Common method of buying foreclosed homes can be risky

Selling homes before receiving a clear title is common, but it still raises questions.

Last August, Chad Giblin found what he thought would be the perfect home in St.Paul. The house had recently been foreclosed, so Giblin took steps to buy it. However, his attempt failed after he refused to sign a document. This document âÄî titled âÄúPurchaserâÄôs Acknowledgement of Limitation of Title Insurance Policy CoverageâÄù âÄî would authorize the transfer of home ownership without the seller having the finalized title. Lou Ann Ryan, Ramsey County Examiner of Titles office manager , said this type of agreement occurs often in the county. After a foreclosed house is purchased from a Sheriff Sale, the title waits its turn in the queue for the Torrens Court, which evaluates whether the foreclosure was performed and transferred correctly. Until this hearing (referred to as the âÄúProceeding SubsequentâÄù in the document) takes place, the property title is withheld from the party that purchased it. Therefore, in a case like GiblinâÄôs, the seller can complete the process of selling the house before the Torrens Court decides they have full legal right to the title. âÄúIâÄôd say the majority of our mortgage foreclosure files have a transfer in the works,âÄù Ryan said. Ramsey County allows transfers to take place before the hearing has, but the transaction is not official until afterward. The transfer request is recorded on the certificate of title when it is filed with the Examiner of Titles. This notes the buyerâÄôs interest and indicates that the new title should be issued in that personâÄôs name. Ann Burkhart , University of Minnesota law professor, said limits on title insurance often appear on real estate agreements, but this type of agreement is risky because it has potential to fall through. Ryan said after the proceedings there has yet to be a case where the title hasnâÄôt been issued to the buyer. She said this is because the former owner, who would be the most likely candidate to disrupt the process, is out of the picture by the time the hearing takes place.

The ethics question

Burkhart said the lender often tries to sell a house before finishing the formal process because it pays for all the homeowner expenses until the property sells. âÄúItâÄôs not unethical, itâÄôs just whatever parties are willing to contract to,âÄù she said. In GiblinâÄôs case, he chose not to sign the document and instead changed the contract to include that the âÄúseller must provide clear title before closing.âÄù The seller was unable to fulfill this contract condition before the closing date in October 2008 and the sale was cancelled. Due to the high number of mortgage foreclosure files in the examinerâÄôs office, it is taking more than a month for the process to be completed, Ryan said. Burkhart said she agreed with GiblinâÄôs decision not to sign the document. âÄúI would never advise someone to close a real estate agreement or pay the purchase price without being in possession of the purchase title,âÄù she said. Giblin is in the process of filing a complaint with the Minnesota Department of Commerce, which regulates and licenses business activity.