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I'm closing on an apt next week. The current owners are in pre-foreclosure, have two mortgages, owe $50k to the condo board, and property tax. The purchase price is large enough to pay off everyone and give the owners $100k to take home.
However, my main concern is to make sure EVERYONE and EVERYTHING gets paid off and that I'm not saddled with any of their debt after closing. What if we miss paying someone? Does title insurance protect against all of these debts? What if some dude he lent money to (and put his house up as collateral) comes around later on and says that the collateral is his? I don't want the owners to walk away with a single cent until everyone is paid off.
This is why your lawyer is doing a lien search, and the sales contract states that the property is delivered free & clear of all liens (or at least, this should be happening).
Talk to your attorney. This is what title and lien searches are for -- they create a list of everyone who has a claim against the property, debt secured by the property, etc. And the title insurance should take care of anything the searches didn't find, but your attorney can explain any caveats, limitations, etc.
The condo is covered by the Lien of Common Charges it will have filed with the city.
If there's a third lender whose loan wasn't recorded against the apartment, they'll be out of luck.
Some condos collect a few months CC from the buyer, to feed the reserve fund, but your lawyer would've spotted that when reviewing the By-Laws.
The way it should work is all the lenders and other secured creditors will receive a check for what they are owed at closing. Those secured creditors will then sign a lien release (which, obviously, releases their lien) and that document gets filed with the appropriate recording office (I'm pretty sure the title company takes care of the filing, but it could be your attorney). You should then receive a "Clean" title insurance policy. Your title insurance policy is the protection that you own the property free and clear of other liens, other than those noted in the policy (if any), as of the date of the policy. So you will want to make sure any liens that have been recorded prior to closing have been released. I had a similar issue when I closed - assuming you have an experienced attorney, he/she will know to handle this. Having said that, always good to check over what they have done.
Thanks for all the help. So it's safe to assume that those people who have debts owed that don't have a lien on the condo are out of luck? Do some parties have liens that don't show up on a title search? Like NYS Dept of Highways - sidewalk liens, etc.
Make sure there is title insurance
If somebody has a lien but has not properly recorded it the lien is not "perfected" (that is the legal term). Thus, if you buy the apartment and don't know about the other liens (the legal term is "good faith purchaser for value") then you buy property free and clear of liens. If you specifically know about a lien, different story. it isn't enough that you think "oh there must be other liens". As long you don't specially know about a lien, you should be fine.
Your title insurance company will handle all this for you. Get a clean title policy and you are fine.
One other thing - there is a difference between a debt and lien. A debt is an obligation to pay; a lien is a "security interest" in a specific piece of property. Simple way to describe it - compare your card card vs your car loan. If you don't pay your credit card, your CC company may not take the property you bought with the card. They need to go to court and get a judgment against you (at which point they can have the sheriff seize your property). Contrast that with your car loan - if you don't pay your car loan, the company that loaned the money to buy your car can take your car without going to court.
Foreclosures/REOs are interesting this way. In New York and other states, the solution is title insurance.
A couple years ago I bought an REO with an undiscovered lien of more than $7000, discovered after closing. The real estate agent and I contacted the title company. The title company paid it off in full within a week.
One thing I always do, and that I recommend to everybody, is that you get a title insurance policy with a market value rider. The rider costs a hundred bucks or thereabouts. So if somebody appears out of the woodwork 10 years from now with a large claim, your policy will cover the value of your property at that time, not what it is now, which we would expect to be less.
kharby [at] RutenbergRealtyNY [dot] com
Thanks for all the info. Huge help and very reassuring.