One advantage of working with hard money lenders to obtain commercial real estate is having access to funding even when title quirks are in play. Hard money lenders can generally work with clients to overcome title quirks for a successful transaction. But know this: no hard money lender will simply ignore title quirks. There is too much at stake.
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Title Quirks and the Problems They Cause
A title quirk is any circumstance that makes the title of a property less than clear and marketable. An issue with the property’s title could create doubt about who really owns it. It could raise serious questions about a lender’s position. In other words, are there other creditors potentially in a higher position?
Here are some examples of title quirks that tend to scare conventional lenders away:
- Title Defects – Things like unreleased liens and ownership breaks are considered title defects. They call the lender’s position into question. If a lender believes it will take second or third position behind another creditor, there is too much risk.
- Ownership Questions – Some title quirks raise questions of ownership. Think of things like unreleased life estates, missing signatures from spouses, and contract-for-deed arrangements.
- Boundary and Access Problems – Encroachments and boundary disputes make properties questionable in a lender’s eyes. Likewise for missing or impaired legal access. If an investor does not have clear, recorded access to a particular parcel, financing it could be risky.
- Restrictions – Certain restrictions, like restrictive covenants and problematic easements, make lenders nervous because they could dictate how a property is utilized once obtained. Such restrictions could actually impact a property’s value.
- Probate, Divorce, Etc. – When title quirks include unfinished probate, divorce proceedings, or even estate issues that remained unresolved, a lender’s risk goes up. There is no way to know if and when said issues will be resolved. And if they are, how they are resolved could impact a lender’s position.
Title quirks are usually enough to scare conventional lenders away right from the start. A conventional lender will not even look at a property until all title quirks have been cured. Hard money lenders tend to be more willing to take a look.
Some Quirks Can Be Cured Prior to Closing
Title quirks do not have to be problematic for hard money lenders. The thing to always remember about hard money, according to Actium Lending out of Salt Lake City, UT, is that they look at risk differently. In terms of title quirks, the two things most important to a hard money lender are:
- Their lien position and recovery options.
- Knowing exactly who they can foreclose against, if necessary.
If any type of title quirk complicates foreclosure or allows another party to move ahead in terms of position, a hard money lender is likely to either walk away from the deal or require the borrower to cure the issue prior to closing.
For example, minor documentation issues that can be cleaned up quickly should be curable before closing. A hard money lender is not likely to be scared away. However, there are a few types of title quirks that even hard money lenders will walk away from. Examples include IRS liens, sizable judgments, municipal liens, and ownership defects that cannot be covered by title insurance.
It is true that title quirks can make financing a property more difficult. Conventional lenders won’t even look at properties when title quirks are in play. Hard money lenders are generally more willing to take a look, but they also tend to demand that quirks be cured prior to closing. Otherwise, they will not do a deal.