Chain of title is a legal concept that serves as the backbone of property transactions, ensuring a clear and unbroken history of ownership. Ideally, any issues with a property’s chain of title should be resolved before you acquire it to avoid costly legal fees or future disputes of ownership. Read our blog to learn more about the specific elements of the chain of title in real estate investment and how you can research a property’s title beforehand.
What is Chain of Title?
The chain of title is the sequential record of historical ownership and transfers of a property. It is a comprehensive documentation that traces the property’s ownership from its origin to the present day. This paper trail, or chain, ensures that each transfer of ownership is legitimate and unambiguous.
Common documentation that establishes chain of title includes:
Deeds: these legal documents transfer ownership from one party to another. They include the names of the buyer and seller at each point of transfer, a description of the property at that time, and the terms and conditions of the sale.
Encumbrances and Liens: Any outstanding mortgages, liens, or encumbrances on the property are documented in the chain of title. A lien implies partial or full ownership of the property by a creditor, while an encumbrance can dictate or restrict how the property can be used.
Easements and Restrictions: An easement on a property gives another party access to the land or plot on which it sits. Restrictions can limit how you will use the property itself. For example, you may not be able to use it as a rental home or other source of income under certain restrictions.
Involuntary vs Voluntary Liens in Real Estate
There are two categories of liens that may be placed on a property: voluntary and involuntary. Voluntary liens do not negatively impact credit scores and use the home as collateral to secure a loan to purchase it. A mortgage and a HELOC are two common types of voluntary liens.
Involuntary liens, on the other hand, are those ordered by a court, municipal government, or other entity until a debt is paid. There are several types of involuntary liens, including:
- Property tax liens: the homeowner is delinquent on property taxes
- Federal tax liens: the home is used as collateral until outstanding federal taxes are paid
- Mechanic liens: a contractor has not been paid for services provided
- Association liens: the homeowner owes dues to a homeowners association, for example
Importance of Chain of Title in Real Estate Investing
Obviously, the seller of the property you wish to acquire will need to have the legal right to sell it in the first place. The chain of title is one way of demonstrating this right. So long as they have the documentation to support their legitimate ownership of the property, they can sell it as they see fit.
Trying to assert ownership of a property without a clear title is extremely difficult. You will likely need legal representation to deal with any liens or property line disputes, and you may need further assistance should anyone else claim ownership of the property.
You could also run into trouble if there are any restrictions or easements on the property that dictate how it can be used.
If you intend to sell the property after purchasing it, keep in mind that it will also be much more difficult to find a buyer if there are any remaining issues with the title. You may have the resources to work around liens or restrictions, but most individuals looking to buy a property for personal use do not want to have to worry about ownership ambiguities.
Causes of Common Title Issues
Undisclosed Liens or Judgments: Hidden liens or other encumbrances not disclosed in the title search can cause hiccups in the chain of title.
Boundary Disputes: In some cases, property boundary disputes may arise due to inaccurate or inconsistent property descriptions within the chain of title.
Recording Errors or Incomplete Documentation: mistakes in public records, such as incorrect misspelled names, can create issues in the Chain of Title. Likewise, missing or incomplete historical records can result in title disputes.
How to Check Chain of Title Status
Most of the documents needed to establish a free and clear title are of public record. You can submit a request with your county clerk and recorder for deeds, property tax statements, liens, and court documents related to the property you are investigating.
It is also strongly recommended that you work with a title insurance company. Not only will they verify that the title of your desired property is clear, they will also protect against any future losses associated with title disputes and discrepancies.
Real Estate Investment Colorado
Looking to expand or diversify your investment portfolio? With the right strategy and funding, purchasing real estate is an excellent way to do this. In the state of Colorado, the professionals at Pinetree Financial offer fast, flexible loans to suit virtually any type of real estate project. Whether you are looking to acquire an existing property or build one from the ground up, we can help. Call or go online today to get started.