Homeowners have approached you about listing their $500,000 residence for sale. They inform you that they have paid off the mortgage on the property and own the residence outright. You check the comparable sales in the area, inspect the property, confirm that title is in your clients’ name and prepare a listing agreement for the property with an offering price slightly above the estimated value.
Within days of listing the property on the MLS, you have received a full price offer, which your clients accept. The agreement contains the standard conditions for closing, including the issuance of a policy of title insurance showing that title will be vested in the buyer and that there are no liens encumbering the property.
So far, so good, you think, until you receive a copy of the Preliminary Title Report showing that there is a deed of trust encumbering the property in favor of a now defunct savings and loan association. The buyers are threatening to walk away from the transaction unless the lien is removed.
Further, no one is happy with you! The sellers repeatedly state that they paid off the lien “years ago” and claim that you were negligent in listing the property without confirming “title was clear.” The buyers and their broker make a similar claim and state that the MLS listing contained misleading information. They have given you two weeks to fix the problem. What do you do?
This post will discuss the obligations of the listing agent with respect to (1) his or her due diligence investigation prior to listing the property for sale, and (2) possible remedial action to clear title.
Duties of the Listing Agent
The job of the listing agent is to gather and confirm all pertinent information concerning a potential listing. Failure to do so can result in the situation outlined above or any one of a thousand of other problems. This means exposure of the listing agent and broker to significant liability for, at the very least, making negligent misrepresentations or omissions of material facts.
The real estate sales agent has available any number of sources for obtaining pertinent information about the property but perhaps the most important source is the owners. You should thoroughly interrogate the clients about the property, title issues, litigation, and condition issues regarding the property or conditions peculiar to their neighborhood. Unfortunately, owners frequently have imperfect knowledge concerning the property, may not have completely understood the legal impact of various events related to title, or kept inadequate records; nonetheless their understanding, regardless of imperfections, should provide a starting point for your research.
Once the clients have provided you with their basic knowledge, you must also ask them to provide any records they have supporting each fact. For example, if the owners claim they paid off a lien, you should ask for proof of payment or any reconveyance document issued by the lender. Similarly, if the homeowners indicate they made improvements to the property, you should inquire about construction permits and the possibility of a mechanic’s lien or design professional’s lien against the property. Another consideration is the existence of pending litigation (whether a family law matter or a dispute concerning, for example, easements) which can impact title.
What else should you do under these circumstances? The first requirement is that you examine the public records for supporting documents. The County Recorder’s Office will maintain records reflecting title to the property, including recorded deeds of trust or mortgages, deeds of reconveyance, grant deeds, easements and Covenants, Conditions and Restrictions. Other sources of information that the sales agent should have in hand are tax bills and property surveys or subdivision maps that establish the legal description of the property. Court filings involving the owners of the property are also a ready source of information. Depending on the location of the property, most of these documents are available online through searchable databases maintained by the various government agencies.
If you cannot access or search all the public records yourself, another source for recorded documents would be a title insurance company that can provide you with a property profile. Typically, title insurance companies provide courtesy property profiles to real estate agents free of charge since they hope that if you make a sale that they will write the title policy. Property profiles will list the documents affecting title, including outstanding liens and recorded easements. When ordering a property profile, you should be sure to ask for the documents supporting the disclosures contained in the profile.
The foregoing investigation, of course, is not the only due diligence that must be conducted by the seller’s agent. The seller’s agent and any cooperating agent have the duty to conduct a reasonably competent and diligent visual inspection of the property. Further, the agent must disclose to a prospective buyer all material facts affecting value, desirability, and use of the property. (The disclosure requirements are beyond the scope of this article but will be discussed in another post.)
Fixing the Problem
Assuming that the failure to disclose issue is limited to the lack of recordation of a lien release or a reconveyance, there are a number of approaches that can be taken to cure the defect. Some solutions can be achieved more quickly than others can and might enable you to close your transaction. Others solutions involve court action and likely a lengthy delay.
Typically, when a debtor (trustor) pays off the loan, the lender (beneficiary) must complete the “Request for Reconveyance” and submits the same to the trustee. (See California Civil Code section 2924(b)(1).) The trustee, in turn, must execute and record the full reconveyance within 21 days and deliver a copy of the reconveyance to the beneficiary. If the trustee does not do this, the beneficiary must substitute in as trustee and execute a full reconveyance.
Assuming the reconveyance was not recorded, a quick telephone call to the lender might result in an easy resolution if they can locate the underlying records and issue a reconveyance. If you are lucky enough to locate the financial institution that held title to the deed of trust or mortgage encumbering the property but they are uncooperative, you may be able to obtain cooperation by reminding them that by statute they must promptly issue reconveyances.
Regrettably, this relatively easy fix may not be easy to achieve. Many residential mortgages will have been sold on the secondary market and/or servicing will have been assigned to third parties. Complicating this, the savings and loan crisis in the 1980s and the Great Recession that commenced in 2008 resulted in the collapse of many financial institutions or the purchase of assets by other institutions. Tracking down just who owned any particular loan can be a daunting task and may involve sorting through public records reflecting assignment of assets or other documents reflecting mergers, conservatorships or liquidation of banks or savings and loan associations.
A second approach entails enlisting the cooperation of a title insurer. Civil Code section 2921, subd. (b)(3)(B) provides that if the trustee or beneficiary has not executed the full reconveyance within 75 days after the loan payoff, “a title company may prepare and record a release of the obligation” after giving notice to the parties to the Deed of Trust. The release issued “shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of the deed of trust.”
Title companies are risk averse but make their money by selling title policies. They thus have an incentive to issue policies if they have reasonable assurances the loan was repaid. Usually, senior title company officials and not the front line title officer make these decisions. You may need to engage an attorney with a strong relationship with a title company to assist you in this process.
A third approach will be for the sellers to engage an attorney to file an action to quiet title to property. While this method will likely be effective in the long run, it may take one or two years to achieve and can be costly—and from the real estate professionals point of view, useless since the pending sale will likely fall through.
The simplest of mistakes can result in intractable problems. The obvious lesson to be learned is to avoid mistakes by assiduously performing due diligence before offering the property for sale. Review the material facts concerning your listing and confirm their accuracy through public records or reliable sources such as title companies. Further, it is critical that you maintain documents supporting your investigative efforts in your file as they may be required to prove that you were not negligent or can assist you in responding to particular questions that a potential buyer may have.