Tucson AZ Home Loan Info

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Broken Priority: When "Free and Clear" Isn't Good Enough for the Bank

  Broken Priority: Mike in Tucson, AZ mortgage lender

The retired couple sitting in my office were incredulous.  They had:

  • photos, 
  • architect drawn plans, and a
  • loan denial letter from a local bank.

"We own the property free and clear," said the husband.  "We bought it as is, and we also bought the rights to the plans."

He was a builder from out of state who knew a good deal when he saw one.  The couple had paid $95,000 for one acre of property with a partially built home. 

The work that had been completed to date was sound.  (My photo illustrates the situation; this is not their home.)

"I don't understand why the bank turned us down for a loan to complete the house." The wife was clearly frustrated.  "When our home is finished, it will be worth more than $300,000, and we need less than $125,000 to make that happen." 

"Did you purchase a title policy?"  My question.  "Didn't need to," was the answer.  "We did our own research at the assessor's office."  And that was the problem.

"Broken Priority" is the legal term in Arizona for the situation this couple was describing to me.  A title officer would have explained to them that under Arizona law, a Mechanic's Lien (a lien for labor or material supplied to a property) can be recorded against a property within 120 days of the completion of work, and the lien takes priority from the date the work began.

Banks and other lenders want a secure first lien on a property.  When there's the possibility of an unknown future lien taking priority over the bank's lien, they're going to keep their hands in their pockets.

We do a lot of private money, but that wasn't an option either, for the same reason.  The solution was to get a notarized release from each licensed contractor and supplier (mechanics liens must be recorded, and only licensed contractors can record a lien) to satisfy the title company.  This is no easy task, and in this case it was all the more difficult because the seller had not kept good records.

The moral of this story:  It pays to buy title insurance. 

 

Mike Jones (Tucson Mortgage Company, LLC): Loan Officer in Tucson, Pima County, Arizona

_____________________

I'm Mike in Tucson, your preferred Tucson Arizona Mortgage Lender.

NMLS #223495

SUNSTREET MORTGAGE LLC ~ Correspondent Mortgage Bank
Offices in Mesa, Tucson, Sierra Vista & Nogales

Comment balloon 33 commentsMike Jones • January 20 2008 06:55AM

Comments

Here's another example proving how dangerous shortcuts can be in real estate. Take nothing at face value.
Posted by Rosario Lewis, GRI, SRES - DDR Realty - Orange County, NY (DDR Realty) almost 13 years ago

Good morning Mike.  Thank you for the story and information this morning.  It's scary out there!


Posted by Susie Blackmon, Ocala, Horses, Western Wear, Horse Farms, Marketing almost 13 years ago

I would be willing to bet that f thehome was only partially completed, then most likely some of the subcontractors are still awaiting to be paid for their work.

Sean Allen

Posted by Sean Allen, International Financing Solutions (International Financing Solutions ) almost 13 years ago
Of course it pays to buy title insurance, did they not use a Realtor to find this property ?
Posted by Missy Caulk, Savvy Realtor - Ann Arbor Real Estate (Missy Caulk TEAM) almost 13 years ago

Sad but true and most likely the case in all states... Excellent information

Your friend in Charlottesville

Posted by Charles McDonald®, REALTOR®, Principal Broker®, Owner (Charlottesville Real Estate Solutions) almost 13 years ago

You can say that again.  So much too for consumers "doing their own research".  title insurance has got to be cheaper than any lien that would have to be paid or any loss caused by any defect. 

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) almost 13 years ago

Lenn,

Testify, sister!  LOL 

Charles,

The time frames may change, but as a builder back in the 80's, this was certainly the case in NJ

Missy,

No.  They were too smart to waste money on a REALTOR.  LOL

Sean,

That's what worries the bank.

Susie,

And a good morning to you!

Rosario,

Thanks for being the first to comment.  Caveat emptor!

