Why do I have to pay off a lien when the debt is not mine?

I have seen several situations where there is a lien that attached to real property, but is not a debt for which the seller is personally liable. In those situations, the seller technically does not owe the debt, but it needs to be paid if they want to sell the house.

The most recent situation I had is with a seller who inherited the house from her father, who died almost five years ago. Prior to his death, there was a judgment lien against the father that was recorded in the Register’s Office. He died about four years after the judgment and the judgment creditor did not file a claim against his estate. Since there was no estate claim filed, the estate did not need to pay the judgment and the fathers heirs were also not responsible for the judgment. However, in Tennessee, there is a ten year statute of limitations on judgments…it has been almost (but not quite) ten years. Since the judgment had already attached to the property, there is no way the judgment creditor could collect on the judgment, unless the house was sold. In this particular case, the seller didn’t want to wait about three months until the statute of limitations had run, so the judgment had to be paid in order to close on the property.

Another situation I have seen is when the property was vested in a husband and wife and they got divorced. After the divorce, the ex-husband filed for bankruptcy and signed a quit claim deed to convey the property to his ex-wife. There was a judgment only against the ex-husband and he listed that judgment in his bankruptcy. Once the bankruptcy was discharged, he was no longer obligated to pay the judgment. However, the judgment creditor had recorded the judgment in the Register’s Office and it attached to the property before the ex-husband conveyed the property to his ex-wife. The ex-wife was trying to sell the property and unfortunately, in order to sell, she had to pay off the judgment that was never her responsibility and that her ex-husband was no longer responsible to pay because of the bankruptcy. Of course, the ex-husband may have been liable to his ex-wife for that judgment because of the divorce decree, but it still needed to be paid off so she could sell the house.

One more situation I have seen is when there is a lien against a prior owner of the property that was not paid off when the current owner purchased the property. If the current owner had a title policy when they purchased the property, that would probably cover this issue, but if they do not have a title policy, a lien that attached to the property would need to be paid in order to sell the property. There may be warranties that the seller gave the prior owner that would make them responsible for the lien, but when that happens, it is at least likely to cause a delay in the closing.

These are just a few situations where someone must pay the debts of others in order to sell their property and it is very sad to see that happen. By the time the seller finds out about the lien attached to their property, they have usually already made plans to buy another property and it is too late to back out of the property they are buying without breaching the contract. We can’t avoid these types of situations altogether, but it is important to work with professionals, who will properly inform clients (whether that is estate attorneys, divorce attorneys or closing attorneys) and help to make sure these situations are minimized.

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Cash Closings

Everyone (except a lender) loves a cash closing, whether you are a listing agent, selling agent, seller or even buyer. When a buyer is paying cash, you don’t have to worry about loan approvals, loan delays, providing mountains of paperwork for the lender or a dreaded loan denial. However, a cash buyer will still want to make sure certain things are done before closing

  • Insurance. Since there is no lender to require a buyer to provide proof of insurance, it is up to the buyer to make sure they have coverage as of the closing date.
  • Home Inspection. It is always a good idea to find out any issues a property may have, even if the buyer isn’t going to require the seller to make any repairs.
  • Appraisal. If the buyer is concerned about the value of the property, it is a good idea to get an appraisal and make sure the contract is contingent on the property appraising for at least the purchase price.

The buyer has completed all of the inspections they require and have the money ready to wire to closing, but doesn’t have time to drive across town…Since it is a cash closing and there is nothing that the buyer will sign that will need to be recorded, the title company will probably not need original documents. If that is the case, it may be possible to email documents to the buyer to print and sign, then scan back to the title company. However, there may be a couple of documents that need to be notarized before they are emailed back. That will save time for the buyer and not necessarily require them to take off work for the closing. Of course, there may be instances where the cash buyer will need to sign in person, but in most cases, that will not be required and can be handled electronically with the buyer also sending the funds by wire transfer.

