MARKETABLE vs INSURABLE TITLE FOR REO FILES
In many areas, the sellerâ€™s attorney is charged with the responsibility of preparing sales contracts. The
lawyer who has been around the track once or twice will ensure that the contracts require that the seller
tender only â€insurableâ€ title. In other parts of the country, it is the brokers and not the lawyers who are
responsible for preparing sales contracts. And more often than not, the contracts that are used are those
approved by local Bar Associations and/or Realtor Boards and cannot be modified in any way.
And all too frequently, these contracts provide that the seller shall tender and the buyer shall accept
â€œmarketable titleâ€. Unless either the contract or a rider/addendum addresses this issue, the seller is stuck
with this title burden.
Is there really a difference between â€œmarketableâ€ and â€œinsurableâ€ title? How do these terms affect an REO
The first question is whether or not an REO property can actually be sold with â€œmarketable titleâ€. For
starters, in many areas, â€œmarketable titleâ€ is generally considered to be the state of title which a â€œreasonable
personâ€ (have you ever met one?) would come to expect in a given transaction. There is more to it, but this
is the five-cent explanation. Marketable title would be expected when a homeowner is selling his house on
the open market. Insurable title, in short, is the title that a title insurer would insure without certain
exceptions. Often the difference is minor or academic, but not so with most REO sales.
In a post-foreclosure matter, the successful bidder (i.e., the lender) obtains title via a refereeâ€™s deed (or
sheriffâ€™s deed, depending upon where you are). This deed conveys only whatever title the referee or sheriff
was given pursuant to the Courtâ€™s order or similar circumstances. Typically, this deed will convey title,
subject to the following exceptions and issues: (by the way, this list is not all inclusive; it just gives you an
idea of the usual problems with marketable title in an average foreclosure). Further, since the
referee/sheriffâ€™s deed does NOT even come close to conveying marketable title, if the seller should offer a
buyer marketable title, it is giving MORE than it has! These are the typical issues which contrast
marketable vs insurable title:
a. Title companies will typically not insure any state of facts which may be shown on an accurate
The survey may disclose premises which are out of possession, cut off by easements, improperly
bounded, illegal structures, encroaching improvements and the like. These are all typical
impediments to marketable title. Sometimes these exceptions can be cleared up with the proper
affidavit from a seller, but only if the seller has owned the property for more than two years. This is
unlikely in most REO sales.
b. Rights of persons in possession or tenants: If there is a lease that predated the mortgage, it may not
be cut off by the foreclosure. Also, in many cities, tenants may have certain rights that cannot be
cut off, such as rent control and/or rent stabilization. These are also impediments to marketable title
because there are people who have rights in the building that survive the foreclosure.
c. Building code and easements, covenants and restrictions: There is no guarantee that the premises
comply with any building codes, and violations of record may not be cut off in a foreclosure. Most
REOâ€™s are sold â€œas is and where isâ€ without any representation that the premises are legal or
comply with any regulations. Also, covenants and restriction are not typically cut off in a
foreclosure and they survive, even if they are being violated. If any laws, regulations, codes,
covenants or restrictions are violated by the premises or their use, there is a problem with
d. The title policy from loan origination or otherwise may insure against certain liens of record. If the
liens are still of record, despite the fact that there is now â€œinsurableâ€ title, the seller still does not
have marketable title until and unless the liens are removed of record.
The moral of the story is that the seller of any REO should take pains to ensure that there is no
obligation to convey marketable title. This can be addressed in the contracts, in the riders or in the
customary REO addenda favored by lenders and services.