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In This Article
- What is a Cloud on Title?
- A Cloud on Title Example (or Nightmare) You Don’t Want To Find Yourself In
- Buying or Selling Property with a Cloud on Title
- The 6 Most Common Clouds on Title
- 5 Ways To Resolve a Cloud on Title
- How to Find a Cloud on Title
- Preventing a Cloud on Title
- The Bottom Line: Cloud on Title
What is a cloud on title?
Before buying a property — whether you are looking for your dream home or a real estate investment — it’s important to know every detail about the property, including a cloud on title.
A cloud on title can prevent the legal transfer of full ownership of a property from seller to buyer. Buying a property with a cloud on the title and creating serious complications — emotionally and financially.
In this article, we’ll explore:
- The most common types of clouds on title
- How to resolve a cloud on title
- How to prevent a cloud on title
- How to find a cloud on title
- And more
Let’s get started!
What is a Cloud on Title?
The purchase of a property can be a lengthy and complicated process. This can be worsened when questions about ownership interest of the property arise.
A cloud on title is a reference to any title defect which may prevent the legal transfer of full ownership of a property from seller to buyer.
These clouds on title can include:
Knowing if there is a cloud on title and how to resolve it to a clean title is key to ensuring a smooth transaction.
Keep in mind that a cloud on title can be used to your advantage.
In the right situation, a cloud on title can be used by a buyer to negotiate down a price.
Because a cloud on title can lower the value of a property, this provides an attractive opportunity to investors willing — keyword willing — to sort out any title defects.
Next, we’ll take a look at a situation when it isn’t advantageous — and it’s actually a nightmare.
A Cloud on Title Example (or Nightmare) You Don’t Want To Find Yourself In
Let’s take a look at a stress-inducing example of a cloud on title.
Let’s say a buyer in their local market sees an attractive investment property that is being sold by the child of the deceased previous owner.
The buyer smartly decides to buy title insurance. The title search reveals a clean title, so it seems that it wasn’t necessary.
The buyer celebrates the new property, addresses necessary repairs, and begins screening tenants.
Months after the sale is completed, just as a tenant is moving in, a newly found will reveals that the seller’s sibling also had an interest in the property.
This leaves the buyer with a cloud on title. Panic floods the buyer’s veins.
Because the buyer bought title insurance, the title insurance company is liable for resolving the cloud on title. Upon remembering this, the buyer exhales for what feels like the first time all day.
The title insurance company will then work with the seller and their sibling to file a quitclaim deed, resolving the cloud on title. In time, this action leaves the buyer with a clean title.
Had the buyer not bought title insurance, he or she could face many time-consuming challenges trying to resolve the cloud on title, such as negotiating with the seller’s sibling, going to court, or more.
This is why it’s so important, whether you are a homeowner or real estate investor, to understand the full implications of a cloud on title.
Buying or Selling Property with a Cloud on Title
A cloud on title can cause complications for the seller and the buyer… even after the sale has been completed.
A cloud on title can mean that there is some doubt about who actually owns the property.
This can interfere with the completion of the sale.
Cloud on Title: Complications for Sellers
As a seller, a cloud on title can make it much more difficult to sell your property because buyers are likely to be wary of complications if there is a title defect.
A cloud on title can also lower the value of the property and lead to delays in closing the sale.
Mortgage lenders will probably refuse to issue the loan on the property if there is a cloud on title, so it can be hard to find a buyer.
Cloud on Title: Complications for Buyers
As a buyer, a cloud on title discovered after the sale may force you out of your home if the seller did not have the right to sell the home.
Buyers who decide to try to keep the home may face expensive and time-consuming legal battles to clear the title.
On the other hand, buyers may have the advantage of buying a property with a cloud on title at a low price and then resolving the title issues, although the resolution can be expensive.
If you buy title insurance, the title insurance company is liable for resolving any cloud on title — which is why we highly recommend title insurance.
The 6 Most Common Clouds on Title
Here are a few of the most common clouds on titles.
An incorrectly recorded address or boundary line on a deed can cloud a title. For example, more than one survey of the property may exist.
This means the property may be larger or smaller than advertised — a critical detail to know before buying a property.
