Two people sitting across from each other exchanging a house with contract form and calculator on the table

A Contract for Deed: Who else may have an interest in the property?

A contract for deed agreement is nothing new. These agreements are between a current owner of the property (the “legal titleholder”) and a person who is interested in purchasing the property from the owner (the “equitable interest holder”) but may not be eligible for traditional financing (or for other reasons), and the owner agrees to finance the transaction. The equitable interest holder typically takes possession of the property in exchange for making monthly or other periodic installment payments, along with possible other obligations, to the legal titleholder. If all the terms in the agreement are successfully satisfied, the legal titleholder is expected to transfer the title by deed.  

Contract for deed agreements are frequently not recorded in the county land records. However, as an example, Texas requires executory contracts be recorded by the seller within thirty (30) days from the date of execution or the seller may be liable for damages to the other party for noncompliance. In Texas, such a recorded executory contract is treated as a deed with a vendor’s lien. See Tex. Prop. Code § 5.076 and 5.079. Other states also have statutes addressing executory contracts.

Contract for deed agreements have been the subject of many lawsuits. Generally, a lawsuit can be the first opportunity for a non-party to know that an unrecorded contract for deed agreement exists. A claimant is either sued or discovers the conflict through other communication, typically from the equitable interest holder. The claimant, at times, files a notice under its title insurance policy seeking coverage for such disputes. As each case is different and depending on the specific title policy, a coverage determination will be unique to the situation. Therefore, it is important to be aware that contract for deed agreements exist and that they may impact a new buyer’s title or a lienholder’s interest in the property.

The claims team has encountered situations involving contract for deeds. For example, a lender may be preparing a foreclosure action involving a recorded mortgage or deed of trust when it discovers a lawsuit naming the lender’s borrower. The plaintiff alleges it entered into a contract for deed agreement with the prior owner several years earlier. The plaintiff states the prior owner failed to execute the deed to the plaintiff at the completion of the terms of the agreement and now seeks a recordable deed to the property, free and clear of the lender’s lien. The plaintiff also argues it timely satisfied all obligations under the contract for deed agreement before the seller sold the property to another and the lender’s lien attached to the property; and thus, alleges that the subsequent transaction is clouding the plaintiff’s title and is void.  There may be various legal and equitable defenses for the lender in such a lawsuit, but the time and expense incurred may be significant.

Practical Pointers

Before closing on a home, there may be ways to uncover and address a contract for deed agreement before the issue culminates into contentious litigation for new buyers and lenders. Here are some steps to consider:

  • If the seller asserts there is a tenant occupying the property, ask if there is or has been any contract for deed agreements (a/k/a installment purchase/sale land contract) with the tenant or any other party.
  • If there is a contract for deed and the intended purchaser has defaulted or violated the agreement, request written documentation identifying that the contract for deed agreement is cancelled. In certain cases, this may require legal action by the seller to establish that the equitable interest is extinguished. It is recommended that this documentation be recorded.
  • If the terms of a contract for deed are still in effect, however, the seller and the intended purchaser mutually agree to terminate the contract, it is recommended that a written termination of the contract for deed agreement between the parties be obtained and recorded.
  • Last, if the intended purchaser under the contract for deed is unwilling to release their equitable interest or asserts that the legal titleholder has violated the agreement, then contact the anticipated title underwriter and the proposed lender prior to the closing date to discuss what options may be available for the situation.

A contract for deed remains a resource to help some with the home buying process. However, the impact of such an agreement can later result in a challenge to the title and impact others when a dispute arises between the parties in the agreement. If you have questions, reach out to me or any member of the Alliant National claims team.

Resources:

Myslajek, C. (January 1, 2009).  Risks and realities of the contract for deed. https://www.minneapolisfed.org/article/2009/risks-and-realities-of-the-contract-for-deed.

