Trouble in Paradise

Trouble in paradise—our plans to build a new house at 102 W 31st may be in jeopardy. Our title search has come back and it’s not looking good. I suppose this would be a good time to discuss the concept of title to a property, which is not unlike title to a car, which most of us have experience with. Think of title as your proof of ownership, which passes from owner to owner when you sell your car or property. Think of buying a new car, in which your title is also brand-new, or even a used car, where you probably only have one or two people before you. But property title can be a little more complicated, especially in a historic district, because of the extended age of the house. Now throw in an issue like we’re experiencing at 102 West 31st, where the current owner bought it at a tax sale, meaning the previous owner had delinquent taxes and the county sold the property to pay those delinquent taxes. Now you see why your mortgage company wants you to create an escrow account with them, so THEY can pay the taxes to make sure they are current. Your property taxes take priority over your mortgage payments in terms of delinquency—in other words, you might be current on your $200,000 mortgage, but if the taxes aren’t paid, the county can take that property, leaving the bank stuck with your $200,000 mortgage, and unlike a foreclosure, without the right to sell the property. It doesn’t happen that often, because usually the mortgage company will pay the taxes and then foreclose upon the house, anyway, because not paying the taxes is a violation of the mortgage, but just know it’s out there. More likely, a property that has no mortgage, especially a piece of vacant land like this, has no bank overseeing tax delinquencies, and eventually, someone gets tired of paying this tax bill and the property changes hands.

The problem we’ve run into is that having the county take the land from you doesn’t mean there were not any title issues before. So let’s say you are in possession of a will that says Aunt Edna is leaving you the house. But Aunt Edna changes her mind and leaves it to Cousin Joe. That ticks you off, so you file a legal suit using the copy of the will as evidence. Now you need a court date and a judgment of some sort, deciding who has the right to the property. And if the judge decides you have the legal right, not Cousin Joe, then Joe may be forced to sell the property or write you a check to settle your interest.

So with all these risks, how do you protect yourself? Well, for starters, most properties don’t have these issues, because you have a title search done as part of your due diligence. You pay someone to go to the courthouse to search the records for anything that’s recorded against the title. Now, all that means is that if someone actually went to the courthouse and legally recorded it, making it of legal record, then there is proof. But if someone has Aunt Edna’s will stuffed under the mattress, and never recorded it, there’s a potential issue. So, if the title is reasonably clean, a title insurance company steps in and says, OK, we will insure this title, and if that will does appear, we’ll defend your interest in the property. If you can purchase title insurance, what’s the issue with 102 West 31st? Well, just like Allstate doesn’t want to insure a driver with 10 accidents, if the title search has brought up a number of issues, the title insurance company may not want to insure. Now, you could still buy the house, going into it with your eyes open, knowing that you’re not protected, and maybe you do. BUT, when you go to sell the property, you have to find another risk-taker willing to buy without the title insurance. Because just because you bought the place, held it for 20 years, and had no problems, it doesn’t mean that will, or some sort of contract written on a napkin, couldn’t rear its head and force you into a legal action to defend your property. And as you know, legal actions are expensive.

And thus, we have a problem. Stay tuned.