You’ve found the perfect investment property. Congratulations!
As you go through the purchasing process, something comes up and grinds the transaction to a halt: a cloud on title.
A what?
A cloud on title indicates that something is preventing the title from transferring from one party to you as a buyer.
A cloud on title is a HUGE roadblock when investing in a new property.
So, what can you do?
There are specific ways you can remove a cloud on title … you just have to know how … which is exactly what we’ll discuss in this article!
What is a Cloud on Title?
Let’s start with the basics: what the heck is a cloud on title?
A cloud on title is a document, claim, or other legal problem related to the title of a property.
These titles prevent the current property owner from transferring the title to a new owner, which is — you guessed it! — essential for a successful sale.
For example, if a lender has placed a property under foreclosure or placed a lien on an existing mortgage, the current owner would not be able to sell that property until they’ve resolved these financial challenges.
Potential buyers often do not discover these issues until performing a title search.
What A Cloud on Title Means for the Buyer
When a property has a cloud on title, a potential buyer won’t be able to secure a mortgage or further the sale until these issues have been resolved.
This drags out the sale process, so it could be months — or even years! — before you can take ownership of the home.
What A Cloud on Title Means for the Seller
If you’re trying to sell a home, such as an investment property, a cloud on your title will make it difficult to find a buyer and complete the transaction.
This means you could end up stuck with a property you don’t want for an extended period of time, eating profit every month of the way.
Common Clouds on Titles
There are several issues that can affect a property’s title.
Here are some of the most common clouds on titles to watch out for in 2024.
Illegal Deeds
An illegal deed happens when a real estate title is fraudulently transferred from one party to another, often with forged documents.
Criminals will sometimes use this strategy to take control of a property without buying it, and then attempt to sell the property with a forged title.
Talk about a red flag!
If you’re attempting to buy a property and find that it has an illegal deed, you will need to track down the legitimate owner of the property to resolve the situation before you can purchase it.
This can be tremendously time consuming, and depending upon the situation, it might be better to cut your losses and look elsewhere for an investment property.
Easements
An easement is a document that gives a third party legal rights or access to a property in some capacity.
For example, your property may have a right-of-way easement for a local utility line.
An easement on a property doesn’t necessarily mean that you can’t purchase it.
However, you will need to either respect the existing easement or negotiate with the easement holder to purchase it separately … which can be a pain!
Errors
If there are errors on the existing property title, it could cause problems with the sale.
These errors will need to be corrected before the sales process can start and usually happen as a result of mistakes in the clerical process.
Liens
Did you know that liens are one of the most common clouds on titles?
It’s true!
If a homeowner fails to pay their mortgage or property taxes, the lender could place a lien on the property as collateral.
In order for the sale to go through, the current homeowner will need to pay their debts associated with the lien.
Alternatively, the buyer can pay off the lien as part of the sale.
Did you know that you can passively invest in tax liens and flood your bank account with payouts of $885.56, $1,248.33, $2,061.21 or more? Learn more in our Government Backed Tax Yields course.
Foreclosure
After a certain number of missed mortgage payments, a bank will initiate the foreclosure process.
You can still buy foreclosed assets, but keep in mind you will need to make the purchase from the bank rather than the original owner.
Encroachments
Simply put, an encroachment is an invasion of property rights. This usually happens in the form of a fence or other physical structure on the property.
While you can still buy a property with an encroachment on it, it can complicate the valuation process and become a major inconvenience for the owner.
Probate Issues
If a house is being passed down as part of an inheritance, it will spend time in probate.
It is possible to buy a house that is in probate, but the proceeds will likely go to the estate rather than going to the person selling the property.
How to Resolve a Cloud on Title
If you have your heart absolutely set on a property — but it has a cloud on title — what can you do?
Here’s how to resolve a cloud on title.
Lien Payment
If there is a lien on the property, you will need to resolve the outstanding payment amount with the lender to move forward with a sale.
Either the seller can pay the amount owed in full, or the buyer can pay it off as a condition of the sale.
Quiet Title Action
If the seller of the property is unable or unwilling to pay off their existing debt, you can file a quiet title action with your local court.
A quiet title action is a legal petition to transfer the title to you, without transferring any existing liens on the property.
Quitclaim Deeds
Another option is to have the seller file a quitclaim deed to relinquish their rights to the property. This approach does not resolve any existing liens.
However, it can be a good option if there are errors on the initial title.
The Bottom Line: Cloud on Title
A cloud on title for the home you’re interested in purchasing can be frustrating, and impede the transaction.
By using a quiet title action, quitclaim deed, or lien payment, the cloud on title can be addressed and the transaction can go through smoothly — a big step towards your real estate investing dreams coming true!
