I would not have believed it if I hadn't seen it for myself.
I just listed a beautiful home my new clients built in 2005 on a vacant lot they bought from the neighbor who used to live next door. The neighbor lived on lot 23 and split and sold them lot 24.
We were sitting at their kitchen table talking about the mortgage process and current interest rates when my client casually mentioned that when they attempted to refinance a couple of years ago, “there was some sort of little problem with the title work” involving the original owner. When the title company contacted the original owner to resolve this "little problem", the previous owner was uncooperative. He was focused on the "what" but I honed in on the "why". Why would the neighbor be uncooperative in correcting something wrong in the title work?
It is not uncommon to find a mortgage lien from a previous seller still on title. This happens when the previous lienholder has failed to file a "discharge of mortgage", releasing the lien after closing, so it remains recorded against the property in the chain of title.
Typically an easy fix, I obtained and submitted a copy of my client's HUD-1, (the Federal document required at closing which discloses all the charges and disbursements) to the title company, proving that the previous owner's mortgage had been paid in full at closing. I then set about to get that lien released. If I were unsuccessful, it would mean my client would have to hire an attorney and sue in court to "quiet title".
This is where it gets good.
Before I even put the property on the market, I pre-emptively had my title company pull the chain of title and to my relief, there was no mortgage recorded against my client’s property. However, a few filings down, there were two Quit Claim deeds filed against it.
On the day after my client closed with the neighbor on vacant lot #24, the neighbor prepared a Quit Claim deed, deeding the property from himself (as if he had never sold it) to both himself and his new wife, and recorded this deed against at the county. Yes, on the property he had just sold to his neighbor, but wait, it gets better...
He then proceeded to obtain two mortgages totaling over $200,000 against his own lot AND the lot he just sold to my clients!
According to the county records, six years later, in August, 2012, the previous owner filed another Quit Claim deed on the property; this time, deeding the property into his newly formed Family trust.
So that you have a clear picture of the chain of title:
2/15/2005 - My client buys vacant lot #24, split from neighbor. Client mortgages this property for $150,000 and proceeds to build.
2/16/2005 – Previous owner records a Quit Claim deed against the property he just sold, deeds it to himself and his wife. (The day after closing)
4/17/2005 – Previous owner mortgages this property along with his own (as in “lots 23 and 24”) for over $200,000. There are now three mortgages on the same property totaling more than $350,000. by two different parties.
8/12/2012 – Previous owner files a second Quit Claim deed against the property, putting it into his Trust.
I was utterly dumbfounded. How in the world could someone have deeded a property they do not own to themselves? Studying the chain of title, I slowly came to the realization that the previous owner totally worked the system; illegally filing the deed and mortgages on the property at the perfect window of opportunity: just after collecting his money at the closing table on 2/15 but before the sale was recorded at the county in public records 4/28. It is not at all uncommon for a recording to take 2-3 months at the county level. During this time, the original deed conveying the property to my client was not public record.
Believing most problems are just puzzles, I went to work solving this complicated labyrinth of deeds and mortgages on behalf of my client. I began with the last deed of record and worked backward. Thankfully, he had used an attorney to prepare the most recent Quit claim deed, and the attorney's name was right on the deed in the "Prepared By" disclosure.
Certain this person had also duped the attorney, I got my facts in order, googled the attorney, and called him. I was calm and pleasant while explaining the situation, dropping little verbal grenades, like: "I'm certain you are unaware", “unwitting party to a fraudulent deed”, “intentionally clouding title”, “failure to properly research chain of title”, “damages as a result of preventing a sale” etc.
Like a good attorney should, he listened more than he spoke, promised to research the situation and get back to me. I saved him the effort and sent him all of my documentation.
He returned my call the next day and offered to prepare two new deeds: One, deeding the properties back to my client from the previous owners and a second deeding it back to my clients from the previous owners Trust, thus correcting both of the deeds that had been “filed in error” by his client.
Of course, I had already prepared my own Quit Claim deeds, making certain they were approved by the title company insuring the title. I received a call yesterday that both Quit Claim deeds have been properly executed by the previous sellers, and he will be delivering them to me tomorrow. I want to be responsible for having them properly recorded at the county. Success! Problem solved for my client without incurring any legal fees.
The disturbing conclusion:
This could have happened to anyone. A seller is responsible for clearing his own title; even if it was erroneously or deceptively clouded.
I recommend everyone do their own title investigations on certain occasions. Particularly, after the property is included in a Trust, upon the recording of a death certificate of an owner and about 6 months after purchase, refinance, or mortgage payoff. Look to make sure the title is held by the current owner and proper lien discharges have been recorded.
If you don't want to do the investigative work at the county yourself, contact a reputable title company in your area. They will do the search for you and it isn't very expensive since they aren't issuing a new policy.