Texas Property Code, Title 2 – Conveyances, Chapter 5 – Conveyances, Subchapter D. Executory Contract for Conveyance. https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm

The Office of Minnesota Attorney General. Contract for Deed. https://www.ag.state.mn.us/Consumer/Publications/ContractForDeed.asp

Vockrodt, S. and Ziegler, L. (March 2, 2022). Contract for deed: The promise of homeownership that often leaves Midwest buyers out in the cold. https://www.kcur.org/news/2022-03-02/contract-for-deed-the-promise-of-homeownership-that-often-leaves-midwest-buyers-out-in-the-cold

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

Russell Gonzales of Alliant National presenting a Crime Watch check to Tirey Smith and Joe Fernandez of Lone Star Title Insurance

Lone Star Title Company Of El Paso: Ever Vigilant In The Fight Against Fraud

With fraud rising across the title industry, it’s important to watch for both red and pink flags.

While working on a recent vacant lot transaction, Tirey Smith and Joe Fernandez of Lone Star Title Company of El Paso came to a similar conclusion about the property’s seller: something was up. Sure enough, their intuition soon proved right. The transaction’s seller was indeed a fraudster. By stopping the fraud, Smith and Fernandez became the latest honorees of Alliant National’s Crime Watch program, receiving $1,000 for their efforts.

Long before deeming the transaction fraudulent, Lone Star Title had been having trouble with their supposed seller. For one thing, they found it challenging to connect with the individual via phone. “This was very unusual because our voice messages usually get a call back, but in this transaction, the seller wouldn’t call back,” said Smith and Fernandez. “She only communicated through emails, including with her own agent!”

However, a lack of communication was the tip of the iceberg. From the beginning, the transaction raised numerous questions. As a vacant lot, the property was assessed to have a low tax value. Yet at the same time, it carried several liens – including one for a substantial amount of $15 million. Additionally, the Deed of Trust for this lien revealed that the seller had used the property as collateral for an equipment loan. Smith and Fernandez indicated that several other notes for equipment loans existed and were connected to the $15 million loan.

The agents thankfully recognized several of the entities listed as the note’s borrower, as Lone Star Title Insurance had done business with them in the past. Because of this connection, Smith and Fernandez were able to speak directly to their point of contact. They confirmed that his wife’s name was the same as their seller’s, that she owned the property in question, and that the property had been given as collateral for the equipment loan.

While all of this checked out, other aspects of the transaction did not. The two agents determined, for instance, that the wife of their contact had an email address that did not match what they had on file. Perhaps most importantly, they discovered that her property was not actually listed for sale. The supposed seller became pushy when later confronted by these facts. She also behaved suspiciously by not wanting to go to the title company to sign and floating the idea of getting their own notary. At this point, Smith and Fernandez determined they had seen enough. They stopped the transaction from going forward and began informing all relevant parties of what had occurred.

“There is a certain feeling of satisfaction when you [help] stop a fraudulent transaction from happening,” said Smith and Fernandez, reflecting on the experience. “[We were] proud that this fraudster couldn’t get one by us.” This perspective is reflected in the larger culture of Lone Star Title Insurance, which has invested significantly in education to ensure that agents are adequately equipped to detect and prevent fraud. Yet as Smith and Fernandez pointed out, cutting down on fraud in the title insurance industry requires a broader approach. All industry stakeholders must come together to stop bad actors and lower the cost of claims. “Programs like Alliant National’s that tackle fraud prevention are both helpful and necessary for the protection of the title agent and the client,” they said.

In short, these programs act as an additional incentive for agents to remain watchful throughout the lifecycle of each transaction, which, according to Smith and Fernandez, can make all the difference in the world. “The only way to guard against fraud is to stay vigilant, ask questions, and always trust your ‘gut,’” they said. “Don’t ignore [any] red flags – or pink ones for that matter!”

By staying vigilant, Smith and Fernandez exemplified what the title industry can be at its best. It is a critical vanguard that protects property rights and makes a positive and tangible difference in the lives of its customers. “The agents and the actual owners of the property were very surprised and grateful that we had paid close attention to what was happening on the seller’s side of this transaction,” they said, echoing this sentiment.

Are you an Alliant National agent that has stopped a fraudulent transaction from moving forward? Learn more about our Crime Watch program!

a man walking toward a house avoiding pitfalls along the way

Claims Tails: Top 7 lender foreclosure issues, and how to avoid them

As borrowers struggle with increased prices for almost everything, it’s no surprise that making monthly mortgage payments has also been an issue. In the last few years, it has been reported that foreclosures have steadily increased.[1] Thus, lenders have sought to exercise their rights granted under either a mortgage, security deed, or deed of trust to force a sale of the collateral due to the non-payment of the debt.

