Closing with a tax lien in Georgia

[Jennifer D.]

Would you close with a $63k lien on a $15k property in the Atlanta metro area?

We are under contract to buy the vacant property for $15,000.  It has an existing lien of $63,000, and the title is still under review with the title insurance company as to whether they will even insure the title.

Regardless of whether they will insure the title, I wonder whether we should back out.  

How does title insurance work?  What if, for instance, we spend $150,000 to build a house on the property?  Will the title insurance cover the $15k purchase price plus the $150k house should someone come calling on the lien?

Is there anything else we need to know?  

Thanks!

jennie

[Gene Chandler]

What kind of lien? IRS, Judgment, City, County Lien? 

[Ned Carey]

@Jennifer D.title insurance only covers you for the price of the property. You may be able to get a higher limit policy but that is not the norm. Ask your title company.

[Jennifer D.]

@Gene Chandler, it is even worse than I thought. There are four liens on the property:

1. Security Deed filed and recorded in 1986 in the amount of $63,000

2. Federal tax lien of an unspecified amount, recorded at an unspecified date

3. Abstract of judgment notice of an unspecified amount recorded at an unspecified date

4. Department of justice notice of lien recorded at an unspecified date.

Thanks for your thoughts!

Jennie

[Wayne Brooks]

Run, don’t walk, away. Title insurance will Not cover any known existing liens.....period. 

[Gene Chandler]

Wayne Brooks is correct about what the title insurance covers or not. Some liens only exist on paper. They could have been satisfied or expired years ago but have never been formally taken off. It is possible to do the research and find out. I've had some on assets that were valid and received reductions for payoff and removal. I've had some that had been satisfied by a statute of limitations but were still showing. I questioned it and "poof" they were removed.

[Chad U.]

Off the top of my head, I believe (but do your own research to confirm) statute on Security Deeds in GA run 20 years past maturity or the execution date if there is no maturity. 

If it's a screaming good deal, you could buy it and then do a quiet title afterwards.  This will be an extra $2K to $5K and approx 6 months, but would ensure clear title. However you may chance having to pay one or any of the liens.  

[David Stewart]

I just closed one this week in Douglasville, GA with multiple liens, and it was basically similar to your case.  It took 6 months to negotiate all of that, mainly because of an unresponsive law firm representing an auto sales company.  If you haven't worked out what the lienholders are willing to accept to remove the liens from the property/settle with the seller, you are going to be saddled with them.  If the property's value is such that you can pay them off, ok.  If it is not, you had better negotiate with them while you can avoid being taken for the full amount.  Personally, unless you have negotiated with all lienholders, and knowing what I know about your situation (which probably isn't enough to say this), I would walk away.

[Jennifer D.]

Hi, Thread Buddies, @Gene Chandler, @Chad U., @David Stewart, @Wayne Brooks, @Ned Carey.

I've got info on the liens, and they sum to $180k. Given that this would be a $15k purchase, we are ready to walk.  But...

We are thinking of offering $1,000, thinking that the investment bank that owns the property may not know about the liens and would be happy to have it off their books.  Our logic is that, in the unlikely event that our proposal is accepted, we would either be: 

1. Stuck with a lemon of a vacant property that we can never sell for profit, OR

2. Able to clear the title, and we'd have a great property worth a lot more. 

What are your thoughts on this?  Are we forgetting any other risks, e.g., we'd never be able to get a loan to build a house on the property, etc?

Thanks!

jennie

[Jennifer D.]

Also, any tips for getting our earnest money back?

[David Stewart]

Negotiate with the lienholders before the close is my only real advice.  Otherwise... the whole deal is opening a can of worms you are unlikely to want to open.  To be clear, I have not purchased a property with liens that weren't negotiated prior to purchase, so I am not as much of a close and quiet guy.  I don't know that part of it and would be unlikely to risk such an intensive legal procedure that I don't know the likelihood of clearing.

[Wayne Brooks]

@Jennifer D. Let’s back up a  bit....

Is this a REO? They are are typically sold free and clear.

What kind of liens are they?

Is someone knowledgeable telling you these liens are are still attached to the property Or are you just seeing them on a title search report? (Liens that are wiped out by “operation of law” don’t show up as “satisfied” or “released” although they are no longer attached)  Most liens would be wiped out by a foreclosure.

Your logic of offering $1000 doesn’t make sense.

[Jennifer D.]

@Wayne Brooks,

It is not a real estate-owned property. An investment bank (Berkshire Hathaway) bought the property I think in 2012 and held it as part of an institutional investment. back then,I think institutional investors were buying properties and renting them.

There are four liens on the property: a security deed for $63,000, one from the department of justice for $115,000. This one looks like their dependent was convicted of a crime. There is also a federal tax lien for $1000.

These are the products of a title search, which was conducted for us by a competent attorney. However, the attorney acts on behalf of the title insurance company, not us.

[Jennifer D.]

@Wayne Brooks, also, the attorney says that the $63,000 security deed might be paid and no cancellation ever filed, but they simply do not know and would need to do a lot more digging to find out. One very interesting thing I found out is that “clear title “ does not mean there are no liens. It simply means that a title insurance company is willing to ensure the property. This would make sense if we were buying a piece of land with a house on it, but it does not make sense for us to buy a piece of land and then improve it if it is only insured for the cost of the land.

Clearing liens is not something that the closing attorney will do for us.

The last of the liens expires in 2036. 

[Ned Carey]

.@Jennifer D. What does the contract say? Most contract say something like "seller to provide fee simple title free of all liens and encumbrances" 

If the contract uses such language and they cant do that then you are entitled to your deposit back.  In fact they are contractually obligated to pay the liens and sell it to you clear of all liens.From a practical matter, most sellers would not pay off $180k in liens on a $15k sale. It is possible but not practical to go after them and force the sale. 

[Jennifer D.]

@Ned Carey, our contract says that they are required to provide clear title, but then goes on to define clear title as the title which is insured for the sale amount. The contract also does allow either party to enforce specific performance. This is what it says:

“ if seller fails or is unable to satisfy valid title objection to add or prior to the closing or any unilateral extension thereof, which would prevent the seller from conveying good and marketable title to the property, then buyer, among its other remedies, may terminate the agreement without penalty upon written notice to the seller. Good and marketable title has used herein shall mean the title which a title insurance company license to do business in Georgia will ensure at its regular rates, subject only to standard exceptions.”

[Ned Carey]

@Jennifer D. well maybe it is in another part of the contract about costs and adjustments otherwise this is a poorly written contract. It does seem that you should easily be able to get your deposit back arguably file for specific performance. However I just don't think that is practical. There are other deals out there. 

[Jennifer D.]

@Ned Carey, Thanks. We exited the contract, and they did give our earnest money back. I learned a lot in this transaction, though. The big lesson was to make sure the contract specifies delivery of clear title, rather than just marketable title. Marketable title includes any title that a title insurance company will ensure, which isn’t very useful if you are buying vacant land and planning to develop it.

Cheers!

Jennie

[Ned Carey]

@Jennifer D.

I don't understand your comment

Marketable title includes any title that a title insurance company will

ensure, which isn’t very useful if you are buying vacant land and
planning to develop it

I am guessing you are referring to; if the land is not build-able or usable for what you intend. Clear title does not cover that. Whether land is usable or not is not a title issue. Those are zoning and environmental issues that generally do not relate to the title. Am I misunderstanding you?