cost of a Prelim for up to two years and credit its cost against the premium paid later for the title policy.

As coincidences happen, I had just heard of the following situation. Mr. Moore and Mr. Jones, Jr. had employed a real estate firm to sell or exchange their commercial lot. After a year of effort in a soft market the agent finally put together an exchange and opened escrow at the title company. Two days later the agent received a call from the escrow officer who asked, “Who is the woman in title with Mr. Moore and what do you intend to do about the $12,000 judgment filed against her”? Good question, and, of course the agent had no answer. Further investigation revealed that Jones Jr. had never been in title to the property with Mr. Moore. Unknown to Mr. Moore or Mr. Jones, Jr. Mr. Jones Sr. had signed the original acquisition papers (Jr. & Sr. had the same names) when the property was acquired. Several years later Jones, Sr. died. His wife inherited his half interest in the property and responsibility for the 12K judgment, of which she was not aware. The judgment was held by the owner of a Casino in Nevada. The agent contacted the judgment creditor and convinced him to lift the lien and allow the transaction to close for Mr. Moore’s benefit.

A preliminary title report would have alerted all parties concerned to this problem even before the agent began to market the property. If an exception appears on the report which could cause problems, why not discover it early, deal with it and not waste a lot of marketing effort only to discover it later? Most offers to purchase real estate are “subject to” the buyer’s approval of title. Having a current Prelim saves time and helps eliminate this contingency.

My partner and I adopted the idea as our company policy, with one enhancement. Rather than have the title company bill the seller for the Prelim, before taking the listing we ask the seller for a check made out to the title company to cover the cost of the report. In the ’60’s the cost was $35. It has steadily increased over the years and currently costs about $360. In California most title companies will allow full credit for the cost of the prelim against the cost of a title policy when issued up to two years from the date of the prelim. Now as we look back over the last 43 years since we adopted this idea, we cannot recall a seller refusing our request.
Some years back a client reported he was having coffee with a group of local business people. During a discussion about real estate companies a local title company executive made the comment, “Arnett & Broadbent is the only firm in San Luis Obispo County who knows what they are selling because they are the only firm who gets a Prelim when they list the property”.

This policy has served us well over the years. We estimate that in at least 1/3rd of all transactions, an item appears on the Prelim that the seller is not aware of. In many of those cases the problem is severe enough to affect the transfer of marketable title.

As we are principals in our note buying activity and do not broker real estate secured notes for note sellers, I hadn’t thought much about this concept until recently. I was reviewing the documents on the purchase of a Contract for Deed on a property in the mid-west that had been offered to me by a note broker. I had spent a fair amount of time and incurred some expense. I kept reminding the note broker that we needed a Commitment To Insure. Finally we received a phone call from the Abstract/Title Company informing us about a sizable judgment and a couple of income tax liens against the vendor/contract holder. These liens totaled more than the value of the property and had priority over the contract. This news obviously killed our deal. The contract sellers still face a real problem. When their buyers have paid the contract in full and expect a Warranty Deed from the sellers, I wonder what the sellers will do. The buyers (under contract) should have had the title checked. The note broker had wasted his time (and mine) trying to sell me an unmarketable contract. This situation reminded me of the importance of checking title sooner rather than later. Waiting for a commitment to insure slows many transaction closings.

If I were brokering notes for note sellers, I would require a Prelim or Commitment To Insure at the note seller’s expense before offering their note to any buyer. I have yet to meet a note buyer who will buy without title insurance. If there are some out there who do, I predict they will take an expensive seminar in the school of hard knocks as a result.

Note-brokers who interface with owners selling their own property and/or real estate agents should encourage them to get their trust deeds or mortgages insured with title insurance at the time they are created. It is cheaper then and will save the note-seller time if they ever want to sell all or a portion of their note in the future.

As a note buyer/investor I require evidence of title condition sooner rather than later. A note broker who can produce that up front will leave a positive impression in my mind and set themselves apart from their competitors. When dealing in notes, it’s good business to know in advance about the title of property whose trust deed or mortgage notes you are selling and or buying.

Bill Broadbent, author of this article, has been a real estate investment broker and consultant in San Luis Obispo, California for 50 years. He started investing in real estate paper as a principal in 1974 and has bought notes for his own account in over fifteen states. Bill is a co-author of the book:

**OWNER WILL CARRY

How to take back a note or mortgage without being taken
© 1993 Bill Broadbent, S.E.C. CCIM & George Rosenberg
“An insider’s guide to techniques that work nationwide”
To view the table of contents & first chapter go to;
www.arnettbroadbent.com/ownerwillcarry.html