Why is Shadowing So Important in Real Estate Investing?

When someone says shadowing you may think of a sleuth following a spy or an episode on a TV show where a detective follows a suspect in a case. In fact, the term applies to one of the best kept secrets in the real estate industry. Still, only a few of the most active professionals use it regularly. That was until the past year or so when less active investors have been finding a critical need for it.

I mention shadowing because keeping it a secret isn’t as important as its purpose which is to help real estate investors stay out of a specific type of trouble – “Chain of Title or Defective Title” issues. It has been estimated that forty percent (40%) or more of all foreclosure properties have chain of title issues.

These defective titles become apparent sometimes when the property is flipped to another investor, or when the new buyer tries to get conventional financing for the property. The next closing agent is not employed by the lender who did the foreclosure and a more through title search is used. The problem can be a simple as the lender who foreclosed didn’t actually have the mortgage note and couldn’t legally foreclose but he did anyway. When the homeowner didn’t do any foreclosure defense, or even show up for the hearing, the title to the property was transferred at the auction sale to the lender.

An even more common problem is when the lender in the foreclosure process starts the foreclosure process by having the lis pendens delivered to the person on the mortgage and anyone who is living in the property. If someone accepts that notice of service that is not on the summons or related in a specific manner, the service is illegal. This means the foreclosure sale also may not be legal and a defect in the chain of title exists.

The problem is often referred to as a break in the chain of title. The break occurs when an individual entity transfers the property’s deed to another person or entity and he wasn’t the true owner of record.

A very common example is when an elderly parent is approached by his children and asked to sign a quit claim deed so when his time comes, the deed will be recorded and the property will transfer without having to go through probate. At least that’s what the children think. Actually, the property must be probated so the court can process all claims against the estate of the deceased. What if one child gets the deed transferred to him and the other siblings don’t get their fair share?

Often children transfer their parent’s properties before they have to put the parent in a nursing home to get state or federal monies to support the parent’s nursing care. These transfers can be illegal as they are masking the parent’s assets. They also cloud the chain of title when they are discovered, which can be years later.

Shadowing is the process whereby you have your title company review the title work of the closing agent for the transaction as soon as the closing agent gets the work completed. This is a necessity for us when dealing with REO (bank-owned) properties because of the inadequate reviews by the so called “factory closing agents” the banks use.

In summary, it may sound like an unnecessary expense to have title work done twice for a single closing, however, the cost is similar to an insurance policy in that the current cost is small compared to the risk exposure. The most common money-savings that we see are in faulty lien searches, missed water bills that have not become liens, and sellers in the chain of title who are not legally entitled to sell the property. Most of these issues can be cleared by paying off the liens, bills or judgments that exist or by doing a Quiet Title action in the court system which can take up to five years in some states – all of which are much more expensive that having your closings shadowed.

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