MARKETABLE vs. INSURABLE TITLE FOR REO FILES

MARKETABLE vs. INSURABLE TITLE FOR REO FILES

General Rule: All marketable title is insurable. Not all insurable
title is marketable.
 What is the difference?

Title policies are regulated by the State of Florida and all title
commitments are issued with exceptions. Schedule B contains general
exceptions common to most properties, such as easements of record,
surveys and property taxes, and exceptions which are particular to
each property. For example, mortgages to be released, death 
certificates to be recorded, homeowners association liens, 
judgments potential liabilities, against the property owner and IRS
 tax liens are particular to a certain property.

The principle difference between “insurable” title and “marketable”
title is the fact that for insurable title, the title insurance 
underwriter, after a risk assessment of the exceptions allows the 
title agent to issue a title policy without “clearing all the title exceptions” as would normally be done when issuing marketable title. For example, a title search reveals that a deed from a prior owner failed to include marital status. The deed in question was recorded 17 years ago. The underwriter determines the degree of risk as to another person claiming an ownership interest in the property is very low and this exception is not cleared prior to closing. Thus, this issue could arise in the future.

In contrast, marketable title is a title that is clean; has no defects that will come up again in a future title examination when the property owner attempts to obtain financing or more importantly tries to sell the property. In the example given above, for issuance of marketable title, a corrective deed would have been requested to ensure that no other person had an interest in the property arising from that deed.

Unfortunately, a great number of foreclosures are riddled with 
title problems. This past year alone, Sunbelt Title’s REO 
Division through examination has revealed countless problems which 
required the lender to go back and either re-foreclose the property
or obtain the necessary releases or corrective documents. 
For example, the following is actual language from a recent REO contract:

“15.  Condition and Conveyance of Title:  Seller agrees to deliver 
insurable title and agrees to pay for the Buyer’s policy of title 
insurance from the Title Insurance Company of Seller’s choice as 
listed below. Seller will not be responsible for any “Gap” title 
insurance coverage and will not under any event provide an 
Affidavit of Title or similar documents in which Seller is
 requested to make representationsor warranties with respect 
to title.”

As a result, the necessity to have an independent title exam 
performed for anyone who is wiling to accept the REO seller’s
title policy cannot be over emphasized. Such title policies often
have countless exclusions for liens, etc. leading buyers to have 
a false sense of security. Additionally, due to the many nuances 
of REO transactions, that examination should be made by experienced
and qualified individuals familiar with REO, such as Sunbelt Title 
Agency.

A recent and alarming trend is the proliferation of title companies
involved in foreclosure that are run as a sweat shop and or are 
located outside of the state. Many of these companies are 
unfamiliar with many of the nuances of Florida Law or pay little
attention to detail, and often employ under qualified or 
inexperienced people. The result is missed issues and further 
claims.

How does this affect an REO sale?

In Florida, the successful bidder at a foreclosure sale obtains 
title by a Certificate of Title issued by the Clerk of Court. 
This instrument conveys title but may be subject to any claims 
and interest not included in the foreclosure action. Here are some
typical issues which contrast marketable and insurable title:

a.	Title companies will typically not insure any state of 
facts which may be shown on an accurate survey. The survey may 
disclose premises which are out of possession, cut off by 
easements, improperly bounded, illegal structures, 
encroaching improvements and the like. These are all typical 
impediments to marketable title. Sometimes these exceptions can 
be cleared up with the proper affidavit from a seller, but only 
if the seller has owned the property for more than two years. 
This is unlikely in most REO sales. 

b.	Rights of persons in possession or tenants: If there is a
lease that predated the mortgage, it may not be cut off by the 
foreclosure. Also, in many cities, tenants may have certain rights
that cannot be cut off, such as rent control and/or rent 
stabilization. These are also impediments to marketable title 
because there are people who have rights in the building that 
survive the foreclosure. 

c.	Building code and easements, covenants and restrictions: 
There is no guarantee that the premises comply with any building 
codes, and violations of record may not be cut off in a 
foreclosure. Most REO’s are sold “as is and where is” without any 
representation that the premises are legal or comply with any 
regulations. Also, covenants and restriction are not typically cut
 off in a foreclosure and they survive, even if they are being 
violated. If any laws, regulations, codes, covenants or 
restrictions are violated by the premises or their use, there is
a problem with marketable title. 

d.	The title policy from loan origination or otherwise may 
insure against certain liens of record. If the liens are still of 
record, despite the fact that there is now “insurable” title, 
the seller still does not have marketable title until and unless
 the liens of record are removed. 

THIS MATERIAL IS PROVIDED SOLELY FOR EDUCATIONAL PURPOSES. IT IS
 NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON BY 
ANYONE OBTAINING A COPY OF THIS MATERIAL FOR THAT PURPOSE. 
SPECIFIC LEGAL QUESTIONS SHOULD BE REFERRED TO AN ATTORNEY