Buyers should understand accepting the REO's economic incentive to reduce their transactional cost may in fact lead the buyer to inherit significant unsecured tax lien exposure well above this cost. I know what you are thinking:
REOs sometimes use Special/Limited Warranty Deeds (SLWD) to transfer Title. These deeds DO NOT necessarily provide CLEAR TITLE.
When using a SLWD the seller warrants or guarantees the title only against defects arising during the period of grantors ownership of the property. The grantor makes no warranty against defects existing before the period prior to ownership.
My understanding is the grantor of a SLWD conveys the property with only two warranties:
1) The grantor received title to the property; and, 2) The property was not encumbered during the grantor's ownership, unless otherwise noted specifically in the deed.
The grantor of a SLWD warrants the title only against the grantors own omissions and/or defects, and warrants nothing pertaining to the title prior to grantor's possession.
A real-world example
In mid 2011 my client made an offer on a REO and elected to not use the REO's designated Title and Escrow companies; instead, the buyer selected and paid for local Escrow/Title. Our Title Rep performed an Assessors Parcel Number lien search and found some items that would need to be paid (old secured lien Mello-Roos and property taxes tied to the property itself during the original owner's possession). Here's the important part:
In addition, the Title Rep also ran a report on the new REO Owner's Company name, which uncovered "unsecured liens" NOT tied to the subject property but tied to OTHER REO properties owned or currently held by the REO Company. As it turns out, these UNSECURED LIENS would need to be paid in order to provide clear Title! The initial outstanding lien amount was ~$4K; however, as the transaction progressed and the County Assessor updated the outstanding lien amount it quickly grew to ~$12K as other REO property liens owned by the same REO company stacked up on our property!
This obviously created an issue for both the buyer and seller, so I requested an explanation from the Chief Title Officer, who informed me many Title professionals wrongly believe the liens only affect the parcel numbers listed on the liens; however, "unsecured liens" occur because at the time the tax assessment is made the referenced Debtor no longer owns the assessed property and consequently the tax bill cannot be placed on the secured tax roll. The Tax Collector's recourse is to record a Certificate of Lien (COL), and the authority to do so is contained in California's Revenue and Taxation Code Sections 2191.3 and 2191.4.
The effect of recording the COL creates a lien ON EVERY PIECE OF REAL PROPERTY owned or acquired by the Debtor during the 10 year life of the lien (which can be renewed in 10-year periods). This is normally explicitly stated in the COL with verbiage like "This lien has the force, effect and priority of a judgment lien for a period of ten years from the time of recording."
According to the CTO, when the process to establish a COL is done correctly and despite the confusing title, "unsecured liens" can be, in effect, judgments and constitute liens on the subject property.
Caveat Emptor! (Buyer Beware)
With already battered County budgets becoming even more anemic over time by budget cuts and reduced property tax valuations it stands to reason the COL tool may be rearing its head in increasing frequency as a means shoring up future County funding; hence, a few important suggestions for REO Buyers:
In addition to RESPA's Section 9 prohibition of Seller-directed Title selection, as of 10/11/09 the Buyer's Choice Act (CA Assembly Bill 957) prohibits an REO lender selling residential property up to four units from directly or indirectly requiring the buyer to purchase escrow services or title insurance from any particular company. A buyer, however, who has received written notice of the right to make an independent selection, may agree to the REO lender's escrow or title recommendations. An REO lender that violates this law can be held liable for three times the charges the buyer incurred, whereas a violation by the seller's agent may be subject to license disciplinary action. This law expires on January 1, 2015