These troubled economic times can offer remarkable opportunities to real estate investors including the possibility of purchasing foreclosure properties at deep discounts. Foreclosure purchases become possible when a lender sells real property that was put up as collateral for a loan in an effort to satisfy that loan. Some investors shy away from purchasing foreclosure properties for fear of being bombarded by title problems. But purchasers and their new lenders can find comfort in title insurance coverage with relatively few requirements and exceptions. This article explains how title insurance policies on foreclosure properties are underwritten for purchasers and lenders.

Only two key requirements are included in the title commitment for a purchaser or new lender: payment of taxes and completion of foreclosure proceedings according to state statute (e.g. N.C. Gen. Stat. Chapter 45). Foreclosure proceedings cancel the existing deed of trust and enable the purchaser to acquire title to the property as it existed at the time the deed of trust was recorded.

The title policy provides coverage but may take exception to matters of priority or the invalidity of the foreclosure action. These include certain judgments, federal tax liens, bankruptcy, rights or claims of parties in possession under unrecorded leases, and purchase money security interests in fixtures, if applicable.

Because foreclosure proceedings restore title back to its status at the time the deed of trust was recorded, the policy will not except to a judgment or non-federal tax lien filed between the time of the recordation of the deed of trust and the completion of the foreclosure proceedings. However, the policy will except to a judgment entered during that period if it arose from a lien with priority over the deed of trust, as in the case of mechanic’s liens. If the judgment or lien arose before the deed of trust was recorded or after the foreclosure was completed, then the title policy will take exception to it.

Where federal tax liens are involved, the policy will except to the lien if the Internal Revenue Service (IRS) filed the lien more than 30 days before the foreclosure sale and did not receive notice of the sale. If the IRS filed the lien less than 30 days before the sale, or if the IRS did receive notice of the sale, then the IRS has a redemption period of 120 days after the sale to satisfy or lose its lien. In this case, the policy will except to the IRS’s right of redemption unless the IRS waives its right in writing.

In situations where the property owner seeks to avoid foreclosure and deeds the property to the lender by “deed in lieu of foreclosure,” the lender can obtain title insurance coverage. The title commitment will require cancellation of the deed of trust, an estoppel affidavit or explicit language in the deed, evidence of the fair market value of the property, and a payoff statement from the lender. If these requirements are not met, then the title policy will except to any loss or damage that occurs if the transfer is later deemed fraudulent.

With minimal requirements and few exceptions, title insurance can provide investors and lenders with the comfort they need to purchase and finance foreclosure property. Through our network of experienced and capable attorneys, the Commercial Services Division of Investors Title can assist with obtaining title searches and title insurance products for commercial or acreage properties in foreclosure or bankruptcy. Title commitments are available for a minimal administrative fee that is waived if title insurance is purchased through Investors Title. Please contact us for more information at tmason@invtitle.com.