Protecting Your client - REO deals and Title Insurance
Compliments of RGS TITLE, LLC - 12/11/2008
In almost every REO deal the bank will respond to your NVAR/VAR contract offer with a REO/bank addendum containing significant changes to your offer. Bank terms we often see include the following:
In the event of conflicting terms the bank's terms will prevail. Translation: Terms in your NVAR/VAR offer are out the window if they differ at all from the bank addendum. Solution: Read the bank addendum and have the buyer and bank initial changes to unacceptable terms.
The bank will deliver a "Special Warranty Deed". Translation: If a title problem pops up after closing, the bank only has to help correct the problem if it was created during the bank's short period of ownership. Title problems that existed before the bank's ownership are now the problem of the buyer and the buyer's title insurer. Solution: Close with a neutral settlement company that you know and trust (one that is not primarily focused on the bank/REO and their interests) and obtain a standard or enhanced "ALTA" owner's title insurance policy.
The bank's addendum says the bank gets to choose the settlement company, the bank chooses the title insurer and the buyer will be sold whatever title insurance the seller's title insurance company is willing to approve (possibly not an ALTA policy). Translation: Your buyer gets what the bank's settlement company is willing to give. There is no neutral settlement company to spot and help remove title risks and no neutral settlement company to issue a customary "ALTA" title insurance policy insuring "marketable title". Solution: Per Federal law (with federally related home loans) and per Virginia law (on most residential deals) the buyer has the RIGHT to choose the settlement company. The bank cannot require the buyer to go with the bank's settlement or title insurance company...it is not allowed. The buyer should amend the bank addendum by listing a neutral settlement company to conduct the buyer's side and to issue title insurance.
SOMETHING ELSE TO THINK ABOUT:
WHAT IS AN "ALTA" TITLE INSURANCE POLICY AND WHY SHOULD MY BUYER CARE?
ALTA (American Land Title Association) creates standard forms used to issue title insurance to lenders and to buyers. Just as standard Fannie Mae/Freddie Mac approved Note and Deed of Trust forms are used across the country, these ALTA forms are used nationwide so everyone knows what they are getting in the basic form. The issuing title agent will add provisions for the specific items related to your buyer's home (lot number, purchase price, easements, etc.) Use of the ALTA forms provides uniformity and efficiency.
WHAT'S THE DIFFERENCE BETWEEN MARKETABLE TITLE AND INSURABLE TITLE?
NVAR and other residential contracts call for "marketable title", which very basically really just means being able to transfer ownership without known or possible problems that a reasonable person would object to. Any issues and possible problems should be addressed before closing and before a customary ALTA policy will be issued, since ALTA policy forms do insure marketability of the property. The REO/bank terms often only offer "Insurable title" which means a title insurance company will issue coverage on the property and may do so despite possible known problems by "insuring over" them as acceptable risks. The problems may still exist, however, and could affect a future sale or refinance. Without the assistance of a trusted settlement company, your buyer may get insured title coverage that is diminished by lesser coverage provisions or non-standard exceptions added to the form policy.
THIS ALERT IS FOR GENERAL INFORMATION AND IS NOT INTENDED AS TAX ADVICE. YOU SHOULD CONSULT A TAX ADVISOR TO DETERMINE HOW THESE PROVISIONS MAY AFFECT A PARTICULAR TRANSFER.
The information in these materials was prepared by the law firm of Shreves Schudel Devol Saunders Jackson Clarke and Parello, PLLC in its capacity as general counsel to RGS TITLE LLC. It is not intended nor should it be relied upon as legal advice, without consulting independent counsel for specific advice on your particular circumstances.