#2: Illegal Deeds
A seller can appear to have a clean title of the property. However, someone in the previous chain of ownership may have illegally sold the property.
This means third-party members could have claim to your property and create a cloud on title.
#3: Probate and Ownership Dispute
Another issue that may arise is that previous owners in the chain of titles may not have had a full legal interest in the property.
A cloud on title can occur when a spouse or sibling of a previous grantor may not have surrendered their interest after failing to properly execute a quitclaim deed.
Easements are property access rights granted to non-owners.
All easements should be properly recorded on a clean title — undisclosed easements can cloud a title.
These can include:
These grant the use of designated pieces of land to utility companies.
These limit the amount and type of development that can occur on a property. For example, 25 million acres of land in the US are held in conservation easements.
These allow neighboring property owners to use your property to access their own.
Unpaid taxes, utilities, and missed mortgage payments are examples of liens that can cloud a title.
Fraud associated with the property can result in a cloud on title.
If a false deed was accepted at the time of the sale and it was later determined to be false, there will be confusion as to who legally owns the property.
5 Ways To Resolve a Cloud on Title
Next, we’ll look at how to resolve a cloud on title.
#1: Title Insurance
The most important step a buyer can take is reducing liability.
As seen in the previous example, a title search and title insurance are key to reducing a buyer’s liability in the case that title problems surface.
Surveyors can also be an important asset to buyers. Often provided by the title insurance company, these surveyors will determine items such as:
- The chain of ownership
- Clarify the boundary lines
- Report any easement agreements that may be in place
With nearly 5,500 different agencies issuing title insurance, a buyer has a range of options to choose what fits them best — and is the best way to resolve a cloud on title.
#2: Quitclaim Deeds
Incorrect or misspelled titles, possible past ownership interests, and unwanted easements can be resolved with the filing of a quitclaim deed.
Simply put, a quitclaim deed corrects title errors and waives the transferrer of any claim to the property.
In some cases, buyers may negotiate payment to those with interests, a route that is quicker than filing a lawsuit to issue a clean title.
Be aware, however, that a quitclaim deed makes no warranty towards the transferrer’s ownership claims.
#3: Paying Off Liens
Though costly, in the case of a cloud on title due to liens placed against a property, a buyer can choose to pay any:
- Debtholders, such as banks or builders.
- Government agencies in the case of back taxes.
- Any relevant entities due to unpaid utilities.
#4: Quiet Title
A buyer can also file a petition to quiet title.
A quiet title action granted by the court demands that the seller be liable for any liens against a property — not the buyer.
If granted, a quiet title would surrender all claims to the property other than the current owner.
#5: File a Lawsuit
If all else fails, your last resort may be to file a lawsuit.
If you are a buyer who purchased a property and you were not aware of the cloud on title, you can file a civil lawsuit against the previous owner.
A judge can issue orders such as ordering the previous owner to repay outstanding liens or taxes to remove the cloud on title.
Keep in mind that following a lawsuit can be time-consuming and expensive.
How to Find a Cloud on Title
You need a clean title — one with no cloud — that verifies the owner of the property in order to complete a real estate transaction.
So how can you do that?
You can find out if there is a cloud on title by hiring a professional title search company or an attorney to conduct a title search.
A title search is an examination of public records to determine if there is a cloud on title and confirm the legal ownership of the property.
The title search is conducted on behalf of the buyer. The title search company examines the deed, searches for tax liens and looks at land records.
A title search will also determine if there are any outstanding court judgments and explore other sources of information.
You can purchase title insurance to protect you against financial losses if the title is found to have a cloud.
Preventing a Cloud on Title
The best way to resolve a cloud on title is to avoid it all together.
How can you do that?
It is important for a property owner to check with their public records office that:
- all information and descriptions on their title are correct
- all easements are recorded
- liens are paid off to prevent a cloud on title
If you find a cloud on title, it’s important to factor that into your decision to buy or walk away from a property.
The Bottom Line: Cloud on Title
As is the case with all real estate transactions, two of the most important items — especially when dealing with a cloud on title — are consulting a real estate legal professional and increasing your real estate education to ensure that your next home or your next real estate deal is your best and most profitable one yet.