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I am in the process of purchasing a home for the first time. The title has a cloud because the house was sold at a tax sale in 2018 (the owner was deceased). The guy who bought it sold it to another person, who remodeled it and is now selling it to me.

The title search company is escrowing money from the seller to clear the title via a Quiet Title action. They want to continue with closing on schedule, and said there will be an exception on my title insurance which will be removed after the title action is completed. It all sounds like standard procedure to me, but I'm not a lawyer.

The one thing that concerns me is, what if the title action were to fail? Can this happen? So, for example, what if an heir of that deceased decides they want to fight me over the house? Could I lose it? What about the mortgage I took out to buy the house? Or am I getting overly concerned about nothing?

Is this standard procedure?

I am in Pennsylvania.

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No. This is not normal. Get out now!

Imagine you and I negotiate a particular price on a car that I'm going to sell to you. Then, right as we're about to close the deal, I say, "Oh, by the way, this sale might not include the engine. I mean, it probably does, but it might not." Still want to pay the same price for the car?

The title company is not sure that you will get title to the property and is asking you to take 100% of that risk. They would only do this if they felt that risk was real.

When you negotiated the price of the property, you assumed that you were getting clear, marketable title. That is not what you are getting.

Whatever the risk associated with the title is should reduce the value of the property today. So you are buying something worth so much less than what you agreed to pay for it, your title insurance company is unwilling to cover that difference.

Immediately get a quote from the title insurance company on what it would cost for them to guarantee that you get clean title and remove the exception. Then ask the seller to reduce the price by that amount and get title insurance that protects you. If the seller or the title company don't agree, get out now.

The seller is not delivering to you what they offered for sale and you are being asked to just take that loss. You are entitled to your full deposit back.

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    Thanks for this advice. I have informed the title company that I will not be purchasing this property without a fully insured title with no exceptions. Mar 11 at 19:46
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    @nonremovable They may be able to remove the exception. There may be costs associated with doing that. You should ask the seller to cover those costs. It may delay the closing, you have to decide if that's acceptable to you. I can't imagine the seller will mind given they now have to disclose to any new buyer that they don't have marketable title. Mar 11 at 19:50
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    That's what got alarm bells ringing in my head. Seller was willing to cover the cost of quiet title action; But I was going to be the plaintiff and it was to be performed after closing. I know nothing about law or real estate, but this just seemed like I was putting my neck in a potential noose. Mar 11 at 19:52
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    @nonremovable That's precisely what the seller was intending: You take the risk. Mar 12 at 0:45
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    One other thing. If you have a realtor and they didn't give you advice similar to what I gave you, I'd be very concerned. A realtor should be protecting their customer, not trying to save the deal at all costs. Imagine if you wanted to sell the house right after buying it for some reason -- maybe a fantastic job opportunity on the other side of the country -- how would you have done that? Mar 12 at 19:12
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It is unusual, but not unheard of, to do a quiet title action in connection with an arms length, non-related party sale of real estate.

The far more customary practice is for the seller to do the quiet title action (at the seller's expense) if it is necessary for the seller to have what is called "marketable title" to the property, before it is even listed for sale.

It would also be more customary for the closing to be extended to a date after which the quiet title action can be completed, and for you to lease rather than buy the property prior to closing.

This way, if the quiet title action fails to quiet title to the seller, the closing with you doesn't have to be undone, and you can just move your stuff out with reasonable notice from the landlord-seller, and you can look for somewhere else to live or can try to cut a deal with whoever is determined to be the true owner of the property.

Also, as a practical reality, it would be quite unusual for a mortgage lender to agree to provide you with a mortgage without title insurance in place. I very much doubt that the deal can go forward as planned, even if the you and the seller agree, if you need mortgage financing to buy the house.

