REAL ESTATE: Beware of Property Title Fraud!

June 11, 2010
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Rafik Tadros, vice president of Glendale-based Investors Title.

Rafik Tadros, vice president of Glendale-based Investors Title.

Mary Stratton (not her real name), a divorced mother of two, was out $5,900 after writing a check to cover the first and last month’s rent and the security deposit on a 3-bedroom, 2-bath Upland, Calif., home she thought she was leasing from the nice homeowner who handed her the keys.

It turns out the friendly, well-dressed gentleman taking her money didn’t own the property at all, but simply stuck a “For Lease” sign in the ground on a bank-owned property that had been vacant for months and then advertised it in the local Penny Saver a “few hundred dollars under market” to make his phone ring.

“The fraudulent owner even spent a couple hundred dollars of his own money to landscape the front yard,” said Rafik Tadros, vice president of Glendale, Calif.-based Investors Title.

“There are vultures out there driving these neighborhoods,” added Tadros describing one popular way these scam artists like to snare their unsuspecting prey. “They look through the window, and if they see the property is abandoned, they’ll break in, change the locks and try to lease it. They take everything and you’ll never see them again.”

Tadros has heard scores of similar such stories, none of which he said ever had to happen. If the victim had used a real estate agent, that agent could have contacted his or her title rep who could have run a title search to determine the rightful owner of the property.

With so many bank-owned or foreclosed properties on the market, and with thousands more to come, however, Tadros is not optimistic about stemming the rising tide of real estate fraud any time soon. In response, he is trying to educate all parties involved in real estate transactions about the vital role that title companies play in ensuring people get exactly what they pay for.

Essentially, a title company acts like the conductor of an orchestra, which has many players. But instead of directing the string and wind and percussions sections, the title company coordinates the interests of all parties to a real estate transaction, including the buyers, sellers, mortgage lender and the real estate agents, to ensure they’re fully satisfied and completely in tune with one another.

After a sales contract between buyer and seller has been signed, a copy is sent to the escrow company, which in turn sends the title company (usually designated by the buyer or the buyer’s real estate agent) an “open order sheet” to begin researching the complete history of the property and its ownership. This search will identify any liens, defects or encumbrances on the title. The title company will then advise the various parties to the transaction on ways to clear any liens or claims on the property so the new buyer can receive a clear and marketable title to the new property.

The reality of this short-sale dominated market is that smart Realtors, especially those who have been burned a few times by deals buried in undisclosed liens and judgments, won’t take a listing or accept a signed purchase contract until first getting the title company involved. They’ll often ask their title rep to provide a property profile that will help identify the number of liens the homeowner faces, including how many mortgages (first, second, third and fourth) were taken out at a time when lenders grossly loosened their lending standards to increase market share and home owners willingly complied, using their homes as bottomless and easy-to-raid piggy banks.

Therefore, title companies at the behest of smart real estate agents are getting involved much, much earlier in the real estate transaction.

“When the economy is tough, it really affects real estate transactions,” Tadros said. “That’s because when the economy is good everyone has money and everyone is paying their bills. Right now, with the economy still hurting, there are a lot more clouds and defects on title.”

To run a title search today, it takes about three to four times longer than it did in a normal market. There are simply more liens, judgments, and loans to track down, not to mention the inevitable surprises and skeletons that always seems to crop up in so many short sales.

“We have to do twice as much work,” Tadros said. “A lot of the properties are over-encumbered. And that’s why you get all these short sales.”

Getting the title un-encumbered is what often separates a good title company and a good Realtor from their less successful counterparts.

Based on the experiences of real estate agents who use his company’s title services, Tadros said that a seller with four or fewer liens or judgments is generally regarded as a manageable situation. More than four, the buyer’s agent may decide to direct his or her clients toward other properties with fewer problems.

Not all liens are alike, of course. Owing VISA $500 is different from owing the IRS that same amount. The courts are also intolerant of deadbeat parents in arrears on their child support payments. Knowing that some creditors are less forgiving and flexible than others, many Realtors and brokers will steer clear of unconventional deals.

While a title company cannot tell a real estate agent client which liens to pursue or try to resolve, real estate agents and brokers working with a seasoned title company will be more confident and prepared to tackle and resolve some of the more difficult liens and judgments.

“One of our clients was able to help close a deal even though the seller was facing a $19,000 federal tax lien,” Tadros recounted. “They were able to help get the lien removed against the property owner, but keep the lien against the individual. So, the seller was able to sell his property and the IRS was able to keep the lien intact.”

In the more than 300 short-sales Tadros has observed and personally helped close, he said that real estate agents typically use one of three strategies in their negotiations with lien holders.