In many cases, whether it is a purchase money loan or a refinance, the lender may purchase and obtain a loan policy of title insurance to protect the lender’s interest from a variety of covered risks.   

As a lender prepares to initiate a foreclosure either by a judicial foreclosure or a non-judicial foreclosure, it may run a title search on the property to determine ownership along with other liens, judgments, encumbrances, and easements involving the property and the borrower. Title matters that present themselves involving the validity, enforceability or priority of the insured mortgage lien that were not excepted or excluded from coverage, and occurred prior to the date of the title policy, may lead the lender to submit a notice of claim to the title insurer seeking a coverage determination under the title policy.

The top seven title issues submitted by lenders to the Alliant National claims team include:

  1. Unreleased prior lien or mortgage;
  2. Spousal marital status is missing or is incorrect on mortgage;
  3. Spouse does not execute the mortgage;
  4. A notary acknowledgment issue;
  5. Error in the legal description or the legal description is missing;
  6. The mortgage was not timely recorded; and
  7. A complete copy of the mortgage was not recorded (i.e., missing a page).

Happily, strong post-closing procedures and attention to detail can easily prevent each of these issues. Let’s look at a scenario and use it to analyze a few different situations.

Scenario

An unmarried couple – we’ll call them the “buyers” – enter into a purchase contract with John Doe (the “seller”). The sale is scheduled to occur in 30 days. The buyers let you know that they are so excited as they are getting married in two weeks and that this is going to be their first home. The seller has two mortgages or deeds of trust on the property, as well as a recorded monetary judgment. All are properly indexed in the county land records. The parties are ready to close on schedule. 

First situation: Thirty days later, the buyers are now married; however, the prepared deed to vest title to the buyers, and the new mortgage or deed of trust shows them as unmarried. What do you do? 

Of course, one should not proceed with having the documents executed until they are corrected to reflect the proper marital status as of the date of closing. It is also important to mention here that one should also verify the proper names of the parties (including business names, trust, etc.), and that the names are correctly spelled.

Second situation: The closing occurs. The documents are executed but the notary misses acknowledging one of the pages in the mortgage or deed of trust for one of the buyers. The instrument is then recorded.

In this case, it’s important to have the mortgage or deed of trust re-executed, re-acknowledged and then recorded in the county land records. However, in some states, there may be an option to have the notary execute a Notary Affidavit. Check with your state to see if the latter is available and the cases for which it is appropriate.

Third situation: The closing occurs. The instruments are not sent to the county land records for recording until 60 days later.

Because of the delay in recording, it’s possible for another interest holder or lienholder to record an instrument in the “gap period,” the time between the closing date and the recording date. Keeping the gap period small lowers the risk that someone else will record an instrument that could challenge the lender’s priority.

Fourth situation: The closing occurs. The lender prepared the mortgage, and it identifies that an Exhibit A will be attached to show the property’s legal description. The mortgage is recorded without Exhibit A being attached.

In this case, it’s important to promptly have the mortgage or deed of trust re-executed, re-acknowledged and attach Exhibit A with the legal description; and then record in the county land records. In a few states, there may be an option to remedy the matter with a correction affidavit. Check with your state to see if the latter is available.

Fifth situation: The closing occurs, and the funds are disbursed. No additional review or follow up with the prior lenders or judgment creditor is conducted for the recorded release or satisfaction of the lien. One year later, these have not been released in the county land records. The current lender is now foreclosing, and the new foreclosure title search shows the items as unreleased in the county land records.

We understand that there may be challenges in getting the respective party (lender or creditor) to record a release or satisfaction if it is on that party to do so; however, this is part of the post-closing process. Being persistent and diligent will help ensure that the county land records accurately reflect the status of the mortgage or lien. There are several states that have enacted statutes that impose on lenders and creditors a prescribed time limit to record a release after payment. Also, in a few other states, a title company or a title insurer may have the ability to execute a release if certain requirements are met and if the lender or creditor fails to do so. Check with your state to see what options are available.

As you can see, title companies can impact the lender’s foreclosure process in a big way. By taking the time to catch the “little” things, you can help reduce the likelihood of claims submitted by lenders under loan policies.

