Cloudy title is one of those terms that you don’t hear much about until it happens to you. And it feels very much like a storm cloud looming over your house sale making you feel powerless against it. When it happens to a buyer or a seller, it can quickly tank a sale right before it’s ready to go through.
To protect yourself as either a buyer or a seller, it’s important to understand what a cloudy title is, how to keep yourself from having one, and what to do if you discover the house you want to buy or sell in Connecticut has a cloudy title.
WHAT IS A CLOUDY TITLE?
A cloudy title – also known as a cloud on title – is a document, lien, claim, or any other encumbrance that can invalidate or impair the title to a property, or that may make that title doubtful. A cloud on title typically occurs when there are unresolved issues regarding a property, such as foreclosure proceedings that were begun prior to a property being sold, or there might be liens from lenders or contracts to which the property owner agreed.
Any property that has liens or is under foreclosure is unattractive to potential buyers because they create a cloud on the title
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If the property’s seller didn’t pay for contracted construction or development work, the property also may have a mechanic’s lien. This type of lien stays in place until all labor and materials costs have been resolved, either by repayment of the debt, some other legal action or the sale of the house.
In cases where a property was received by the seller in an estate or inheritance, probate issues also can cause a cloudy title. These issues arise if a property owner passed away without clearly defining who the property should go to, or if there are missing documents – such as death certificates – that throw ownership of the property into question.
Another, less common, situation that can cause a cloud on a title is fraud. If someone created a false deed that was recorded as a real one, it can throw into doubt who actually owns a property. A false deed can cause all sorts of problems and ca drag the property through the courts for month even years.
HOW CAN I PROTECT MYSELF FROM CLOUDY TITLE AS A SELLER?
If you’re selling a property, the best way to know whether or not you may have a cloud on your title is to have someone perform a title search prior to you listing the property for sale. Typically a buyer that puts a property under contract will do a title search and make the sale contingent on a clean or clear title giving them an opportunity to back out the of sale if the title is cloudy.
A title search, which is usually part of most standard home sales, can show you whether there are issues with the title of the property. Knowing about them before you’re in the midst of the sales process gives you enough time to clear up any issues by getting quitclaim deeds, paying outstanding debts, or pursuing other legal action.
You don’t want to be caught with a surprise during the sale process which can jeopardize a sale and put into question the property to future buyers. We always recommend before going under contract with a property to do your own title search. They usually only cost about $250. As cash home buyers in Connecticut we immediately conduct a title search for all homes we put under contract and we work with sellers to resolve problems with the title before closing on a property.
Starting this process before you’re sitting with an offer on the table can save you a ton of time and frustration. A title search usually takes only 5 business days to complete.
HOW CAN I PROTECT MYSELF FROM A CLOUDY TITLE AS A BUYER?
As a buyer, there isn’t much you can do to predict whether or not there will be issues with a cloudy title on properties you’re looking to purchase. Part of the sales process will be having a title search done on any properties you’re considering purchasing and having Title Insurance.
Title insurance usually costs about .5% to 1.0% of the home’s purchase price and are usually included in the homes’ closing costs. As a buyer you will get a itemized breakdown of the title policy. They usually cover cases like undetected liens, covenants, easements, etc. against the owner by a 3rd party, claiming rights to the house. This one time fee is paid and its coverage lasts for as long as the owner holds the property.
Sometimes, a cloudy title can be easily overcome by having the seller pay any money owed to a contractor or other lien holder, for example, or getting a quitclaim deed. However, not all situations are resolved this easily.
To protect yourself in the event of a cloudy title, don’t hinge all your property purchasing hopes on one single property. If you have any inclination there may be problems with the title to a property you’ve put an offer on, keep looking until you get the all-clear.
As a buyer, you are not liable for anything related to a cloudy title, but one certainly can derail your home purchasing plans without warning.
In addition to buying title insurance you can get a warranty of title. A Warranty of Title is a legal document where the seller guarantees the transfer of ownership of the property to the buyer. This document primarily protects buyers from future problems that may arise due to a cloudy title like:
- Unresolve or contested inheritance issues
- Boundary-line disputes, easement claims or survey inconsistencies
- Undisclosed mortgages or liens
- Outstanding property or income taxes
Basically, it says that no one else has any claim on the property and it allows the buyer to sue the seller in case any dispute arises in the future.
The only drawback about this warranty of title is that it does not have the financial protections that a title policy has. Since this warranty is an agreement signed by the seller it is good to have along with a title policy rather than an alternative.