The title insurace policy is what protects you from any threats against the property. The Preliminary Title report is issued to you once your purchase agreement has been accepted by the bank, and there is no guarantee that the IRS lien will show on that report. The title company must run the social security number of the previous owner (the person that got foreclosed upon) in order to find the IRS lien (if it doesn't show on the prelim) because it is associated with his/her income taxes not property. This is happening quite frequently now because the large number of properties that are now being foreclosed.

Fri Mar 14 2008, 16:24

The preliminary title report issued by the title company will normally disclose all the liens. Your purchase contract should have a clause in it that requires the seller to clear all debts, liens, and encumbrances off the the record of the property, before transferring title to you You are advised to read the preliminary report and then purchase (or even better require the seller to purchase ) title insurance, to further protect you.

The link below is the title industry consumer FAQ web site.

The agent that you work with and the title company officer will be able to answer your questions in even greater detail.

Fri Mar 14 2008, 16:07

Hi C. Olsen,
You can check with the title company for IRS tax liens. Remember, the title company needs to show clear title before the recording so be sure you have in writing that the bank is responsible for the clear title.

Fri Mar 14 2008, 14:51

Thanks for all your quick responses! How would I find out if there are also IRS tax liens on the property? The 30K owed is in back property taxes. There are no HOA's in this community so that won't be an issue. So once the title is transferred, what happens to all the liens on the property? Do they get taken care of by the bank prior to closing?

Fri Mar 14 2008, 11:18

If your agent writes your offer correctly*, the bank will be required by the terms of your accepted offer to pay the property taxes current before they transfer title to you. The banks are not required to bring the taxes current at the time of the courthouse steps foreclosure auction, nor are they required to bring the taxes current during their marketing ( listing period )

To those of us who are not employed inside the bank servicing department It would appear to be bad accounting practice, bad marketing and government relations on the part of the banks to allow the penalties and interest to pile up on the unpaid taxes. The cost of penalties and interest charged by the county can be higher than credit card interest rates.

Here is an example of how foolish it is from my perspective for the banks to go delinquent on the taxes.
Say the taxes are $2000 per year. If the bank misses both the first installment in November and the second installment in February, and does not pay until after July 1st. It will have to pay interest and penalties of about $255 for being delinquent. The annual percentage** rate that the delinquent taxpayer ( a bank, in this example ) must pay the county is approximately 25% In different examples the rate can be as low as 19% APR.

One would think that a solvent bank could borrow money somewhere for less than 18% annual rate.

*The CAR contract has verbiage to require that property taxes and penalties be paid current at the transfer of title. Have your agent make sure that this protective clause is not counter offered away by the bank's anti-consumer addendum. Obtaining title insurance is strongly recommended for buyers Title insurance is required by almost any new lender

** I am using Placer county penalties and default rates for my example. Being delinquent will cost the delinquent at least 10% of the past due amount even if the tax is delinquent only 1 day. The county allows no leeway on delinquency because the due dates are 40 days before the delinquency date in the autumn (effectively a 40 day grace period) and 69 to 70 days before the delinquency date in the spring. (effectively a 69 or 70 day grace period )

Fri Mar 14 2008, 11:14

Hello C. Olson,
You are correct that Title has to be cleared in order for a buyer to purchase the home, but that is not true when a bank reconveys the property in foreclosure. One of my clients just closed escrow on a REO this Tuesday, that did have IRS tax liens. She was not responsible for those liens. If you would like more information regarding this situation, please call me. REO properties have many advantages, but there are disadvantages as well.

Fri Mar 14 2008, 10:44

Back property taxes can be an issue and are not always paid. A bigger issue is a tax lien from the IRS on the property.. foreclosure will not clear those and you could be liable for paying off monies owed by the former owner.

Foreclosures are not always the "deal" people believe. You have to be very diligent in checking all aspects of the property

Fri Mar 14 2008, 10:12

Hi C. Olson,
The bank will give clear title at close of escrow like any normal closing. Be sure that there's no HOA because the banks in most cases will not pay for any back HOA dues.
Hope this helps.
Ken

Fri Mar 14 2008, 10:04