This said, there is nothing particularly unusual about a title insurance company's requirement that a quiet title action be completed in a case where the current owner took title via a tax sale from a deceased owner's probate estate. Any irregularity in the tax sale process could vest the property back into the estate of the deceased owner, the tax sale buyer likely paid less than fair market value, and there are probably special notice requirements involved in a tax sale from a deceased owner's estate that don't apply (and extend the statute of limitations for contests of the tax sale) that wouldn't apply in the case of a tax sale from someone who is alive. Some of the potential irregularities wouldn't appear in the public record or in any other documentation that you could demand (e.g. a forged signature or an error in crediting payments of taxes to the wrong account).

The likelihood that a quiet title action will vest title in the name of the seller is high, but the fact that the title company is not willing to insure title in its current state is strong circumstantial evidence that the risk that the seller does not have good title to the property is real.

Your concerns are not unreasonable, and the safer course of action would be to restructure the deal so that you do not take title unless and until the title is quieted in the seller in a lawsuit conducted at his sole expense and risk, even if you move in pursuant to a lease pending that process. The existence of an (amended) real estate contract between you and the seller should be sufficient to protect your interest in the deal that you have struck between now and closing. It is possible that your financing could fall apart between now and closing, but often the circumstances that would make that happen are circumstances that would cause you to wish you never did the deal in the first place anyway.

When I represented some heirs of a decedent in a similar case (involving a fraudulent sale to avoid a tax sale, rather than a tax sale itself, from a probate estate), the deal ultimately struck was to have the heirs sell the house to the buyer who was under contract, with proceeds split between the nominal owner of record and the heirs who might have had a claim to undo a prior sale. Such a resolution if there is a contested quiet title litigation, in lieu of taking the quiet title dispute to trial, is another resolution that would be fine with you if the closing is postponed until after the title dispute is resolved.

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Title companies are skeptical of tax sale transactions because the validity of the tax sale depends on the government correctly serving notice to anyone who owned or had an interest in the property at the time of the tax sale. The title company doesn't have a way to audit the government's records to check that notice was properly served, so they can't be 100% sure that the tax sale actually conveyed title.

If a quiet title action succeeds, the judgment can be recorded, and then the title company will consider that recorded judgment as establishing title firmly enough to issue title insurance.

There are a few problems with using quiet title actions for that purpose:

  • They cost a lot of money, typically at least $5k
  • They can take months, even if no one objects
  • It is always possible that someone will object, however frivolously, thereby enlarging the previous two problems

For the purpose of issuing title insurance, I know of at least three other options:

  • There are companies which for a much smaller fee (typically $1k-$2k) will audit the tax sale in question, and furnish a certificate to the title company that the tax sale was done properly. Some title companies accept these certificates; some do not. Your title officer can tell you if your title company accepts such certificates. Better yet, you can google for one of the certifying companies, and ask them which title companies in your state accept their certificates. It is typically possible to change title companies if it turns out the one you're using can't insure your purchase, but another one can.
  • Wait for a long time. Some title companies will insure properties that have been through a tax sale if the tax sale was conducted at least 5 years prior to close of escrow. That doesn't help you if you want (or your lender demands) title insurance for the present transaction.
  • You can buy the house with no title insurance. This is not conventional, and it is seen as dangerous. Realtors as well as lenders will typically refuse to participate in non-insured transactions. Some escrow holders will nonetheless allow you to proceed without title insurance. If you insist on driving a stick shift, using the Mac OS X command line for routine tasks, or loading your own ammo, you may be the sort for whom such an approach merits consideration.
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    "You can buy the house with no title insurance" To do so, you'd need a 100% downpayment or a non-conventional lender.
    – ohwilleke
    Mar 11 at 8:59
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    True. I meant to communicate that by saying with it lenders and realtors generally don't deal with non-insured properties. Mar 11 at 20:35
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    In this case the title company was issuing insurance with no exceptions to the bank. they just weren't willing to do the same for me. Mar 11 at 20:49
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    Weird. I don't see how your interest could be clear enough to insure it as collateral, but not good enough to insure that you really own it. Title companies have their reasons, I suppose. Mar 11 at 20:58
  • @nonremovable Another reason not to proceed on that basis.
    – ohwilleke
    Mar 11 at 22:00

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