Making Your First Hard Money Loan--Title Review

Hard Money Lenders make high-interest-rate (10-14%) loans secured by real estate. Let's break Loan Origination down into 8 steps:

1. Marketing for Borrowers

2. Comping Loan Collateral

3. Loan Structuring & Commitment

4. Collateral File Assembly

5. Title Review

6. Drawing Loan Docs

7. Drawing Lender’s Escrow Instructions

8. Funding & Closing

Previously on Hard Money Monday, I discussed Collateral File Assembly. Today, I’ll discuss Title Review.  Title review happens concurrent with the assembly of a Collateral File.  But it’s critical enough that it warrants its own Hard Money Monday discussion.

TITLE INSURANCE

Title insurance is weird.  Firstly, it isn’t actually issued until after the closing.  Secondly, it’s backward looking.  While the rest of the insurance industry insures against potential future events, title insurance protects you against title problems/defects prior to the policy date.

Prior to closing, a document known as a title commitment or a preliminary title report (“prelim”), is issued by the title company to the proposed insureds.  In order to prepare a prelim the title company engages in a title examination by looking at the history of the parcel in question.  To speed this process up and make it more accurate, title companies operate title plants.  These are database’s with information about ownership and transaction history of parcels that are searched prior to issuing a prelim.  Even still, it typically takes 1-2 weeks to generate a prelim.

WHAT IS IN A PRELIM?

SCHEDULE A

Says who the title company proposes to insure.  What type of policy they are prepared to issue and for how much money.  It also says the nature of the estate (ie fee simple).  It includes a legal description of the property and who the current property owner is.  Right away I match this up with the purchase contract to make sure it passes the smell test.

SCHEDULE B, PART I

This lists the title company’s requirements prior to insuring.  For example, title might require a corporate resolution to purchase and sell the property by both buyer and seller respectively.  They’ll likely want to see corporate documents.  Occasionally for example, when an individual is selling a title search might reveal something like unpaid child support in the same name as the seller.  In this case, a title company will require evidence that either the child support has been paid, or that the seller isn’t actually the person in the public records that owes child support.

SCHEDULE B, PART II GENERAL EXCEPTIONS

Many of these exceptions will go away with a 2006 ALTA Lender’s Extended Policy.  They include matters that may affect the insured property but are not recorded in the public records, such as defects, liens, encumbrances, easements, encroachments and boundary conflicts.

SCHEDULE B PART II SPECIAL EXCEPTIONS

These are property specific items discovered during the title examination.  A lot of deals die a slow death because of special exceptions.  I have a deal now that’s been in limbo for almost two months because the seller has a lien from a bank (rhymes with Base).  Title and its lawyers have been unable to get a payoff on the lien and title companies in this state typically refuse to hold back funds for matters like this (we can discuss holdbacks another time).

When I review a prelim, I’m immediately looking for a deal killer so as not to waste my time or the borrower’s time.  Recently, I got back a commitment with the following language in SCHEDULE B PART II “Subject to restrictions, reservations, easements and covenants of record, if any.”  In other words, the title company was unwilling to insure recorded restrictions, reservations, easements and covenants–even while it wasn’t telling specifically what has been recorded that they unwilling to insure!  I spoke with title, tried to get them to remove or alter it but ultimately my borrower and I decided to have another title company insure the deal.

Types of Lenders Title Insurance

There are different types of lender’s title insurance  Title insurers are quick to offer a CLTA or Standard policy of coverage, protecting lenders from issues found in a public records search.

This includes:

• RECORDED Liens/Easements/Encumbrances

• Marketable Title

• Fraud

A CLTA policy insures that my security instrument is recorded in the 1st priority position but doesn’t cover a host of other things  I require a 2006 ALTA Lender’s Extended Policy  Big picture, this provides coverage for some title matters not shown in a public records search that would otherwise be general exceptions in SCHEDULE B, PART II.

As you will see in a future Hard Money Monday, my Lender’s Instructions require title endorsements to our Lender’s Title Policy as a condition of closing.  This means the title company omits or deletes various exceptions in Schedule B in its policy.  For example, ALTA Endorsements 32-06, 32.1-06, 32.2-06 & 33-06 are endorsements that provide different types of Mechanic’s Lien protection for you as a lender.

In my next edition of Hard Money Monday, I’ll discuss Drawing Loan Docs.