Frequently Asked Questions
- What is not covered by title insurance?
- What is a lien?
- What is a mechanic’s lien?
- What is an abstract of title?
- I’ve heard about people who have made money by buying property cheaply at mortgage foreclosure sales and then reselling it at a profit. What does this involve? Is it something I could do?
- What is Torrens or registered title?
- What is a contract for deed or land installment contract?
- What is the difference between actual title and record title?
- What is adverse possession?
- What is a variance?
- What does it mean when something is said to be grandfathered in for zoning purposes?
- Learn More: Real Estate Law
Title insurance provides valuable protection for property buyers. Like all forms of insurance, however, it does not cover every conceivable problem and it is important to understand its limitations. Title insurance is based on examination of the county real estate records, and generally will not cover problems arising from facts outside of the recorded chain of title. One common problem not covered by title insurance is boundary line issues, which would be revealed by a survey of the property (for example, it turns out that your fence is actually two feet onto your neighbor’s property). Unrecorded mechanics’ liens and unpaid public utility bills are other examples. The title insurance policy will describe many of the situations it does not cover; these same limitations will generally be found in an attorney’s title examination. A qualified real property attorney can assist in helping a buyer understand the limits of a title policy and can take care of issues not covered by the policy.
A lien is any legal claim on real property that acts as a security for the payment of a debt or other obligation. If the debt is not repaid as promised, the lender or the lien holder can foreclose its claim on the property and force a public sale to pay the debt. The most common form of a lien on property is a mortgage. While all mortgages are liens, not all liens are mortgages. Other types of liens are commonly encountered and part of the work of the real property attorney is to check for outstanding liens at the time a real estate transaction closes. These include such things as judgment liens resulting from a court judgment against the owners, mechanic’s liens resulting from recent improvements to the property, liens for unpaid taxes, and liens for unpaid municipal utilities such as water and sewer. Often, if a seller is divorced, the divorce decree will provide the ex-spouse with a lien on the couple’s property to be paid at the time of sale.
Mechanic’s and materialmen’s liens exist in most states to provide special collection rights to persons and businesses that make improvements to real property. They are of particular concern to the purchaser of real property, as the seller may have had significant work done on the property in anticipation of sale. If the seller has not yet paid for that work, mechanic’s liens can result. The definition of mechanics and materialmen usually includes anyone who provides services such as carpentry, plumbing, painting, and the like, as well as anyone who supplies building materials and supplies for the project. On any given project, the general contractor, the subcontractors, and the lumberyard and other suppliers will have mechanic’s lien rights. Some states also grant these rights to professionals such as architects, engineers, and surveyors.
The laws governing mechanic’s liens vary greatly from state to state. Commonly, however, the contractor has the right to serve the owner of the property with a lien claim or notice of lien and to record it as part of the county land title records when payment is not made for materials or services provided for the improvement of real property. If the lien is not paid, the contractor can commence a court proceeding to foreclose the lien and to sell the land in payment of the obligation. In some states, the contractor is required to file a notice of lien or to provide the owner with notices relative to the possibility of a lien, prior to commencing work on the property or supplying materials. Usually the time for filing a mechanic’s lien is short; commonly the lien must be filed within sixty to 120 days of the last day of work on the property.
Mechanic’s liens are of special concern, because in certain circumstances, they can result in an owner being forced to pay twice for the same work. Commonly, this occurs when the owner pays the general contractor in full for the work in advance. If the general contractor then fails to pay his subcontractors, the subcontractors may still have the right to file a lien and force the sale of the property if they are not paid. The fact that the owner has already paid the general contractor for the work may not be a defense. This problem can be prevented by obtaining mechanic’s lien waivers from all materials suppliers and subcontractors prior to full payment.
An abstract of title is a summary of the legal history of a piece of real property. It is used by title insurance companies as the basis for issuing title insurance and by attorneys examining title as the basis for their conclusions with regard to ownership. Despite its importance, the abstract of title is not a legal document and is not prepared by any governmental agency. Rather, it is a summary prepared by a title company or abstracting firm. To prepare the abstract, an employee of the firm, called an abstractor, reviews all of the records on file with the office of the county recorder or similar government land title office, which relate to that particular piece of property. The abstractor prepares a short summary of each transaction, arranged in chronological order, which identify the instruments (deed, mortgage, etc.), names the grantors and grantees, lists the dates the instruments were signed and filed, and, where appropriate, provides a summary of their contents. This sequence of deeds and other documents is often called the property’s chain of title, and the function of the abstract is to summarize it accurately.