“Option one is to call the creditor and say, ‘Look, we’re in a short sale. Can you do a partial satisfaction of judgment,’” Tadros said. “This means, release the lien from the property but keep the lien against the individual.

“Option No. 2 is, ‘We’re in a short sale. We owe you $1,000. Here’s $200. In exchange, issue us a partial satisfaction of judgment.’ If accepted, the judgment will be removed against the property, but the $800 will remain as an unsecured judgment against the individual.

“Option No. 3 is for the seller to simply negotiate directly with the creditor outside of escrow. They might say, ‘I want this to go away,’ and start negotiating from there. Even if the seller offers just pennies on the dollar, this offer may be a far better deal for the creditor than if the property goes into foreclosure.”

Often the toughest liens to resolve, according to Tadros, are personal money loans.

“Friends owed money don’t always look at it from a business perspective,” Tadros said. “They look at it from a personal perspective. ‘I lent you money; we’ve been long-time friends, you didn’t repay me. No way am I going to help you do anything. I’d rather lose everything than help you.’

“People who take it personally and don’t look at it from a business perspective, those are the deal-killers.”

The best title companies will conduct the most thorough and comprehensive searches early in the escrow process. Besides searching all the real estate and public records within a county, town or city for a specific property, they will search the seller’s financial obligations as well, including publicly recorded past tax bills, contractor liens, homeowner association dues, etc. to ensure the title is clear for the proposed buyer.

“A lot of real estate agents will get regular property profiles that show just the recorded deeds against the property, which are the secured loans against the property, but they won’t show anything else.”

That’s too little, too late, according to Tadros.

“A buyer’s agent needs to do his homework and break down every aspect of the property and what the seller owes before escrow opens,” he said. “If you wait for escrow to open, you could find the seller has $2 million worth of liens.”

Should the title company detect any defects or clouds on the title, it usually contacts the escrow company, which will in turn contact the real estate agents. Tadros, however, said it’s not unusual for top-tier title companies to contact every principal in the transaction.

“When asked, we’ll talk to anybody,” Tadros said. “We’ll talk to escrow, the listing agent, selling agent, buyers, sellers —  anyone involved in the transaction that wants information. We’re going to try to clear up any issues beforehand.”

Because it’s possible for a lien, judgment or title defect to go undetected — given human error or outright forgery — title companies offer two kinds of title insurance: a lender’s title policy, which the mortgage company requires so that its investment (the loan amount) is protected, and the owner’s version, which protects the buyer’s interests.

Who pays for the owner’s policy varies from state to state and sometimes even within a state. For instance, on much of the West Coast, the seller typically purchases the owner’s policy for the buyer. On the East Coast, however, the buyer usually pays for the owner’s policy.

Once satisfied that the title looks clear and the lien holders will be satisfied, the title company coordinates with the mortgage lender to receive the Loan Documents for Closing. After receiving them, the title company reviews all forms and complies with the mortgage lender’s requirements for closing.

From these documents, the escrow company will complete the HUD-1 Settlement Statement. This settlement statement is one of the most important documents to sign, and is further reviewed at closing. Escrow and the lender will also prepare the deed and other documents necessary to comply with state and federal laws.

At closing, all documents will be explained to all parties prior to signing. Settlement will last about an hour. After closing, the title company disburses all the monies collected at settlement.

“People think escrow does all the disbursements,” Tadros explained. “But the new lender will fund only to the title company because the title company is issuing it a title insurance policy, which, in effect, says, ‘We got your money, now we’re going to pay off everything of record and we’re going to issue a clear title policy.’

“That’s why we do all the disbursements.”

The title company disburses the funds to pay off all lien holders and creditors who are secured against the property or are secured against the individual. It will also take out its title fees, which are regulated, and then return the remaining proceeds to escrow to cover real estate commissions and any refunds owed the buyer and seller.

Orchestrating all this — searching property title, spotting potential fraud, bringing to the table and having a meeting of the minds with all lien holders, issuing title insurance, coordinating payoffs, meeting deadlines, and seeking extensions – requires a very skilled and experienced conductor.

“You really have to know what you’re doing,” Tadros said.

That said, in today’s market, a title company’s place in any real estate transaction can’t be an afterthought; it has to be a forethought.

When consumers interview potential buyer’s agents to help them find a short sale, they need to ask them what kind of relationship they have with their title rep and title company. A casual relationship won’t do; they need to have a strong, supportive and fully committed relationship because too much is at stake, Tadros said.

“My experience,” he added, “tells me that whenever a professional and well respected title company is a full partner in the real estate transaction, the buyer has the greatesst opportunity for success.”

Reported June 9, 2010 by Peter Bennett


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