No Free Lunch

One of the most important things you can do as a real estate investor is putting together a real estate team. Two important team members are a real estate broker/agent and a title company. Your broker/agent will also have a relationship with a title company. Often these relationships can be useful and there is a quid pro quo arrangement that can exist. What does that mean? Well, often the title company will run a property profile report for the agent/broker and or investor that is related to a potential deal. This report can provide the investor with useful information. This is great, but the investor must be careful about how much they rely on these free reports.

Recently, the California 2nd Appellate District Court of Appeals (Soifer vs. Chicago Title) had a case that demonstrated that these “free property profile reports” are deemed reliable but not guaranteed.

Here’s the low down:

free real estate investing workshopBen Soifer (according to court record) “was an investor in distressed real estate. His business plan involved the purchase of real properties that were being foreclosed upon by mortgage holders. In order to decide whether to bid on a particular property, he needed to know if the foreclosing lender was in fact the senior lender on the property.” So, he had a team member (title agent) for Chicago title that would run a property profile report and provide title information upon Mr. Soifer’s request. This was free title information, not a “guaranteed” title report. Mr. Soifer was relying solely on this information before making a bid on a particular foreclosure property. Then, when Mr. Soifer was ready to sell the property to the end user after fixing it up, he would use Chicago title as his title agent. This was the quid pro quo arrangement.

This arrangement worked out well for the two, until it didn’t. Mr. Soifer requested an answer to this question on XYZ property in Encino, California, “is the loan that is foreclosing in ‘first positon’?” If the answer was yes, then Mr. Soifer would bid for the property. Mr Soifer’s title agent told him yes, the foreclosing loan in the amount of $990,000 was in first positon, which gave Mr. Soifer the confidence to bid $1,000,000.01 on the property. Well guess what? The $990,000 loan was not in first position. Now Mr. Soifer had to the deal with CitiMortgage Inc. who was in first position at $1,600,000. That loan was now Mr. Soifer’s responsibility. He ended up negotiating with the bank but he lost $1,000,000.

Of course Mr. Soifer sued Chicago title, but the courts ruled that there are only two types of instruments for which a title company may be liable.

• “policy of title insurance” (which is most common)

• Abstract of Title

The reports that Mr. Soifer received were not abstracts or title insurance policies, so Chicago title was not liable.

Lesson to learn here – make sure you know what you are basing your decisions on.

Learn to Trade Now