The abstract of title will have as its first entry a summary of the transaction by which the United States Government conveyed the land to a private party for the first time. It then shows every transaction affecting the land from that date up until the present. A new abstract is not prepared each time the property is sold. Rather, at each sale the abstract is updated to reflect new transactions since the time of the last update. Each time the abstract is updated, the abstractor will also conduct a search for judgments, bankruptcies, tax liens, and other similar documents that could affect title to the property. Generally, a purchase agreement will provide that the seller will pay for and provide an updated abstract to the prospective buyer for examination.
While an abstract is not a legal document and can be replaced at any time by a qualified abstract or title firm, it is still an important document to safeguard. A new abstract is expensive. Depending on the history of the property, creating a new abstract can cost several hundred to a few thousand dollars. Not all property, however, requires an abstract of title. If property is governed by the Torrens or land title registration system, the owner received a governmental title to the property, which eliminates the need for the abstract.
I’ve Heard About People Who Have Made Money By Buying Property Cheaply At Mortgage Foreclosure Sales And Then Reselling It At A Profit. What Does This Involve? Is It Something I Could Do?
There are indeed companies and investors who specialize in buying foreclosed properties and make money doing so. This is, however, an extremely high-risk form of investment that is definitely not for the inexperienced or faint of heart.
Consider the differences between a sheriff’s sale and a standard real estate purchase. In a normal sale transaction, the seller gives the buyer an opportunity to inspect the property, and provides promises and warranties regarding title. These promises are in turn generally backed up by a title insurance policy or an attorney’s title opinion. In a sheriff’s sale, none of these safeguards exist; the rule is caveat emptor, or let the buyer beware. The deed that the sheriff conveys to the purchaser has no covenants, warranties, or representations of any kind, and the purchaser generally has no recourse if there is something wrong with the title to the real estate.
Another major problem with purchasing at a sheriff’s sale is that there is little or no opportunity to inspect the property prior to the sale. In general, the delinquent borrower still lives in the property at the time of the sale, and may be at best uncooperative (and at worst downright hostile) if asked to allow inspection by a prospective purchaser. Moreover, in many states the borrower will be allowed to remain in the property for some period of time after the sale (the redemption period); this is often up to six months and sometimes as much as a year. During this period, the borrower obviously has no incentive to maintain the property, pay taxes, or utility bills, and may actually be antagonistic enough to deliberately damage the property.
These problems explain why the mortgagor/lender is usually the only bidder at a sheriff’s foreclosure sale. With experience and the assistance of competent counsel, a purchaser can indeed successfully obtain good title to property, often at bargain prices, through the foreclosure sale process. But this is an activity best left to those with expertise in the area and a high tolerance for financial risk.
The United States has two systems for determining real estate title, which exist side by side in some jurisdictions. The most common and oldest is the abstract system. The abstract is a summary of all deeds and other instruments relating to a particular piece of property that have been recorded in the county land office. The attorney or title insurance firm reviews the abstract, traces the various lines of ownership from person to person and deed to deed over the years, matches mortgages with satisfactions of mortgages and so forth, finally arriving at a conclusion as to who owns the property and what liens or encumbrances are still valid and in force.
In some states, particularly Illinois, Hawaii, Massachusetts, and Minnesota, the abstract system is being gradually replaced by a system of registered land titles. Land is initially registered through a court proceeding. An examiner of titles or similar government official will examine the abstract of title, and draw a conclusion as to ownership. A court action is then commenced to obtain a decree of registration confirming that ownership, with notice being given to anyone in the chain of title who might have grounds to object.
At the end of the process, the owner obtains a certificate of title to the property. Much like the title to an automobile in some respects, the certificate is conclusive evidence as to the ownership of the property for most purposes, and any liens or encumbrances must be recorded (or memorialized) on the certificate to be valid. When ownership of the property changes, the old certificate of title will be canceled and a new certificate issued in the name of the new owner. The registration process greatly simplifies the task of examining and determining title. This system is also referred to as the Torrens system, after its developer Sir Robert Torrens (1814-1884).
By far the most common method of financing the purchase of real property is through a traditional promissory note secured by a mortgage. Some states, however, provide for an alternative financing method, most commonly used in transactions between private parties, called a contract for deed or land installment contract. At the risk of over simplifying, such a contract looks like a purchase agreement contract but effectively acts as a mortgage.
In a traditional mortgage finance transaction, title to the property transfers to the buyer on sale. The buyer borrows the money to pay the seller in full, and then gives a mortgage back to the lender. With a contract for deed, however, title stays with the seller. The contract will provide for a purchase price and monthly payments, and provide that if the buyer completes making the specified payments, the owner will then provide the buyer with a deed to the property. Contracts for deed are often used for short-term financing (of a few years or less), and may contain a balloon payment clause. The contract is then said to balloon on a specified date at which time the entire outstanding and unpaid balance of the purchase price will be due and payable. The hope is that the buyer will be able to use the contract period to find and qualify for financing.
