What If Title Issues Are Found?
Title issues are surprisingly common on distressed and investment properties. Industry data suggests that 25-30% of real estate transactions encounter some form of title defect during the search process. For wholesalers dealing primarily with distressed properties, the rate may be even higher.
Knowing what title issues look like, which ones can be resolved, and which ones should make you walk away is essential knowledge for every wholesaler.
Common title issues on wholesale properties
| Issue | Severity | Typical Resolution Time |
|---|---|---|
| Property tax liens | Moderate | Paid at closing from proceeds |
| Mechanics/contractor liens | Moderate | 1-4 weeks to negotiate release |
| Judgment liens | Moderate to High | 2-6 weeks; may require payment or negotiation |
| Unreleased mortgage | Low to Moderate | 1-3 weeks; lender issues release |
| IRS tax liens | High | Weeks to months; IRS has 120-day redemption right |
| HOA liens | Low to Moderate | Paid at closing or negotiated |
| Code violation liens | Moderate | Must resolve violations; can take weeks |
| Ownership disputes / unknown heirs | Very High | Months to years; may require quiet title action |
| Forged or fraudulent deed | Very High | Requires legal action; potentially unresolvable |
| Easement or encroachment issues | Low to Moderate | May require survey and negotiation |
| Divorce decree complications | Moderate | Need both parties to sign or court order |
Issues that can be resolved at closing
Many title issues are resolved simply by paying them off from the sale proceeds at closing. The title company handles this automatically:
- Property tax liens: Deducted from the seller's proceeds
- Existing mortgages: Paid off from proceeds (standard on every sale)
- HOA dues: Brought current from proceeds
- Small judgment liens: Often negotiated down and paid from proceeds
The key question is whether the liens plus the contract price exceed the property's value. If the seller owes $180,000 in mortgages and liens but you contracted at $150,000, there is a shortfall. The seller cannot close unless they bring money to the table or negotiate lien reductions.
Issues that delay closing
Some title defects require time to resolve:
- Unreleased mortgages: The seller paid off a mortgage years ago but the lender never recorded the release. The title company contacts the lender to obtain it. Usually resolved in 1-3 weeks.
- Mechanics liens: A previous contractor filed a lien for unpaid work. Must be negotiated, paid, or disputed before closing.
- Missing signatures: If the property was inherited and not all heirs signed the deed, the remaining heirs must be located and agree to sign.
When these issues surface, negotiate a closing extension with the seller. Most sellers understand that title issues are not your fault and will grant additional time.
Issues that should make you walk away
- Unknown or contested heirs. If multiple people claim ownership and there is no clear chain of title, a quiet title lawsuit may be needed. These take 6 to 18 months and cost $3,000 to $10,000. Not worth it for a wholesale deal.
- IRS tax liens with large balances. The IRS has a 120-day right of redemption after sale, and the lien amount may exceed the equity in the property.
- Forged deeds in the chain of title. If someone in the property's history forged a deed, the true owner may surface and contest the sale. This is a legal nightmare.
- Active litigation involving the property. If the property is the subject of a lawsuit (divorce, partition, boundary dispute), the outcome is uncertain and closing is impossible until the case resolves.
- Total liens exceeding property value. If the seller owes more in liens than the property is worth and will not negotiate short payoffs, there is no viable transaction.
How to catch title issues early
- Order title work immediately after signing the contract. Do not wait until week 3 of a 4-week closing.
- Pull a preliminary title report before making your offer if possible. Some data services provide basic lien information.
- Ask the seller directly. "Are there any liens, judgments, or legal issues with the property?" Many sellers will disclose voluntarily.
- Check county records yourself. Tax lien, judgment, and lis pendens searches are often available free online through the county clerk's website.
- Work with experienced title companies. An investor-friendly title company knows where to look and moves faster on issue resolution.
Your rights when title issues are found
Most purchase contracts include a requirement for the seller to deliver clear, marketable title. If title defects are found that the seller cannot cure:
- You can typically terminate the contract and recover your earnest money
- This right exists even after the option/inspection period in most contracts
- The seller must be given a reasonable time to cure (usually specified in the contract)
Title defects are one of the few reasons you can exit a contract after the option period without losing your earnest money. This is why title is considered separate from the option period in most contract structures.
Contract rights regarding title defects vary by state and by the specific contract used. This is general information. Review your contract language and consult a real estate attorney for advice specific to your situation.
Bottom line
Title issues are common on distressed properties. Many can be resolved at or before closing by paying off liens from proceeds. Some require time and negotiation. A few should make you walk away entirely. The key is catching issues early through prompt title work, asking the right questions, and working with experienced title professionals.