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 13 years ago
Ouch! It would probably be an understatement to say that these people wish that they had purchased title insurance or had gone with a Realtor to aid in the purchase of the property.  8-}
Posted by TeamCHI - Complete Home Inspections, Inc., Home Inspectons - Nashville, TN area - 615.661.029 (Complete Home Inspections, Inc.) almost 13 years ago
Perhaps I should add this scenerio to my .. why you should use a Realtor..  portfolio?  I can't think any Realtor worth his/her salt would have let a client NOT buy a title policy.  Insurance is only good when you need it..  sounds like it is a need in this case!  Just in order to get a loan, that is the need.
Posted by South Austin Real Estate Blog (Sky Realty South Austin) almost 13 years ago
Mike, Title Insurance is cheap compared to what not having it might cost someone.  Good point.
Posted by Dan Forbes almost 13 years ago

Pay for title insurance and get someone that know the rules so you don't get into a mess like this. Good luck.

Posted by Terry & Bonnie Westbrook, Westbrook Realty - Grand Rapids Forest Hills MI Re (Westbrook Realty Broker-Owner) almost 13 years ago
Juat another example of smart people making dumb mistakes.I make sure agents of my company can actually read and understand something as simple as a title report.Been in this same situation before with clients who are looking for help after the fact. So frustrating." And look how much we saved by not using an agent."
Posted by Kim Harris, Designated Broker/Owner/Sound Realty (Sound Realty) almost 13 years ago
Mike, Great post. I bet your clients wish they would have found you before they bought that property and listened to you then.
Posted by Matthew J Blum - (retired from the business) almost 13 years ago

Mike:  Title insurance doesn't always cover "future liens". 

In other words, once you have bought a newly constructed home, if the builder hasn't paid all the subcontractors, a lien can be still be placed against your home after you have already purchased and closed on the home.  Just finding that out here in Tennessee. 

Posted by Jan Wood (None) almost 13 years ago
A great illustration of the need for title insurance, after the fact, unfortunately. The money they saved is a pittance against the obstacles they face to get a clear title. Good information for consumers.
Posted by Bonnie & Terry Westbrook, Grand Rapids MI Real Estate (Westbrook Realty) almost 13 years ago
Mike in Tucson- Great topic. To many people do not understand the need for title insurance. This is a great illustration. Thank You
Posted by Mark Horan, "The Resident Chef" - Resident Team Realty LLC & (Resident Team Realty, LLC & Toni's Property Management LLC) almost 13 years ago
I was not aware that Title Insurance would cover you for leans not in existence yet. I thought it covered free and clear title from the date of closing back? Interesting.
Posted by Judy Tuscano, NH Real Estate Professional (Prudential Verani Realty) almost 13 years ago
we all must Dot the i's in real estate and as agents, its our job to do this for all clients
Posted by Richard Lecinski (Long Realty Company) almost 13 years ago
Mike,  "Didn't need to," was the answer.  "We did our own research at the assessor's office."  You got to love it.  Obviously they have an idea of what they are doing, but...
Posted by Marc Grossman, GRI, Greater Orlando Real Estate Broker (Marc It Sold!) almost 13 years ago
Mike- The dangers of going FSBO! I would never allow a client to buy property without title insurance! Katerina
Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) almost 13 years ago
Don't you just love the ones that know how to do everything by themselves without professional assistance?
Posted by Gayle Balaban, E. TN Waterfront Real Estate (The Best Spot Realty/Waterfront Real Estate/Ooltewah Real E) almost 13 years ago
I'm really glad I read this. Of course, I always recommend title insurance, but this gives me another reason and example to use. Hope this works out for them. GBU!
Posted by Elizabeth Nieves, Bilingual Raleigh - Durham North Carolina Real Estate Team (The Elizabeth Nieves Realty Group) almost 13 years ago

What a shame for those people!

Good information to know though...I never would have known about that! Thanks!!

Posted by Joan Mirantz, Realtor, GRI, CBR, SRES - Concord New Hampshire (Homequest Real Estate) almost 13 years ago

All,

Thanks for commenting.  I guess I wasn't clear.  They could NOT have bought a title policy under the existing circumstances for the reason explained in the post, but HAD THEY TRIED to purchase title insurance, the Title Officer would have explained this to the buyers before the buyers plunked down the money.  A good REALTOR would have kept them from making a mistake as well.

