Assuming Financing? The Real Issue Revealed…
By David Whisnant, JD
http://www.4-real-estate-investing.com
I am a little concerned when I read the advice of other “real estate gurus” to their students.
Because of my background as a real estate attorney prior to becoming a full time real estate investor, I understand how to identify and deal with the truly critical issues on different types of real estate transactions.
As you probably know, newer mortgages typically have a “due on sale clause.” The due on sale clause prohibits the person who took o t the loan from selling or transferring title to another individual or entity without permission from the lender. If such a transfer is made, the lender has the contractual right to foreclose on the mortgage and declare all sums due and payable.
As someone who has assumed many loans, I have never had a problem with any lender being upset that I was violating this clause. I typically try to either sell or refinance such properties within a few months, but the lender is typically happy to get paid. While this is something to consider, a more important issue exists.
The real issue is that most title insurance companies will not write title insurance for you, the new owner of the property, when you have assumed a loan. This has more risk, in my opinion, than violating the due on sale clause because it does not protect you from the most common title claims — liens or loans that were missed when the title was run.
For example, if a title examiner missed a $10,000 lien from a contractor on the property you bought, there would be no title insurance to jump in and take care of that. The law firm or company that ran the title might be liable in a court of law to you, but your legal fees will quickly make such an action a break-even deal at best if they are not inclined to write a check to you for the claim. The prior owner may also be liable, but again it will be expensive to get them to pay if they are dishonest.
Or, a lien may be misindexed by the clerk so that the examiner could not see it, but because it was filed, the law may allow the lien holder to still recover against the property. (The examiner was thus not at fault, so you would probably owe this sum or have to file suit against the prior owner.)
Note that the lender will have a lender’s title insurance policy, but that title insurance company may not be so willing to step in to handle this claim.
How do I protect myself? I used to run all of the titles personally where I was assuming a loan, but now I have the closing attorney run the title AND another firm run the title. One examiner may miss something, but the odds are better that two will not. While there is always the risk of something that was misindexed, the odds are low that this person will contact me or make a claim against the property if I only own the property for a short time.
Thus, if you are investing in real estate always get title insurance, and if you are assuming a loan, take steps to protect yourself!
There is always some risk in violating a due on sale clause, but the risk of buying property with no title insurance is greater, and that is the story that is never told by other “gurus.”