Stay Calm and Verify the Defect
Discovering a title defect late in the process-say, just days before closing-can be alarming. Common defects include an undisclosed lien, an easement that blocks intended use, a forged signature on a prior deed, or an error in the public records. Your first step is to confirm the nature of the defect. Request a copy of the preliminary title report or title commitment from your title company. Review any documents related to the defect (e.g., a recorded lien or court judgment). Do not assume the worst; some defects are minor and can be resolved quickly.
Notify All Key Parties Immediately
Time is of the essence. Promptly inform:
- Your real estate attorney (if you have one)
- Your lender (if financing is involved)
- The seller or the seller’s agent
- The title company or escrow officer
Most purchase agreements contain a “time is of the essence” clause, so delays can risk the transaction. The title company may already be aware of the issue and working on a solution.
Evaluate Your Options with a Qualified Attorney
Each defect requires a tailored response. You should consult a real estate attorney to assess the specific situation. Common steps include:
1. Reviewing the Purchase Agreement
Check your contract’s title contingency or due diligence period. If you are still within the inspection or due diligence window, you may have the right to terminate and recover your earnest money. If the window has closed, your options are narrower but still exist.
2. Title Insurance Claims
If you purchased an owner’s title insurance policy (or are obtaining one for closing), the policy may cover the defect. Most policies require the title company to defend your title and pay for losses up to the policy amount. Lender’s title insurance covers the lender, not you, so an owner’s policy is critical. File a claim with the title company immediately-they often have in-house counsel to resolve defects.
3. Negotiating with the Seller
The seller may agree to correct the defect at their own cost (e.g., paying off a lien, obtaining a release, or filing a quiet title action). You can also negotiate a price reduction or escrow holdback-where funds are set aside to cover future correction expenses. The outcome depends on the seller’s willingness and the defect’s severity.
Understand the Risks and Deadlines
Title defects can lead to:
- Delayed closing (common, but manageable).
- Increased costs (legal fees, recording fees).
- Cancellation of the transaction (rare, but possible if the defect cannot be cured quickly).
Work with your attorney to set realistic deadlines. Many title defects can be cured in days if the parties cooperate. However, certain issues-like a disputed inheritance claim or a government lien-may take weeks or require court action.
Prevent Future Defects with Due Diligence
While not always possible to avoid surprises, you can reduce risk:
- Order a title search early in the transaction.
- Review the preliminary title report as soon as it arrives.
- Ask the seller about known defects in the property disclosure statement.
- Obtain an owner’s title insurance policy from the start.
A late defect is stressful, but with a methodical approach and qualified legal advice, many can be resolved without losing the property or your deposit. Always consult a licensed real estate attorney in your state, as laws and procedures vary widely.