A title company still has the same responsibility to a cash buyer as it would with a buyer who was getting a loan. If the buyer is getting an owner’s title policy, the title company would search the property and clear any liens or other issues it finds in the search, before closing. The title company should also inform the buyer if there will be any unusual exceptions in the title policy. When there is a lender, they would probably not allow any unusual exceptions (like lack of access to a public road), but a cash buyer is depending on the title company to inform him or her of those issues prior to closing. I would typically tell the buyer about any issues myself and if the buyer still wanted to close on the property, have them sign a form acknowledging that I am informing them of the issue in writing.

Know What The Contract Says

It is very important to pay close attention to the details in a contract. Most residential real estate contracts contain form language with some sections that are “fill in the blank”. Those sections are all very important details of the specific transaction. Some obvious items you want to check are:

  • Purchase price
  • Amount of Earnest Money or Trust Money
  • Closing Date
  • Inspection Period
  • Which costs are to be paid by the buyer and which costs are to be paid by the seller
  • Home Warranty

However, you should also pay close attention to what your buyer is contracting to purchase or your seller is contracting to sell. Here are a couple of situations I have seen that could have been resolved easily if it was more clear before the contract was executed:

  1. I recently had a contract where the buyer’s agent prepared the contract with the street address of the property, referenced the map & parcel number for the property and referenced the prior deed, where the seller acquired the property. That seems like a situation where it is pretty clear which property is being sold. However, the seller had recently subdivided the property so he could sell the part of the property with the house on it and build another house on the other part of the property. The two new parcels were also assigned new parcel numbers. All of that was done at about the same time the contract was signed, so there was no way for the buyer’s agent to know that the property had been subdivided. If you were to look at the only the contract, it would appear that the buyer was purchasing 123 Main Street, but it was the seller’s intention to sell Unit A on the 123 Main Street Subdivision. This grew into a dispute that has become costly for both sides, but could have been easily resolved if the seller or seller’s agent had noticed that the entire property (123 Main Street) was listed on the contract instead of just one of the units, before signing the contract. That way, the buyer would have known what the seller intended to sell and could have adjusted the offer price accordingly.
  2. In another similar situation, I once closed on a foreclosure property where the seller was selling 356 Oak Ave, which was the property that had been foreclosed on. The buyer closed on the property and thought they were getting a house and a vacant lot that was surrounded by a fence attached to the house, but after closing, realized that the property at 356 Oak Ave. was separate from the fenced vacant lot at 358 Oak Ave. The original owner of both 356 and 358 had a loan only on 356 Oak Ave. That meant that the lender could only foreclose on 356 Oak Ave, because it had no interest in 358 Oak Ave. The original owner still owned 358 Oak Ave. and didn’t even realize it because he thought it had been foreclosed on during the house foreclosure. A little more research by the buyer or his agent (and clarification in the contract) would have made the buyer aware of what the seller was able to sell, so he could decide if that was what he wanted to purchase.

Authority to sell. Who has the right to sell property?

When individual people own property, this is a very easy question to answer…those individual owners have the right to sell the property and only need to prove that they are the same person as the owner of the property. This is usually done by producing a drivers license or ID. However, when the owner of the property is not an individual, this requires more investigation. Property can be owned by a corporation, LLC, trustee of a trust, partnership, etc. If that is the case, it is not always clear who has authority to sign for that entity in order to convey the property.

Corporation

When property is vested in a corporation, the documentation that will typically be required is a copy of the Articles of Incorporation, a resolution regarding the transaction and appointing an individual to sign on behalf of the corporation, and proof that the corporation is active with the secretary of state. This documentation is required in order to confirm that the transaction is allowed in the corporate documents and to confirm who has authority to sign for the corporation. The corporation must also be active, in most cases, in order to convey property. If the corporation has been dissolved, we would likely need proof as to who the individual shareholders were so they could sign in an individual capacity or the corporation would need to be reinstated with the secretary of state. However, there may be some situations where a representative of the corporation may still be able to sign with proper proof of authority.

Limited Liability Company (LLC)

Proving authority to sign for an LLC is similar to the requirements for a corporation…the seller would need to produce a copy of the Operating Agreement, a resolution regarding the transaction and appointing an individual to sign on behalf of the LLC, and proof that the LLC is active with the secretary of state. Sometimes a “seller” will produce a power of attorney (“POA”) from an individual who is authorized to sign for an LLC or corporation, but an individual POA is not sufficient to transfer authority to someone else to sign on behalf of the entity. A resolution from the board or members would be required.