If you have any questions, we’re here to help! Please feel free to reach out to me at: mhawkins@alliantnational.com

Resources:

Bates, M. (2024, April 11). ATTOM: Foreclosure Filings Increased 3 Percent in Q1. https://mortgageorb.com/attom-foreclosure-filings-increased-3-percent-in-q1

Fabino, A. (2024, March 13). Map Shows States Where House Foreclosures Are Rising.  https://www.newsweek.com/housing-foreclosure-rise-states-affordability-crisis-1878775.

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.


[1] Bates, M. (2024, April 11). ATTOM: Foreclosure Filings Increased 3 Percent in Q1

magnifying glass looking at an aerial view of a neighborhood

Legal Descriptions: Wait! I Can’t Locate My Real Property 

In the automotive world, each vehicle is uniquely identified by a vehicle identification number (VIN), a distinct code used by the car industry. This identifier is used in various ways, such as for insurance and department of motor vehicles records, ensuring each vehicle is clearly and accurately tracked.

There is a similar concept that applies in the area of real property, and it’s not the parcel identification number shown on a county appraisal district or a property appraiser or assessor’s website. The true identifier for real property is the property’s “legal description.” However, errors with a property’s legal description can lead to complex issues affecting transactions. Let’s discuss some common issues and strategies to prevent and address these problems.

Legal descriptions come in various types, such as metes and bounds, or plats, just to name two. The legal description is created by a professional surveyor and is used to locate and identify the real property it describes. This information is located on deeds, deeds of trust, mortgages, and other instruments pertaining to real property. Without a legal description, it is nearly impossible to determine where a property is located and the boundaries of the property on the ground. Absent a legal description, it is also extremely difficult to determine who holds title to the property, who can convey title, what property is being pledged as collateral to secure a loan, and much more.   

At Alliant National, the claims team regularly sees cases involving legal descriptions. Here are just a few of the more common issues:

  • the legal description is not included with the recorded deed, mortgage, or deed of trust;
  • the legal description is incomplete;
  • the legal description has typographical errors;
  • the legal description references an incorrect subdivision or references an erroneous plat book or page; or
  • ownership of property is being challenged due to a gap in the property or an overlap of the property’s legal description with that of a neighboring property owner.

When a legal description is missing or not correctly identified in an instrument, it may result in a title claim involving intervening conveyances or liens on the real property. In some cases, a person may not be able to convey title to property they believe they own, or they may face challenges from others who believe they have better title.

Legal description issues can be timely or difficult to cure. In some states, there are statutes that permit certain legal description errors to be corrected through the use of a correction affidavit. However, states that have such corrective statutes generally limit their use and have certain requirements that must be met before a correction affidavit may be utilized. If the situation is not covered or the requirements are not met under the statute, then a correction affidavit is not available. In those cases, it may require a corrective instrument be obtained from a party or costly litigation. Even though it is not an exhaustive list, the Resources section below includes links to a few states’ corrective statutes.

Familiarizing yourself with your state’s laws is crucial to understand if there are corrective statutes relevant to legal descriptions, along with their specific limitations and requirements.

Happily, experience teaches that attention to detail can significantly reduce the occurrence of legal description issues. Here are a few tips for avoiding legal description headaches:

  • Purchase Contract and Addendums. If parties make changes to the purchase contract’s legal description, make sure to have those changes incorporated into your real estate closing platform to ensure, when it is time to print documents, that the documents properly reflect the accurate legal description.
    • For example, the parties may have originally contracted for Lots 1, 2 and 3, Main Plat. Subsequently, through an addendum, the contract now only dealing with Lots 1 and 3, Main Plat. Make sure the documents reflect only Lots 1 and 3, Main Plat.  
  • Who else should know of changes? Let your team and any third-party vendor know of any changes made to the legal description since the last time products were obtained and request that the products be revised, and new products issued to reflect the change. Then, distribute the revised products to the proper parties.
    • Remember to let the lender know of any changes to the legal description as soon as you know. Lenders may use this information to obtain an appraisal of the property to determine its value and may have to adjust the lender’s underwriting review.
    • In some cases, if the lender prepares the deed of trust or mortgage, it may pre-print the legal description on the instrument.  Review the instrument prior to closing for accuracy of the legal description. If the legal description is inaccurately reflected, contact the lender immediately to discuss.
  • Review and ask questions. If a survey was purchased or a prior survey is being reviewed showing the property’s legal description, review the survey for any differences shown in the seller’s vesting deed (and those in the chain) against what is being prepared to be conveyed. If there are differences, ask questions and review with the surveyor and the parties to clear up any discrepancies and document your file indicating how the parties addressed and resolved the situation. 
  • The parties. Review all documents prior to the closing to ensure they accurately reflect the legal description the seller intends to convey and the buyer intends to purchase. Don’t forgot to review and compare any legal description changes that the parties agreed to in the contract or purchase contract addendum.
  • Recording. When sending the instrument to the county recorder’s office, remember to include the correct legal description with the instrument.
  • Policies. When a final title policy is issued, review to make sure the correct legal description is included in Schedule A before sending it to the recipient.

