TIP: When discussing any of the below issues with your customers, let them know that you are only giving them a "head's-up" on potentially critical situations. You are not providing legal advice and they should certainly seek the counsel of their own attorneys.

This course is intended to let you, the real estate broker, know your way around some of the post common pitfalls of the title-insured real estate transaction. In no way should any of the information contained in this course be construed as legal advice or a firm statement of law. The statements made here are intended only to be general in nature and to make you aware of some of the issues that may arise unexpectedly before a crisis occurs at the closing table. You should always discuss any specific situation with one of our escrow officers as every case is unique.

As you know from your own experience, there is an exception to every rule, and you will undoubtedly recall a situation that does not fit into the scenarios or solutions written below. Below are some "rules-of-thumb" that give you an idea of what questions to ask and who to go to for assistance. That being said: Here are a few situations that should raise a red flag for you!

Child & Spousal Support

TIP: If you know about a client's divorce proceedings, either current or past, let them know that the case, including judgments, may appear on the title report.

Definitions:

• Payor: Individual paying a debt (support); also debtor, obligor.
• Payee: Individual to whom a debt (support) is paid; also creditor, obligee.
• Dissolution: Cancellation or annulment of a contract, in this case, a marriage.

In Oregon, when a final dissolution of marriage calls for a judgment against one of the parties for child or spousal support, that judgment is made part of the public records and is, by default, a lien on any real property owned by the debtor. Unfortunately, most people are unaware of this action of the law and are surprised that they need to deal with this situation in addition to all the other concerns of selling or buying a home.

Naturally, most child or spousal support is ongoing and cannot be satisfied in full. However, a title company will require that all support due through the date of closing is paid-in-full. In this way, the company can insure that the creditor (spouse) cannot lay a claim to the property or to the proceeds from the property because of the judgment. The necessary form for this purpose is a Partial Satisfaction of Judgment signed by the creditor in front of a notary public. This Satisfaction says that the support is paid in full through a specific date; the satisfaction is filed in the court records so that there can be no dispute regarding the status of payment and anyone questioning the title to the property can be assured. An alternative is if the State of Oregon Department of Human Resources ("DHR") is handling the collection and payment of child support. In that case, escrow only needs a statement from DHR stating that the support is paid in full.

It is important to note that all title insurance is based upon what the public records show: If the parties to a judgment have made a separate agreement "off the books" then the court records still need to be corrected and documents need to be filed showing either the new status of the relationship or simply that support is paid in full or no longer owing. The most common example is if the minor(s) being supported have turned eighteen. If there is no court record showing that all child support due over the life of the judgment is paid, then the creditor could still make a claim based upon unpaid child support from the past. Therefore, a Partial Satisfaction may be required for a period of time such as May, 1993 to November, 1995, even though the supported child turned 18 in February, 1998 and the transaction is closing in March, 2000. The same rule applies if the payor and payee have agreed that no child or spousal support is to be paid: If the court records aren't clear, then the payee could still make a claim that would require a court case to deny.

A lesser known aspect of the support judgment is its effect on the buyer who is also a obligor. The child or spousal support judgment will attach to any property to which the buyer goes into title. An institutional lender's loan will be fall behind a support judgment in priority which will be intolerable to the new lender. All the above "rules-of-thumb" apply. Of course, if the buyer is paying cash, it is only the buyer's problem that the judgment attaches to his new property: No one requires that a Partial Satisfaction be obtained or other proof of payment.

Important Notes:

• Judgment(s) are not specific to real property: The judgments attach to all the property owned by the debtor in the county in which the case is filed.
• The judgment can be transcribed from one county or state to another (i.e. a judgment from a dissolution in Pima County, Arizona may be transcribed to Washington County, Oregon which may be useful if the debtor owns property in Washington County.) In that case all the same rules above apply.
• If a Partial Satisfaction of Support Judgment is impossible to obtain, you may want to discuss other options with legal counsel for the title company on a case-by-case basis.

Incompetency

TIP: Know your customer.

Definitions:

• Incompetency: "Lack of ability, legal qualification or fitness to discharge the required duty" - Black’s Law Dictionary.
• Guardian: Individual appointed by the court to manage the affairs of a minor or incompetent individual; generally, the guardian has custody of the protected individual’s person.
• Conservator: Individual appointed by the court to manage the affairs of a minor or incompetent individual; generally, the conservator has custody of the protected individual’s financial affairs.
• Minor: Any person under the age of 18.
• Majority: The age at which a person is no longer a minor, and is legally entitled to contract.
• Fee simple: An estate under which the owner is entitled to unrestricted powers to dispose of the property, and which can be left by will or inherited.

For title insurance purposes, issues of incompetency revolve around the inability of a party to sign valid documents for the real estate transaction. The incompetency of any party can impact the transaction whether he or she is a seller, buyer or underlying contract holder.

An excellent example of an incompetency and its affect is presented in a recent article in the journal of the Oregon Escrow Council, Inc. The author tells us the story of Frankie Z. "a deaf mute, legally blind in his right eye and, in the opinion of his family members, mildly retarded", but who also won $1.25 million in a Megabucks™ lottery. Frankie’s sister and brother-in-law bought a home with Frankie’s financial support in order to plan for his future. When the title agent questioned Frankie’s competency since he was deaf, mute and partially blind, he was told that Frankie’s disabilities were strictly physical not mental: Frankie was employed and had never been under a guardianship. At closing, the only person able to communicate with Frankie was his sister using hand signals and body English recognized only by Frankie and his sister.