Trust

Trust property is controlled by the trustee of the trust and trust real estate is usually vested in that person as trustee (ie: John Wolfe, Trustee of the Wolfe Family Revocable Trust). To show that the transaction is allowed by the trust, the seller would need to produce a copy of the trust agreement and the trustee would also need to sign a Certification of Trust at closing. There are some situations where the trustee is no longer able to serve as trustee and the trust agreement may appoint a successor trustee or it may require more than one trustee to sign. The Certification of Trust will confirm the main clauses of the trust and will state that the trust is still an active trust.

Partnership

If the property is vested in a partnership, the seller would need to produce a copy of the partnership agreement. That agreement will confirm that the transaction is authorized by the partnership and will identify the partners. In a general partnership, any general partner can bind the partnership, but if all of the partners are available, it isn’t a bad idea to have all of them sign. I recall one situation where the property was vested in Joe, Sr. and there was a quit claim deed signed by Joe, Jr. under a POA, conveying the property to the Joe, Sr. and Joe, Jr. Partnership. The contract to sell the property was signed by Joe, Jr. as a general partner of the Partnership. In that situation, we required both Joe, Jr. and Joe, Sr. to sign the deed, because Joe, Jr. could have been trying to sell Joe, Sr’s property without his knowledge.

Why should a Buyer get a Title Policy?

There are many title issues that could cause problems for a buyer or may even cause the buyer to lose their home. Even a careful title search would not discover certain hidden risks and the buyer may not know about those problems until years later.

Here are a few issues that occur most frequently:

  1. Forged deeds, mortgages or releases of mortgages.
  2. Deed by a person who is mentally incompetent.
  3. Deed by a minor.
  4. Deed from a corporation given under a falsified resolution or not authorized by the corporate bylaws.
  5. Deed from a partnership that is not authorized by the partnership agreement.
  6. Deed from a trustee that is not allowed by the trust agreement.
  7. Deed challenged as being given under fraud, undue influence or duress.
  8. Deed following a non-judicial foreclosure, where the proper procedure was not followed.
  9. Deed executed under a falsified power of attorney.
  10. Deed executed under an expired power of attorney.
  11. Deed conveying property of a deceased person, not joined by all of the heirs.
  12. Conveyance by an heir or survivor of a joint estate, who murdered the decedent.

Some of these issues could be prevented by a diligent review of documents presented by the seller (for example: making sure a trust agreement allows the trustee to convey real estate), but many could not be discovered until someone comes forward at a later date making a claim to the property. A buyer should always consult with a reputable attorney or title company before purchasing real estate, to discuss the potential risks the buyer may encounter if they choose to not purchase a title policy.

What does a Seller need in order to prepare for a real estate closing?

You have listed your house for sale with the best Real Estate Agent in town and he or she has now secured a contract for selling your house.  What do you need to provide to your agent or title company that will help facilitate the transaction and prevent any delays?  This post will explore different items and information you need to provide during the closing process.  Some information should be given to the real estate agent before you have a contract in order to prevent any delays in the closing.

Information about yourself and the property.

As soon as you have decided which real estate agent you will use to list your house for sale, you should provide him or her with the following information, even if they do not directly ask for it.  You can also provide the information to the title company, but the earlier this information is known, the less likely it will cause a delay in the closing once you have a contract on the house:

  • How is the property titled?  Is it in your name alone, your name and a friend’s name, your name and a spouse’s name, your parents’ names, a company name, a trust, etc.  If you have a copy of the deed when you purchased the property, that is the best way to tell how the property is titled, so be prepared to give a copy of that prior deed to your real estate agent.  It is very important that this is known early on, because anyone on title to the property will likely need to sign at closing.  If you bought the property 10 years ago with your girlfriend and she has moved away with no contact in the past 8 years, she will very likely need to be contacted and will need to sign a deed before you can sell the property to someone else.  She may also likely be entitled to a portion of the proceeds from the sale, but that will depend on the particular circumstances.
  • Have you gotten married since you purchased the property?  If so, you will most likely need to provide a copy of your marriage certificate.  Even if your spouse is not on title to the property, he or she may need to sign the deed at closing.  This may not be the case in every state or in all situations where there has been a marriage, as that will depend on the laws of your particular state, but it is better to be prepared with that marriage certificate instead of having the title company ask for it at closing when you have it packed away in a box.
  • Have you gotten divorced since you purchased the property?  If so, you will most likely need to provide a copy of the divorce decree and marital dissolution agreement approved by the court.  Even if your former spouse was not on title to the property, the court order may contain specific language about the ownership of the property or how the proceeds from the sale of the property are to be distributed.
  • Have any owners of the property died since the property was acquired?  If so, you will at least need to provide a death certificate for that person.  It is possible that you may also need to provide a will and certain affidavits required by the title company.  But it is important that the title company is aware of any deaths as soon as possible so they can do further investigation as to what will be needed in order to close.
  • Have you filed for bankruptcy protection or been involved in any lawsuits?  You will need to provide copies of any orders from the bankruptcy court and copies of any final judgments in a lawsuit, especially if the lawsuit involves the property you are selling.  The title company will need to review these to determine how to proceed toward closing.
  • Do you have any loans against the property?  The title company will need contact information for your lender, along with your account number and social security number and will also probably need an authorization form signed by you in order for the lender to send them the payoff information.  Keep in mind that if you have a Home Equity Line of Credit (HELOC), you may have used the loan funds for something not involving the house, but if the loan is secured by the real estate, it will either need to by paid off and released at closing or transferred to different collateral and released from the house you are selling.
  • Is your house in a homeowners association (HOA)?  You will need to provide contact information for the association, so the title company can find out what fees and association dues are owed on the property.  The association may have charges for providing a statement, a transfer fee, initiation fee, capital contribution or other fees.  If this information is not provided early on in the transaction, many associations also charge a rush fee to provide that statement prior to closing.
  • Is there a mobile home located on the property?  If there is a mobile home, that may require additional work before being able to close as mobile homes are typically titled as a vehicle and that vehicle title may need to be retired before the mobile home can be sold with the land.  How this process is handled may be different in different states.
  • Is the property in a corporation, limited liability company, a trust or other entity?  If so, you will need to provide the articles of incorporation, articles of organization, trust agreement or other documentation showing who has authority to sign for that entity to sell real estate.  Your title company will have specific requirements based on the type of entity involved and may also require resolutions or other affidavits related to the entity selling the property.

On Closing Day!

Once you have made it to closing, you will need to bring a copy of your drivers license, passport or other identification.  If the sale proceeds are being wired to your bank account, you will need to have your account information, which includes: the name of your bank and the bank address, the bank’s routing number for wires (note: this may be different from the routing number on your checks and you should verify the correct routing number for sending a wire with your bank prior to closing), your account number, your name as it appears on the account and your address associated with the account.  If the title company has requested any original documents (such as a power of attorney), you will need to bring those to closing as well.

If you think your work is done when you close, guess again…after closing, you will need to cancel your homeowners insurance (I usually tell sellers to wait until they receive the proceeds before they cancel), transfer utilities, change your mailing address with the post office and unpacking all of those boxes is always fun too!   

What happens when the owner of the property is deceased?

There may be some similarities in different states, but the documentation required in a closing involving an estate is determined by state law and you should discuss these situations with an attorney licensed to practice in your state.  The title company insuring the transaction will also have specific requirements regarding how to handle a particular estate issue and those requirements may vary between different title underwriters located in the same state.  The analysis of different situations in this blog is based on Tennessee law.

Definitions of Estate Terms.

These are some terms you may hear when dealing with a closing involving an estate. 

  • Testate: having died with a will.
  • Intestate: having died without a will.
  • Holographic Will: a handwritten will.
  • Nuncupative Will: an oral will
  • Probate: the process of proving a will in court.
  • Executor (Executrix): the personal representative of a testate estate, named in the will and appointed by the court.
  • Administrator (Administratrix): the personal representative of an intestate estate, appointed by the court.
  • Muniment of Title Probate: probate with no administration for the purpose of establishing title to real or personal property.
  • Insolvent Estate: an estate where there is not enough personal property or assets to pay all valid claims against the estate.

