Buying a mortgage note without reviewing a comprehensive property title report is risky. Without knowing about possible liens, taxes, and judgements against a property, you will not be able to complete proper due diligence.
What Is a Title Report?
A property title report also known as an O&E or ownership and encumbrance report is going to show you all the previous property information such as property ownership, mortgages, and any existing property details with open mortgages and who the current owner on title is.
What Is in a Title Report?
The Order Details section is where the current owner is listed. If you are to purchase a mortgaged property or a property with a deed of trust, the current owner on title is the borrower. If you were to purchase a land contract or a contract for deed, then the current owner would likely be the individual you are purchasing the asset from.
The Deed Information section indicates the name which the property was deeded over to, the name which the property was deeded from, and the year it occurred. For contract for deed and land contracts, the ownership remains in the lender’s name. If that is the case, then there would be a chain of deed transfers under the Deed of Information section as well.
The Mortgages section will show any open or previous mortgages on the property, the names of the borrower and lender, the dates the mortgages were executed and recorded, and the amount. You will also want to check for any additional mortgages. If yes, there should be a “release of mortgage” recorded as well.
The assignment is what transfers ownership interest in the mortgage from one person/entity to another. It does not transfer the note or the property. The name of the person/entity who the property was transferred to (assignee) and from (assignor) should be included in the Assignment section. The dates recorded and executed should also be included as well.
After you verify that nothing is missing from the Assignment section, you can now look for liens. The Liens section will indicate the type of lien, the names of the plaintiff and defendant, the dates recorded and executed. You will have to determine what the lien was regarding and whether it is a deal breaker. This information can be found in the Legal Description.
The next page on the document is the Tax Form. This will indicate if the taxes are late, the amount due, and the due date. This will help you learn about how the borrowers are handling their tax situation.
The Writeup section will show all the documents which are recorded (i.e., Deed, Mortgage, Assignment, Lien Type), the dates recorded, and the book/page number for each document recorded. The order date, borrower name, property address, county, parcel no., and effective date are included as well.
On title reports the above documents are recorded by the county where the property is located. There are copies of these documents attached to every title report.
Breaking the Chain of Title
To complete due diligence, you will have to reference back to the Collateral File you received from the seller, which should be in e-file format.
If you have an assignment that is not recorded, you need to verify and compare that to your chain of title to make sure there is no break.
If you find an unrecorded assignment and compare it to your title report, determine where that assignment would fit in for the purpose of checking whether you are missing an assignment or if there is some sort of issue or break in the chain of title.
If you have a break in your chain of title, you could face some challenges in the event you need to foreclose.