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 13 years ago
Wow, that is a heavy story indeed, I just hate to see these issues come up, you hear about stuff like this. Its good when you can bring your expertise to the table to remedy such situations, great points, its a real problem. Lance
Posted by Lance Winslow (The Car Wash Guy) almost 13 years ago
Mike:  Amen.  Thanks for throwing this one out there.  Title Insurance is almost always worth it (unless your family owned the property since the days of the Mayflower... and even that could be subject to issues!).  The benefit received far outweighs the minimal cost.  :)  Great post.
Posted by Martinelli Caputi, & Associates, Ltd. (Martinelli Caputi & Associates, Ltd.) almost 13 years ago

This story reminds me of my trying to do surgery on my husband in order to save money for a gastric bypass........well, maybe just the removal of the appendix! Geesh.......when will people learn. We all need to work with someone that knows, is qualified, specializes in what we plan to do. We simply cannot be an expert in everything....or can we? ;-)

Pepper

Posted by Mesa, Arizona Real Estate Mesa Arizona Realtor, AzLadyInRed (Homes Arizona Real Estate LLC) almost 13 years ago

Teri,

I think the fact that the husband had been a builder in his home state weighed heavily in his decision to bypass what would seem to be a common sense decision to me.  So you actually do surgery to save money?  LOL

Richard,

Thanks for stopping by to comment.

Lance,

Unfortunately, the horse was already out of the barn.  I couldn't help them.

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 13 years ago
Ok, well.. I'm late to this post... so I'll just say hi... and say I'll bet this is a lesson they won't soon forget.  Btw, how's the weather in Tuscon???  Want some snow?
Posted by Jesse & Kathy Clifton, Retired (Jesse Clifton & Associates, REALTORS®) almost 13 years ago

Mike, wow.  Why would a builder not buy title insurance, they should understand lien law. Educate me here Mike, doesn't this mean that no one can ever finish the house?  that makes no sense?

a Mechanic's Lien (a lien for labor or material supplied to a property) can be recorded against a property within 120 days of the completion of work, and the lien takes priority from the date the work began.

Or are you saying that title insurance would have protected the bank?

Can you go back and buy title insurance after the fact?  In California Title Insurance is simply part the transaction, it never occurred to me that you could bypass it.

Posted by Kate Bourland, Onlilne Marketing Mobile Marketing (Marketing with Kate) almost 13 years ago

Kate,

They will be able to get title insurance and financing, but not until and unless he 120 day period expires.  Even then, the title insurance company will almost certainly require a release of lien / lien waiver from both suppliers, contractors and subcontractors. 

The request for title insurance would have brought to light the broken priority situation, and they (the buyers) would likely have bought something other than this property, or would have structured the contract such that the burden fell on the seller as a condition of closing.

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 13 years ago
Mike - what a headache that turned out to be! And a good lesson for all of us on another reason for title insurance!
Posted by Billnulls Blog Florida Realty Professional, AHWD (Charles Rutenberg Realty) almost 13 years ago

First of all, property records in Arizona are not in the "assessor's office", they are in the recorder's office in most counties.

Second, it is true that title insurance won't uncover unknown liens.  However, there are workarounds:  1)  the Seller obtains lien releases from all the licensed contractors and subcontractors and they are recorded; 2) for a extra amount of premium and additional research, the title company may issue a lien endorsement; 3) estimate the last date that work was performed and close 121 days after that -- or however many days after 120 it takes to have an up-to-date record available in the recorder's office or in the title company's document plant.  In Maricopa County, it is next day; in other rural counties, it may take a couple of weeks.  A search of the county court records should be done as additional assurance there is nothing outstanding against the seller having to do with the property.

Third, without their own title insurance, it will be more expensive for them to purchase title insurance for the buyer if they ever sell the property and the buyer may not be able to obtain a loan either because of title issues.

I am a commercial agent:  broken priority is a big factor in the purchase of stalled-out developments and partially completed construction.  Contractors with lien rights include suppliers and pre-development vendors such as surveyors, architects, etc.  And the fastest way to lose a construction loan commitment on land development is to begin clearing the land or even unloading materials on the land prior to the closing of the loan.

 

Posted by Nadina Cole-Potter over 9 years ago

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