We Loaned on a Stolen House

[Jeff S.]

Local wholesaler gets a response from some bandit signs. A homeowner is willing to sell his vacant hoarder house and adjacent lot in a nice area in Los Angeles. Sale price for both properties is something over $500k (I’m not exactly sure). He pays cash, which is unusual for a wholesaler but completely legit, and he closes appropriately thru title and escrow and also obtains an owner’s title policy.

Some weeks later, the wholesaler contacts our borrower, a local and very experienced house flipper, who agrees to buy both properties for $610k. House will take about $75k to fix and end up with an $875k ARV. Not a barn-burner, but the lot next door will be sold quickly for $100k to make this a great deal.

Our borrower’s transaction is handled through the same independent escrow and title company that handled the wholesaler’s purchase. Our borrower gets an owner’s title policy and we obtain lenders title insurance in the amount of $685k. We fund and close like any other normal boring loan.

Two days later, our borrower is standing in the property planning the rehab. A gentleman walks in and asks who he is. He says he’s the new owner. The gentleman says he’s the owner and never sold the property. Uh, oh.

The escrow company calls the notary who witnessed signing the grant deed for the original sale to the wholesaler. At first, she doesn’t return the call but calls back a few days later claiming she lost her notary book or it was stolen. More uh, oh.

Everyone files a title claim and a police report, including us. Title opens an investigation.

I understand the wholesaler, who we never met, sent all his profits to the title company. He’s even. As a result of the great long-term relationship we have with our borrower, we loaned him 100%, so he’s out almost nothing as well, but has been paying for fire and hazard insurance since he closed. We’re out over $600k but with either a legit 1st position lien or a credible title claim. I’m not worried.

I called our lawyer asking if we need to hire him. With almost no info from me, he virtually repeats what happened and what will come. He advises us to sit tight and let title “do their thing.” No need to hire him unless someone files a lawsuit or title denies our claim. He tells me this could take two months or two years to resolve. Aren’t I thrilled.

Title does a four-month investigation, interviewing everyone and their brother. It appears the police (I think?) were able to search bank records and determined the “real” owner never received any money and was telling the truth -- he never sold the property. The grant deed was indeed forged, though we don’t know by whom and I don’t know the involvement of the notary.

It also appears the escrow company, which is an independent escrow (not associated with a title co.), did not require the seller to present himself with proper ID to sign a notarized grant deed. They accepted everything by mail – and obviously from a scammer. You’d think this would violate a title company rule???

We just received a check from title for our principal and interest. We were also owed points but title claimed they were not part of the “indebtedness.” Our lawyer said we could argue but it would take a while and the outcome wasn’t certain. Per his recommendation, we require the value of our lenders title policy must be at least 125% of the loan value. Frankly, we would have been happy just getting our principal back so we’re happier than a pig in you know what. The system worked for us.

This problem it seems occurred because escrow either didn’t follow proper processes or because they didn’t have any. Bottom line is don’t even think about buying or lending on a property without proper title insurance. Make sure your policy will cover all your potential losses.