In those states that allow them, terminating contracts for deed or land installment contracts is frequently easier and faster than foreclosing a mortgage. If the buyer fails to make the required payments (including any balloon payment when due), the seller can cancel the contract, usually by serving notice on the buyer. If the buyer fails to cure the default within the time provided by statute, he or she can lose the property and any money paid to date.
The concept of actual title to a particular piece of property refers to who actually owns it. In real estate law, however, title examiners and title insurance companies are governed by the concept of record title. The basic principle behind various statutes allowing recording of deeds and other instruments of title in the county in which the property is located is that buyers and other interested parties are entitled to rely on the record of title as reflected in the county records and to make decisions based on that record.
An example will serve to illustrate this distinction. A prospective buyer has title to a piece of property examined. The examination shows an unpaid mortgage that the seller did not reveal. There are two possibilities. The first is that the mortgage is unpaid and will need to be paid if the property is to be sold. A common problem, however, is that the mortgage actually was paid in full years ago, but the owner forgot to obtain (or record) a satisfaction. The seller’s actual title is good, in the sense that the mortgage has in fact been paid and no one can foreclose on it. But the seller’s record title is not good, because the real estate records do not reflect this fact. In either case, the seller lacks marketable title, and the situation would need to be corrected before the property can be sold.
Making sure that all appropriate steps are taken to ensure that the record title to property accurately reflects its actual ownership is one of the important services that an attorney working in the area of real property law can provide a buyer or seller.
Adverse possession is a right to use or own property that is the result of continued use and occupancy over a period of time, generally ten to twenty years depending on the state. If a non-owner of property occupies and uses the property without the permission of the actual owner for long enough, the law will find that the actual owner has lost his or her rights in the property and ownership has transferred. Since the doctrine of adverse possession results in taking property without payment, the principle is applied very carefully by the courts and only if certain specified conditions are met. Thus, for example, the adverse use must be obvious to the real owner. And the use must be hostile, meaning that it is without the permission of the real owner. Use of another’s property with the permission of the owner will never create a right of adverse possession.
Adverse possession issues arise most often where an adjacent property owner encroaches on a neighbor, although they may also arise in other situations. For example, assume your neighbor erects a fence three feet onto your property, preventing you from using that space, and starts using the land as a garden. Obviously, as owner you would have the right to remove the fence and the garden. Or, you could sign an agreement with the neighbor allowing him to use the land with your permission for a specified period of time. But, if as owner you took no action, and the adverse use continued for the specified number of years, the neighbor could come to actually own that portion of the property. For this reason it is important when purchasing property to check for encroachments and adverse uses, and conduct a survey if there is any question as to where the property lines actually are.
The theory behind state and local zoning ordinances is that uses within a particular area should be uniform. While this system generally works well, obviously there will on occasion be the need for exceptions to the general rule. Depending on the needs of the individuals involved, and the impact on the neighborhood as a whole, it may be possible to change the zoning on a particular property by obtaining a variance. A variance is permission to depart from the requirements of a zoning ordinance in one or more particulars. Generally, a variance request is granted or denied through administrative action. Variances can be divided into area variances and use variances.
An area variance may be requested where the use is permissible, but does not quite fit the property. For example, if an owner wanted to add a deck to his or her home that would violate the minimum setback requirements of the zoning regulation, or wanted to build a two-story garage, which exceeded the height requirement, an area variance would be required. By contrast, the use variance relates to a use of the property that is otherwise impermissible in the given zone. If, for example, a landowner wanted to build a grocery store in a locality zoned exclusively for residential purposes, a use variance would be required. Generally, a use variance will be harder to obtain than an area variance. The land owner requesting the variance must show undue hardship that is not self-imposed, and must demonstrate that the variance would not harm the public welfare, have not an excessive impact on the general zoning plan, or would not adversely impact surrounding property values. The requirement that any hardship not be self-imposed is of particular significance. The purpose of this requirement is to prevent an owner from building a nonconforming structure and then seeking a variance for it on the grounds that it would be a hardship to tear it down.
One goal of zoning is to separate property uses into distinct zoning districts (residential, commercial, industrial, etc.) and to keep uses within each zone uniform. For example, if a district is zoned for residential use, no businesses will normally be permitted to open there. But, what happens to a business that existed and was operating prior to the time when its location was zoned residential?
At this point, the constitutional prohibition against taking property without just compensation comes into play. If a use predates the zoning plan, it will be permitted to remain, because the government lacks the power to simply close a business in a zone that becomes residential, or require a home in an industrial zone to be torn down, unless it is willing to compensate the owner for the loss. Such exceptions are called nonconforming uses. Commonly, the portion of the zoning statue allowing prior nonconforming uses is called a grandfather clause and such a use is said to be grandfathered in.
