Whoesaling a Note?

Question

I posted this in the Note Forum 5 hrs ago and no answer. Maybe someone here can help

I was scouting for houses in my target area and called the number posted. After talking to the seller it sounds like they purchased NPNs because he said the closing would be on a Quit Claim Deed leaving me responsible for past due taxes and such. Also he said they had other houses and this one was out of a package.

I want to flip this quick, and can do so even with the past dues I found. I just am not sure if this will work like and normal closing and let my end buyer file Quiet Title or not. Any help appreciated.

Jon Holdman · Answer

I think what you're dealing with is a seller who's bought a REO or a package of REOs.  They're only getting a quit claim deed rather than a warranty deed.  Banks NEVER give true warranty deeds when they sell REOs anyway.  They will give "special warranty deeds", which are somewhere in between a warranty deed and a quit claim.  The seller is then turning around and selling the properties with quit claim deeds.  That leaves it up to you as the buyer to clean up the mess.  You, or your buyer if you sell this property, are going to have to go to a title company and buy title insurance on the property.  That's going to require you to pay any back taxes or other liens.

If Wells sold the property with a quit claim to your seller, one would reasonably assume they had indeed already foreclosed.  If not, they could have sold the note, but not the property.  If they sold the note it would have been up to the buyer of the note to foreclose or work something out with the borrower.

I don't know definitively what's going on in deals like this.  I think what is happening is that the banks get a property like this that has little value and just want to get rid of it.  Rather than going through the expense of cleaning up the title and selling it with a "special warranty deed" or your local equivalent, they sell it for a lower price with a quit claim.  You might be able to do a title search on your own, and a title company certainly could, and verify Wells did legitimately acquire some title to the property. Here in CO, you would see Wells had been given a "Public Trustee Deed", which is the end result of the sheriff's sale.  If you see that, then get a quit claim from Wells, you do have some legitimate title.  If you clean up the dregs (back taxes and any other liens), then you have a clean title.

You should be able to take your contract with the seller to a title company and ask them to issue a title policy.  If you have a title company you've done some business with, they may do the preliminary work for free.  That will turn up exactly what's on the house.  You'll have to clean up the mess before they will issue the policy, and you'll have to pay for the mess and the title policy.

Certainly, you could just turn around and sell the property to your end buyer.  You would only be able to sell with a quit claim, and your buyer would still have to clean up the mess.  Pretty sure there is no note involved here.

Bill Gulley · Answer

Hi, follow Jon's advice and go to the title company. I have never heard of a lender selling REO with a quit cliam, that is inappropriate. A quit claim deed would not warrant that anything was paid off to underlying potential lien holders, like an attorney fee incurred by the bank with the property! I think what you might find is that WF was the grantee. ALWAYS INSIST ON A SPECIAL WARRANTY DEED from lenders or government entities, (like the department of economic development) they can limit what ever they want in the warranty of title. Bill

Rodney Williams · Answer

I did find that Wells Fargo did Quit Claim this property for $9,000 to the co. trying to sell it to me for $16,000, and that there is $4500 in past due taxes. Would the reason they didn't get a Deed be because there are past due taxes?

The reason I was thinking they are the Note holder, and as you said they may be, is they are offering a package of homes and cut this one out of the package. I've never run into this before.

Rodney Williams · Answer

Thanks Jon, this sounds like what is going on here. The last recorded instrument is the Quit Claim from Wells Fargo. I will do what you suggested and get the help of a Title Co. This makes a lot of sense now.

Don Konipol · Answer

No. A purchaser of a note gets the note only.  The note is an obligation to pay a certain amount of money over a certain period of time. A real estate note is a note secured by real property.  The security interest in real property is perfected by either a deed of trust or a mortgage.  If the borrower defaults, the lender or note holder is then able to foreclose (sell the property at a sale) to recover thew amount owed.  In order to foreclose a specific set of procedures must be followed, pertaining to notification, posting with the county, and conducting a foreclosure auction.  All state procedures are different, In some states a judicial order allowing foreclosure must be obtained.  If no bidder bids at least the amount owed including back interest, penalties and legal fees, then usually the lender (note holder) will bid in the amount owed and obtain ownership by being the winning bid at the foreclosure sale.  The winning bidder is then owner and can lease, sell, rent the property for whatever price the market will bear.  
I don't know why you are thinking that the sellers offering a quit claim deed are the noteholders, they may very well be but a quit claim deed is a record of possible ownership while a note holder holds an indebtness secured by the property.

Don Konipol · Answer

There are actually a few different concepts here.  A quit claim deed is a transfer of title with no warranty - essentially says I am transferring to you whatever I own.  So if seller owns no interest in the property you get no interest, if seller has partial interest you get partial interest.  Obviously no title co will touch this.  Further, you're buying it subject to any existing liens and encumbrances, and subject to any title defects past, present or future.  
Obviously, even with a thorough title search you may end up with much less than you figured.  Transferring title to a new buyer would most likely entail engaging a title company to "clean up" the title, a proceess that could be very long and expensive.  Quit claim titles are mainly used when a seller has little or no equity in a property and a purchaser wishes to get control anyway, and is willing to give the seller some walking away money, usually less than $1000.00.
Different states have different laws about real estate ownership interests.  Quiet title filing usually is a means by which an individual can provide notice for anyone with any unstated claim to come forward and state his claim.  After a period of time if no one makes claim the filer motions the court to state that any other parties are excluded from ownership and he has whatever ownership is he is claiming.  This is a aspect of the law that is very technical and subject to possible lawsuits after the fact usually based on non notification.  
Bottom line is that you are considering getting into a legal area where specialized knowledge and legal advise by a real estate law specialist is absolutely neccessary.

Rodney Williams · Answer

Thanks for the reply and info Don. So is this what a purchaser of notes gets, is a title with no warranty?

Whoesaling a Note?

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