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Posts Tagged ‘sheriff’s sale’

Foreclosures continue to rise in 2010, and with them, we continue to see more REO and Sheriff’s Sales. A sheriff’s sale is the judicial auction at the end of the foreclosure process. If there are no bidders, the bank retakes the property and sells it from its “Real Estate Owned” Department, or REO for short.

Both of these sales occur after a foreclosure, a judicial proceeding designed to end all ownership rights in former owners. This raises the question:

Do buyers of these properties really need title insurance?

The Answer is a resounding YES!

A Sheriff’s sale is designed to “strip” all interests and liens from the property and sell it free and clear to a new buyer. But, that does not always happen. Lien holders, like mortgages and judgments, that are not properly named or served in the foreclosure proceedings may retain an interest in the property. Taxes likely will remain due against the property. And, certain federal liens can be enforced months after the sale.

The Sheriff’s deed provides no warranties. This means that any title problems are solely the buyer’s responsibility. While title insurance will not entirely take the place of a warranty, it provides a level of protection and insurance in the event of a title claim.

Similarly, a Bank generally will transfer the property by “Special Warranty Deed” or “Quit Claim Deed.” These deeds also lack the full warranties of an ordinary deed. The warranty is the seller’s promise of good title.  Without a full warrenty, buyers will not be able to go after the seller for most title problems.

Thus, the need for title insurance.  A title insurance policy can protect buyers from liens such as past mortgages, judgments, taxes, or construction liens that might attach to the property.

Buying a property out of foreclosure without title insurance – whether at Sheriff’s sale or through REO – is a risky proposition. The cost of an owner’s policy of title insurance is a small price to pay to substantially minimize the risk.

Title insurance, however, is not the perfect solution.  It won’t eliminate all risks.  Title policies usually include certain “exceptions” or “exclusions” from coverage. The policy may not cover for some title risks such as adverse possession, boundary line disputes, construction liens, or matters not shown in the public record (among others). A full warranty deed would be the only protection from all title claims. But, Banks and Sheriff Sales don’t generally offer full, warranty deeds.

The trade-off when buying an REO or Sheriff’s sale is a great price in exchange for a little risk… unless you don’t bother with title insurance, in which case you’ll get a great price with a whole lot of risk.

This discussion is not intended as legal advice and should not be used outside of Wisconsin.  Buyers of REO or Sheriff sale properties are urged to seek the advice of a qualified attorney.

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