Closing with a public encroachment

[Todd Handriegh]

Working on our first investment property purchase.  We're under contract less than 4 hours so far, working towards closing with a conventional loan.

The property is over 100 years old and has a detached garage that apparently, the back portion of which encroaches onto the public alleyway behind it, and has for many years.  The city is aware of this and is ok with it (I'm not yet sure what kind of certification or permission they've given) but the seller says they will forever reserve the right to take the property back and enforce removal of the structure should they ever need to.

Now in this case, with the alleyway being small and completely surrounded by residential homes built in the early 1900's, the odds are astronomical.  And according to the agent, this happens all the time (but she admittedly deals with cash offers most of the time).

However, this now has me fearing for my deal. 

I'm afraid to ask my lender before they've even seen the purchase contract because what if they refuse to even pre-approve me or accept the purchase contract?

I'm afraid to ask the agent for more information on the previous title history and any endorsements given because she might smell weakness and advise the seller that complications lie ahead...that they should abandon us and seek a cash only buyer.

But mostly, I'm afraid that I could pay for a loan application, an inspection, a loan commitment, and a title search and policy, and then be denied clear title and lose the ability to finance, and of course, lose the deal.

It's hard to imagine that, as frequently as this supposedly occurs with very old properties, that none of them would be allowed to be financed conventionally.

Does anyone have any words of encouragement that will save me some sleep tonight?  Will title insurance cover this if I pay for an endorsement or am I up a creek?