What is a Preliminary Report and Why does it matter?
When it comes to selling real estate sales, it’s important to be incredibly thorough from the beginning. Do you have the legal right to sell the property? Is the home’s title free of “clouds” or “defects” — such as judgments, liens, or bankruptcies — that would prevent the seller from transferring a clear or marketable title to the buyer? How do you know?
Get the Preliminary Report and Review it!
A preliminary report contains the conditions under which the title company will issue a particular type of title insurance policy. It lists title defects, liens, and encumbrances which would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the preliminary report. Selling a house is already a complex process, but when you want to sell a house with a lien on it, the process becomes even more complex.
I had a client with this particular problem with a lien.
Liens, particularly on real estate, are a frequent method used by creditors to collect what they are owed, which is what our seller was dealing with. In reviewing the preliminary report on my client’s home, we noticed some liens on the property. I immediately reached out to our seller to let him know. It turned out that our seller filed Chapter 7 bankruptcy back in 2011; however, the creditor was able to attach a lien to this current property that we were selling for this same debt. The seller had no idea about any of this and was beside himself. This was a big deal because the judgment was over $34,000 and should have been absorbed in his bankruptcy filing in 2011 and not affect this current property.
The seller had all the court documents from 2011 showing that this debt was discharged, so how did this happen? One of the things that I have seen cause confusion for my clients is the fact that the debt owed to the creditor and a lien created to secure the payment of the debt are not the same thing. Clients find it hard to absorb the concept that a debt can be discharged in bankruptcy, but a lien can survive the discharge and can often create a significant problem down the road when the owner wishes to sell the property, like in the case of this seller. Our seller took the brave step of seeking bankruptcy relief to resolve his problem, only to discover a lingering issue with a “lien” that did not go away upon obtaining a discharge in bankruptcy.
I quickly referred him to a new bankruptcy lawyer to assist him with reopening his Chapter 7 case. My assistant worked with the seller and the attorney to get all the necessary documents and signatures together to rectify this issue. The lawyer told the seller that he would will file a Motion to Avoid Judicial Lien with the bankruptcy court, but it would take up to 30 days. At this point, I had recently ratified on an offer and we were in escrow. I reached out to our title company that I have opened many escrows with, including this one, to ask if they would hold back twice the face amount of the judgments for 60 days. This would allow us to close on time and more importantly, to allow time for a favorable response from the court. After all, this debt was discharged back in 2011, so the seller did not want to have to pay this!
The title company told us that they could not and would not do this. My first thought was, are you kidding me?
At the same time, the buyers were requesting unreasonable financial compensation to extend close of escrow because they needed to move in right away. My assistant immediately reached out to another title company that we had a relationship with (thank goodness we have a bunch of friends in this industry), and they agreed to hold back twice the face amount of the judgments for 60 days. We moved escrow that day in agreement with the buyer’s agent. It made a big difference to be aligned with the right partners: Matthew G. Grech, Esq., Grech Legal and Silvia Barragan, First American Title.
And the seller? The bankruptcy court “Motion to Avoid Judicial Lien” judgment came back in his favor!
We waited out the 14-day appeal to allow the creditor to appeal, but we did not hear a peep from them. They knew they were trying to backdoor our seller. The title company wired the seller back the $68,280 they were holding (twice the face amount) and everyone was happy!
Moving escrow was paramount in allowing us to close on time and without hardship to either party. The Chris Eckert Team prides itself in putting ourselves in our client’s shoes and approaching each situation with a solution-driven mindset. My team and I always think, if this was me, what would I do or need? One of my main duties as your realtor is my fiduciary duty and, in the case of this story, a very necessary one by reviewing the preliminary report.
