Buying a REO with a quit claim deed - bad idea?

Question

Hello BP,

I came across a property (SFH) that is offered for sale with the following clause:

Buyer will accept with a quit claim deed-no title insurance, assume any liens, code violations, fines.

The property is owned buy a bank but I wonder what can possibly be so wrong with the title that the bank cannot fix it and want to quit claim it to a buyer. I understand about code violations and fines but what else can be there?

How can I protect myself against possible title issues?

Thanks

Nick

PS: @Rocky V.  and @Bill Gulley, may be you can help?

Bill Gulley · Answer

Be careful about "multiple offers" they lie!

If they won't allow any inspection or previewing then expect a complete gut job and bid on what you can see.

Fannie "sent" the property back to the originating bank most likely, banks don't just buy properties.

You'll need a cash offer, but they can't tell you that you cannot get financing, they just don't want any financing contingency.

The property should be listed, ask that agent why the property isn't being shown, it should be to seek the highest price. Something doesn't sound right, does the Realtor have a buddy in the bidding?

Just some thoughts, is it really that good of a deal? :)

Rocky V. · Answer

Going to agree with @Wayne Brooks on this one.  Just had an issue last week with a seller who was given her property by Quite Claim Deed, Capital Title would not accept this.  So seller had to sign heirship affidavits and other paperwork in order for Capital Title to ins.   Luckily it closed but I can imagine the frustration this can cause.

From LoneStarLandLaw.com -

Quitclaims

Clients  often call a lawyer’s office and say they need a quitclaim deed. The lawyer’s  response should almost always be “No, you don’t.” Why? For one reason, a  quitclaim is not a true deed at all since it is technically not a conveyance.  It merely “quits” any “claim” by Grantor to any right, title, and interest that  the grantor may have in a certain property, if any such interest exists. It  does not “grant, sell, and convey” as does a deed. See Rogers v. Ricane Enterprises, 884 S.W.2d 763, 769 (Tex. 1994).  Secondly, from a practical standpoint, title companies disdain quitclaims and  will frequently require that a proper deed be obtained instead. One does no  favor to the chain of title by inserting a quitclaim into it. If the seller is  unwilling to provide a conveyance with warranties, then an investor buyer  should insist on a deed without warranties instead of a quitclaim.

Nick B. · Answer

I would do like you suggested, Bill, but the bank doesn't allow for inspection contigency or option period. That kills the deal for me even without QCD.

Title company that the bank wants to use (and they won't use any other company) won't issue a title insurance with QCD.

Bill Gulley · Answer

Then @Nick B. it sounds like you need to go back and look again with your contractor.

Ask the conventional lender about purchase and construction loans with an end loan after completion. Your contractor should be familiar with this type of financing. You'll need plans and specifications along with 25 to 30% down (might get it with 20%).

Did you ask a title company if they would provide title insurance with a CQD from this bank? :)

Nick B. · Answer

@Bill Gulley,

The house is listed on MLS and I saw it inside. It needs a full rehab indeed. The big unknown is the price of that rehab, of course. That's why I need a contingency that the bank does not want to give me.

My preliminary numbers are: ARV - $160K, offer $90K, rehab+transaction costs - $40K, rents $1400/mo. So, based on these numbers, it's a good deal if rehab can be done below $40K.

As far as financing, a conventional lender won't do it because of the general house condition and a hard money lender won't do it because of QCD that is not insurable.

Nick B. · Answer

Thank you @Bill Gulley for your very detailed and clear answer. This deal has more hair on it than just QCD:

• original owners were foreclosed upon by Fanny Mae;
• then the property was transferred or sold by Fanny to this bank;
• the bank has been sitting on it for 4 years and finally decides to sell, but
• in addition to QCD they want cash only (not even hard money);
• 10% earnest money deposit - I have no problem with it if I can get it back in case the deal does not work out - but they allow for
• no option period and no contingencies of any kind!

That last bullet point makes it a no-go for me because I need an option period to inspect the house, get contractors bids, and make sure those bids are below my repair budget. Oh, and there are multiple offers on the house already.

Bill Gulley · Answer

Nick, banks sell with QCDs because it limits their liability greatly, they are selling whatever interest they may have in the property. Title companies recognize this, unlike buying from a non-institutional lender.

There may not be any issue with that property but it could be a standard listing clause used by that bank, just in case there were any issues.

Ask a title company to do a preliminary title search, that's a quicker version of a search, they can tell you about all current liens or other clouds on title. I got mine free but they may have a smaller fee.

From that you can make an offer, if there are costs to obtain clear and insurable title deduct those from your offer and describe the liens that need to be cleared by you at settlement. If you are getting financing, list those liens with your lender.

Get title insurance at closing, that bank is simply saying they will not warrant title but the title company will see how the bank obtained title, from a foreclosure. They can also see the filing process that the bank did, the risk to the title company is slim, such as a wrongful foreclosure. The previous owner has other avenues to take with the bank if that bank messed up besides trying to obtain the property bank after a sale and most likely the borrower would be compensated without going to the title, but at that point the title company would then be paying you, not likely IMO.

With title insurance you are then free to warrant title when you sell.

Lone Star Law is correct, but the exception is with an insured institutional lender as the title company has recourse with that lender as well. Other than in this case, never buy real estate on a QCD and also look to the title insurance policy/binder, Schedule BII, exceptions to ensure the transfer from a QCD is covered.

Good luck :)

Nick B. · Answer

I got a little bit info on this deal. The bank is concerned that they might do something wrong in the foreclosure process and want to protect themselves by shifting these problems to the next owner via quit claim deed.

Jeff B. · Answer

Because they don't want to due the work you're doing now AND to be responsible in the Title insurance.

Nick B. · Answer

Sure, I got the title search part and a need to pay off whatever outstanding liens may be there. Does it cure the title though? Say I did the title search and found $1000 city fine. If I agree to pay that fine, does it allow the seller to cure the title and issue a warranty deed?

I guess my main question is why seller (a big bank!) insists on selling via quit claim deed?

Buying a REO with a quit claim deed - bad idea?

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