Nonconforming uses, however, are not exempt from all zoning regulation. While they cannot be taken (without compensation), the government is not required to allow them to change or expand. The use is generally limited to what existed when the zoning ordinance was adopted. Also, if the nonconforming use is abandoned or ceases, the grandfather rights are lost, and the nonconforming use cannot be restarted at a later date. Under many laws, if a nonconforming structure is destroyed by fire or other cause, it may not be rebuilt. The hope is that with these restrictions in place, nonconforming uses will decrease and cease over time.
Real estate law is a highly complex and specialized area of legal practice. United States real property law has roots stretching back to medieval England, where the transfer of real property and the protection of land titles was one of the first and most important functions of the law. Real estate is also an area in which consumers and businesses are well advised to seek legal counsel and advice. This is an area in which attempting to do it yourself without adequate experience can have long-term and frequently disastrous consequences, for a number of reasons. First, problems in real estate, particularly real estate title law, often do not become apparent for many years. A mistake made at the time a property was purchased, which could have been corrected easily at the time, may not make itself known until the time comes to sell the property years later. By that time, it may be possible to correct it only with great difficulty and expense.
Second, real estate law is one area of legal practice that varies greatly from state to state. In many areas of law, there is a trend towards uniformity between states, which is thought to foster commercial transactions across state lines. Real estate, however, is by definition immobile and the law in this area has resisted the trend toward uniformity. While all states share a common English real estate law history, each state has modified that law to suit its own needs. This means that general principles of real estate law may not provide adequate guidance when attempting to deal with a specific fact situation in a particular state. The real estate attorneys in each state specialize in that state’s statutes, rules, and procedures. Your attorney will assure that a real estate transaction goes smoothly and that the interests of all parties are protected.
As with any area of law, real estate law has many distinct components and areas of specialization. The real estate attorney may practice in one or more of these areas. Common areas of specialization include the following.
- Commercial leasing deals with the leasing of real property for business use, usually for extended periods of time. The attorney involved in commercial leasing needs to protect the needs of a business owner for continuity and stability while at the same time making the lease flexible enough to adjust to changing circumstances as the years progress.
- Commercial real estate law deals with the purchase, sale, and operation of property for business, as opposed to residential purposes. It deals primarily with the need for businesses to make sure that property they purchase is both legally and physically appropriate for the type of business they hope to conduct.
- Condemnation is the process by which the government takes property for a public purpose and determines how much it must pay the owner to do so. For most individuals, the most important aspect of a condemnation proceeding will be obtaining a fair price for the land.
- Condominiums and cooperatives are an increasingly popular form of ownership, particularly residential ownership. A condominium or cooperative attempts to combine the advantages of home ownership (building equity, tax advantages, and the like) with the advantages of apartment living (such as limited maintenance responsibilities). Condominium and cooperative law deals not only with the purchase of the property itself, but with the rights and responsibilities of the owners of the various units.
- Conveyancing is the art of transferring property from one owner to the next. It involves the technical requirements necessary to create a valid deed, mortgage, or other instrument. It also involves advising the purchaser as to the various options available by which title to property can be taken and held.
- Eminent domain law deals with the right of governments and private companies exercising public functions to take land for public purposes. It is closely related to condemnation, which is the process by which the land is actually taken. Eminent domain law also deals with situations where a landowner wants to force the government to take and pay for property on the theory that the government’s activities already amount to a taking for which compensation is required.
- Land use and zoning law deals with the methods by which government (and occasionally private individuals) attempt to control development and preserve the character of neighborhoods by regulating the uses to which land can be put and the types of buildings that can be erected on the land.
- Landlord and tenant law deals with the interaction between tenants and landlords, most commonly in a residential setting. It attempts to balance the rights of the landlord to control the property, to receive rent in a timely fashion, and to remove tenants who breach their lease promptly against the rights of tenants to privacy, security, and a well-maintained rental unit.
- Mortgage and foreclosure law deals with the most common method of providing secured financing for the purchase of real property and for other purposes. Mortgage financing is used in the vast majority of real estate transactions. This area of law governs the issuance of the mortgage as well as the lender’s right to collect the secured debt through foreclosure if the borrower fails to pay as promised.
The attorney specializing in residential real estate helps the consumer with what is frequently the most important purchase in his or her life-the purchase of a new home. The attorney will guide the consumer through the complexities of real property law as it relates to the purchase and explain potential options and pitfalls.
Title insurance provides the buyer of property with certainty and security by guaranteeing against title defects and hidden problems that could be costly to the buyer.
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