Taking a moment to thoroughly address a property’s legal description can greatly reduce potential errors that could lead to claims. If you have questions, please feel free to reach out to me or any member of the Alliant National claims team. We’re eager to help!

Resources:

Colorado Revised Statutes Title 38, Sec. 38-51-111 – https://leg.colorado.gov/colorado-revised-statutes

Florida Statutes, Title XL, Sec. 689.041 – http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0689/Sections/0689.041.html

Texas Property Code, Title 2 – Conveyances, Chapter 5 – Conveyances, Sec. 5.027-5.031 https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

illustration of a woman holding HELOC paper in front of a house

A Claims Tale: All Mortgages Are Not Created Equal – HELOC Mortgage Payoff

Dealing with mortgages and deeds of trusts in a transaction seems fairly easy to address at a closing, you would think. On occasion, we see a security instrument known as the Home Equity Line of Credit (HELOC) Mortgage or Deed of Trust – a revolving credit line secured by the home’s equity – that is not treated the same way as a traditional mortgage. HELOC instruments may require additional steps to shut down and release the lien from the property.

Let’s consider a scenario:

Mr. and Mrs. Smith are the previous owners of property located at 123 Main Street, Anywhere, USA.  The owner has two loans secured by the property: a $150,000 traditional mortgage and a $300,000 HELOC mortgage. Mr. and Mrs. Smith sell the property to the buyer, Tim Jones, for $475,000. As part of the closing process, the title company sends the payments to the lenders by wire transfer.

Two years later, Tim Jones receives a notice of foreclosure from the home equity line of credit lender. The lender asserts that Mr. and Mrs. Smith’s HELOC loan has a balance and was never closed. The HELOC loan once again has a balance of $300,000, and the loan is now in default. Tim Jones submits a claim.

The Lesson:

A HELOC loan typically includes a clause that gives the borrower the ability to “borrow, repay, and reborrow” from time to time, up to a maximum credit available, through a maturity date.  

In our scenario, the lender may have applied the payment on the HELOC loan as a “pay down” on the loan and did not close down the account and cancel the loan two years earlier. 

For a HELOC loan, the lender may require additional steps be taken to close out the loan and have the lien released from the property. In certain cases, the lender requires that the borrower execute a “Close out / Close Down” letter. Not only does the borrower(s) have to sign the letter authorizing the account to be closed, but the signed letter has to be delivered to the lender instructing the lender to do so. In some cases, a lender may even have a specific form to be used to effectuate the closing of the account.

Practice Points:

If you are planning to mail or wire payoff funds to a HELOC lender, as a best practice, if you see that the loan is a HELOC –

  • carefully review the lender’s instructions to close out the account; 
  • ask questions to ensure all requirements are met;
  • deliver the borrower’s signed close down the account letter concurrently with the payment; and
  • keep a copy of the letter along with evidence on how and when you sent the “close out / close down” letter to the lender. 

Even if there is a zero-dollar ($0) balance on the borrower’s account on the day of closing, you still want to ensure that the account is properly closed, and the lien released. 

When you come across a HELOC mortgage, be aware that only requesting a loan payoff statement from a lender may not be enough to obtain a cancellation and release of the HELOC mortgage. By recognizing that there is a difference between a traditional mortgage versus a HELOC mortgage when it is time to pay off the loan, you will be well on your way to having the lien properly cancelled from the property.

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