The Power of a Hold Harmless Clause in Real Estate Investing
Too many real estate investors want a “Clear and Marketable” title from a seller when they purchase a property. In a perfect world every title should have no deficiencies or defects when you buy a home, rental or commercial property. For many reasons including defaulted mortgages and code violations and other liens or judgments, clear title is more of a rarity than common place.
Very often the closing agent doesn’t check the “chain of title” for defects or get lien letters from the local municipality until just before closing. The reason is simple, it costs the closing agent money to do the title research (pull title) and if the sale doesn’t close, he has an out-of-pocket cost that may not be recoverable.
Savvy investors look to title deficiencies as a way to make additional profits rather than an excuse not to close. Part of the problem with title deficiencies is that some can be fixed (cured) before the closing and others take more time to cure. They all fall into three basic groups, either they can be cured before closing, those that need time to fix after closing and those that can only be cured through court action.
Following are just a few examples –
Type #1 – Cured before closing: These are usually judgments, liens, utility bills, property taxes, property assessments or fines that can simply be paid at closing usually by the seller. One “major” issue is IRS liens which can be negotiated and paid, allowed to stay on the property or passed on to the individual who they were originally filed against. There are huge opportunities for investors with these IRS tainted properties.
Type #2 – Cured after closing: In some cases the amount of repairs needed to cure a lien or violations on property make it unfeasible to do all the work before the closing especially if permits have to be obtained. Some municipalities want the work completed before they will reduce or eliminate liens against the property. Even tearing down a part or all of a structure on a property usually requires a demolition permit before the work starts.
These liens are an opportunity for investors who are willing to get the repairs and permitting completed as required by the municipality. If the seller had the time and/or funds to do the required work, he could get much more for the property. Instead he typically gets pennies on the dollar from a savvy investor buyer. There is always a risk that the municipality won’t reduce the lien very much and the deal can become a loser for the buyer. This is why it is important to know the municipality and how investor friendly they are before you start down the path assuming they will cooperate. Never be afraid to sue an unreasonable municipality if that’s what it takes.
Type #3 – Must be cured by court action: The most notable of these are tax deed sales and mortgage foreclosures. In foreclosures they can be judicial or non-judicial depending on which state the property is located. Judicial foreclosures take an extended court action to finalize while non-judicial don’t require as much court action but still require a public sale. These foreclosure sales can cause “hiccups” in the chain of title if not done properly by the foreclosing attorneys – which does happen by careless title work.
Tax deed sales usually do not come with a new deed but rather some form of “Certificate of Deed” which has clouded title. To get a marketable title, the new owner has a couple of options. First, he can do what is called a Quiet Title Motion to the court to “quiet” any title claims form the past. Secondly, he can sit with the property and wait for the Statute of Limitations to pass (sometimes 5 years or more) or he can sell the property to an unsuspecting buyer using a Quitclaim Deed. The quitclaim deed transfers all liability to the new buyer and he will have to deal with the potentially devastating title issues.
Some municipal liens that have to be finalized for payment after being cured or repaired must be approved by a Special Master, Magistrate or even the city or county commissioners. While these are usually referred to as non-judicial matters, you wouldn’t know it when you are trying to resolve your case. These could take further legal action to finalize, so ask a lot of questions before buying the property so you can get a feel for what will happen BEFORE you have money at risk in the property.
In summary, there exists the opportunity to make large profits by benefitting from title issues and not running from them. You must do your research and get involved with the city or county that will ultimately determine you fate once you own the property.
To your limitless success,