When you purchasing a foreclosed property, you often get a property which seems to be worth more than you are paying for it. One of the reasons you are getting a bargain is because most selling banks will only accept your offer if you will agree to accept insurable title. They will not guarantee that you will get marketable title. If you are purchasing a property in foreclosure in New Jersey, it is important to understand the distinction and know what you are getting.
The selling bank will often add an addendum to the contract for your purchase specifically stating that the bank will often provide only “insurable” title at closing, as opposed to the standard contract provisions requiring a seller to provide “marketable” title. The bank will further offer to pay for all or part of the costs to obtain title insurance if the buyer obtains the insurance from the title insurance company designated by the seller. While this can result in significant savings, it is important to understand what you will get (and what you will not get) as part of this bargain.
Prior to issuing a policy of title insurance, a title insurance company will conduct numerous searches on the property to determine if there are any clouds on the property’s title, if there are issues with the deed, the ownership status of the property, any tax liens against the property, the status of property tax payments, and judgments, etc. The question is, will you be satisfied with receiving insurable title, as opposed to marketable title?
“Marketable” title means that the chain of ownership to a particular piece of property is clear and free from defects. It can be sold without additional effort by the seller or potential buyer to “clear” the property’s title. To transfer marketable title, a seller must cure or repair any defects found during the title search, such as, for example, paying off liens and/or having them discharged as of record.
“Insurable title” means that the chain of title may have known defects, but the title insurance company provides insurance against the defects ever affecting the ownership or value of the property. When transferring insurable title to a property, the seller is not required to cure or repair the defects in title, as long as the title insurance company is willing to insure against the defect. Rather than curing or fixing the defect, which can be very expensive and time consuming, the title insurance company may elect to insure against any problem the defect may cause in the future. That is, the insurance company agrees to fix the problem only when – and IF – it ever becomes an immediate problem. Some defects in title may never become a problem or threaten the value or ownership of the property. Title insurance companies, like any insurance companies, are in the business of risk management, and whenever possible would rather defer the risk then to pay to address or correct it.
So, in any given case where only “insurable title” is transferred, there may or may not be defects in the chain of title, but in either case the seller will convey insurable title, while the insurance will protect you against those defects, the defects, if any, will still exist. And, of course, some defects are more significant than others. However, as a general rule, in New Jersey title companies search for the past 20 years, so after 20 years any old defects will not appear in a title search, even if they were not cured.
The attorneys at McLaughlin & Nardi, LLC are well versed in sales of foreclosed property. If you are purchasing a foreclosed property, call or please e-mail our attorneys.