After discussing how liens can affect the short-sale of a property in our last post, we now want to focus our attention on how each side deals with the potential discovery of the liens encumbering the property as well as well as their discharge. For consistency purposes we will focus on the seller’s perspective in this post and then focus on the buyer’s perspective in our next post.
From a seller’s point of view, it wants to see what liens are encumbering the property as soon as possible. The reason being is many sellers involved in a short-sale are facing other financial difficulties aside from the subject property. Moreover, many of these sellers have been sued or are in the process of being sued by other creditors. As such, discovering whether any liens exist as early as possible is significant as the more time the seller has to come up with the necessary funds or negotiate a reduced release amount with the judgment lien-holder(s), the better.
With that said title searches (including judgments, taxes, patriot, etc (hereinafter collectively known as “title search”)) are traditionally ordered and paid for by the buyer. The reason being is the buyer (and its lender if there is a mortgage) is the one obtaining the benefit of such insurance. The problem is the buyer (not incorrectly) usually does not want to spend any money until it knows the transaction has been approved by the seller’s mortgage lien-holder(s). The reason being is if the buyer obtains a title report and the title – with the exception of the mortgage liens – is clean, and the deal is not approved by the seller’s lender for whatever reason, than the buyer has wasted its money. Notwithstanding the foregoing, depending on how many potential buyers are interested in the property and/or how badly the buyer wants the property can also determine whether or not a buyer will order title insurance prior to obtaining the approval letters from the mortgage lien-holders. However, for purposes of this article, let’s assume that there is not a lot of interest in the property and/or the buyer likes the house, but does not want to take the risk of obtaining a title search prior to the approval letters from the mortgage lien-holders, what are the seller’s options?
One (1) option the seller has is to write a list of all of the potential creditors it is aware of, and provide as much documentation (e.g., complaints, judgments, bills, etc) that it has in its possession regarding the same. This way the seller can check with these creditors to see what the status of their collection effort is (e.g., a complaint has been filed or a judgment rendered). The problem is what happens if the seller did not keep all of the documentation it received from its creditors? A judgment lien might exist on the property that the seller either forgot about or did not know about, which would not be discovered by the seller until a title search was actually ordered.
A more concrete solution to the problem is for the seller to order and pay for a title search as well as a credit report for itself. This way the seller will know what liens are encumbering the property (via title search) and what judgments there currently are against the seller that may turn into liens (via credit report). By knowing this the seller can (i) agree to pay the judgment lien-holders the necessary amount to release the liens, (ii) negotiate a reduced amount for the release of the liens with the judgment lien-holder, or (iii) see if the purchaser would be willing to pay for these amounts on behalf of the seller. (Please note that the latter is by far the least common, and will depend on how badly the buyer wants the house). The drawback of the seller obtaining the search, is it costs money (e.g., $350 – $600), which an already financially distressed seller may or may not have.
This leaves the seller in a dilemma as to whether or not to order a title search, etc on its own, so it knows what liens are encumbering the property. There really is no right and wrong answer as each transaction is different. Accordingly, the seller needs to assess the situation and decide what approach (whether or not to order a title search on its own) is right for it.
As mentioned in our previous post, if a judgment has been rendered and the judgment creditor seeks to docket the judgment with the state, the judgment (once docketed) becomes a lien on the property – which then as part of the short-sale will almost always needs to be removed.
Andy Roth, New Jersey Real Estate Lawyer
*The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.