The Seller signs a contract to sell real estate and dies before closing.

In this situation, it is likely that an estate will need to be opened in probate court.  After a personal representative is appointed, that person would be able to convey the property to the buyer.  This is different from a typical closing involving an estate because the seller actually signed the contract before she died.  Since she signed the contract, her estate is bound by the terms she agreed to in the contract and the personal representative of her estate is authorized to sign on behalf of the estate.  The typical estate requirements that we will discuss below do not apply.

A husband and wife own property, the husband dies and the wife wants to sell the property.

In order to sell the property, the widow will likely only need to provide a copy of the husband’s death certificate.  If both of them were not on title to the property or if she did not have a survivorship interest, she will need to provide more, as discussed below.  But if they were both on title to the property and had a survivorship interest (which can be determined by reviewing the deed to the husband and wife in accordance with the laws of the state where the property is located), she will only need to prove that he is deceased.

Sam owns a three bedroom house and dies intestate.  He is unmarried and has 2 adult children, who want to sell the house as soon as possible.

Sam’s children would not be able to sell the house within 60 days from the date of his death in Tennessee under any circumstances.  There is a Tennessee statute that gives priority to a deed from the decedent that is recorded within 60 days after death.  If an estate is being administered, creditors of the estate have 4 months to file claims against the estate, so the children would not be able to close until the 4 month claims period has run and the title company has verified that no claims have been filed.  However, in some situations, they may be able to close before the 4 month claims period if there is proof that the sale is an arm’s length transaction for market value, but the net proceeds would likely need to be held in escrow until the 4 month claims period has run.  If Sam was age 55 or older at the time of his death, the 2 children will need to obtain a TennCare Release before they would be able to close.  If Sam’s estate is not being administered, his 2 children may be able to close after 6 months from the date of his death as long as they have a TennCare Release.

Sally owns a condo downtown and dies testate.  She is unmarried and does not have any children.  Her will names her brother, Bob, as Executor and leaves her condo to her church.

Bob has admitted the will to probate and wants to list the property for sale.  He has told you that since he is the Executor that he has the right to sell the property.  If the will contains language that the real property is to be administered as part of the estate subject to the control of the Executor, Bob would be able to sell the property as the Executor of Sally’s Estate.  Also, if Sally’s estate is insolvent, Bob may sell the property to satisfy creditors of the estate.  This will likely require a court order declaring that the estate is insolvent.  If the will does not contain that specific language and the estate is not insolvent, a representative from the church would need to sign in order to convey the property.  However, before that transaction can close, there would need to be a TennCare Release (if Sally is age 55 or older) and the 4 month claims period has run, or it has been 1 year from the date of Sally’s death, whichever is earlier.

Steve owned a 20 acre farm that was only in his name and died intestate 15 years ago.  He had a wife, Sara, and 3 adult children.

Sara wants to sell the 20 acre farm and said that since she is Steve’s widow that she should be able to do that since she hasn’t spoken to her children in 5 years.  Under Tennessee laws of Intestate Succession, the wife and all 3 children would inherit the property and would all need to sign in order to convey the property to a buyer.  A TennCare Release would likely not be necessary since Steve died 15 years ago.  Affidavits of Heirship would probably be required from someone who had enough knowledge of the family to identify Steve’s spouse at the time of his death and all of the children he had during his lifetime.  Once all of those heirs are identified, they would all be able to sell the property.  Not being able to locate any of the children is not sufficient, as their interest must be conveyed in order for the buyer to have clear title to the property.

Consult a local attorney or title company.

These are just a few examples of situations you may encounter and some things that can be done to help close these transactions with as little delay as possible.  Since laws vary greatly from state to state and title underwriters may have different requirements based on their interpretation of state law, you should talk to a local attorney or title company about the specifics of your transaction and always inform your title company if one or more of the property owners is deceased, so they can research and find out what they will need in that particular situation.