Skip forward eight years: Frankie’s sister fell on hard times and the loan fell into default. At this time, Frankie (directed by other family members) filed suit in federal court against his sister and the lender because he alleged "that he was ‘of unsound mind and mentally incapable’ of entering into the home purchase transaction . . . should have been obvious to the originating lender." The lender, of course, made a claim on the title insurance. An outside investigation showed that Frankie had an I.Q. of 62 and could read at the level of a child in the first grade. He remembered signing the original mortgage documents because his sister "tapped his knee and made their gesture for ‘Please’." The following year, Frankie was placed under a conservatorship as described in the accompanying text. A tentative settlement calls for various (unnamed) parties to the transaction to share in reimbursing Frankie $90,000.00. The title agent paid legal expenses of over $81,000.00. No mention is made of legal expenses paid by other parties. There were many other factors and factions in the story, but the heart of the matter is that an incompetent individual can cost all the parties much more than the benefit of the original transaction.

Incompetency can include the following:

• Mental defects such as insanity, stroke-related conditions or dementia.
• Minority: Documents signed by individuals under the age of 18 are invalid. Also, in this country, parents cannot sign conveyance or encumbrance documents for their children. For this reason, it is a very good idea to consult with an attorney before putting minors into title in fee simple since the powers of minor individuals are restricted.
• Lack of Authority: Someone of sound mind and age of majority could attempt to execute documents without the right to do so. e.g. outright fraudulent representation or attempted use of a revoked power of attorney.

If the person is judged "incompetent" in the real estate matters, then another alternative must be found. A common alternative includes establishing a conservatorship or guardianship. Loosely speaking, a responsible party may petition the court (always with separate legal advice) to establish such a protectorate and asking that the responsible party be the conservator or guardian over the "protected person" (the incompetent individual).

In these cases, the court maintains a close record over the activities of the guardian and the affairs of the protected person: The conservator/guardian is often required to prepare annual reports of the financial activities of the guardianship or conservatorship. It is important to know that often a court order is required to be signed by a judge and filed before a house owned by the "protected person" can be sold. As you can see, it is vital to have an attorney involved in these complex circumstances.

Frequently suggested is another alternative solution for the problem of an incompetent principal is the power of attorney. A power of attorney can be used on behalf of an incompetent individual as long as the person was competent at the time of the execution of the power of attorney. However, because of the high liability involved, a title company will accept a power of attorney in such a situation on a case-by-case basis. Some of the items that legal counsel will closely review prior to approval of closing with a power of attorney are:

• The documents involved (power of attorney, any other documents signed by the principal, etc.);
• The terms and structure of the transaction;
• Roles of the principals, parties, attorney(s)-in-fact;
• A letter from a medical doctor regarding the individual’s history of competency, condition, and limitations at the time of execution of the power of attorney and currently;
• Use of net proceeds (specifically whether the proceeds are intended to benefit the incompetent individual or not).

Although it seems like a great deal of work to go through with the sale of a home, I think you’ll agree that — thinking about Frankie’s story — it is better to be safe than sorry. Remember that in this kind of a situation all the parties including the real estate brokers, loan officer, notary public could end up in the court room together.

Powers of Attorney

TIP: Obtain copies of all powers of attorney before any real estate documents such as the listing agreement or sale agreement are signed.

Definitions:

• Principal: Individual who gives authority to his or her agent or attorney; the individual who is appointing someone to act or sign on his or her behalf; the actual person selling the property or committing to the loan
• Attorney-in-fact: Individual acting for the principal; the person who will actually sign all the documents

In today's fast-paced world, rapidly shrinking with amazing technological advances, it is hard to keep up with some of our customers. As a result, powers of attorney ("POAs") have come into increasing popularity as ways for people to complete their business from a distance without the expense and time spent on overnight or U.S. mail. However, although "POAs” are increasingly popular, they remain high-risk and high-liability solutions.

Imagine:

Joe Bloe walks into Lenders–‘R’–Us with a power-of-attorney from his parents. The document authorizes him to handle their affairs in connection with a 60 unit apartment building, and he wants to get a loan. Since the "POA" clearly gives Mr. Bloe extensive authority, Lenders–‘R’–Us lend him $650,000.00 and DEF Title issues title insurance on the loan. Funds are disbursed and everyone congratulates themselves on a profit well-made.

Three months later, Mr. Bloe, contacts Lenders–‘R’–Us to find out about the late notices that he’s been receiving for payments on a loan he doesn’t know he owes. No one is able to locate Joe Bloe, Jr. Turns out that that Mr. and Mrs. Bloe never spoke to their son about the new loan and never intended him to use the "POA" to encumber the property. Apparently, he had misrepresented their intentions and skipped town with the loan proceeds.

This very unfortunate situation (loosely based upon a true story) leaves everyone in the lurch. These kinds of situations end up in court for years costing everyone money, time and effort. Due to circumstances like these, which have happened more than once, a title company may require some or all the following items for review and approval:

• That the "POA" be specific to the transaction: i.e. a Power of Attorney to Buy Real Estate vs. a Power of Attorney to Sell Real Estate. Each of these documents have slightly different wording and clarifies that the principal knows of the intent to sell or buy;
• That the "POA" be specific to the property: it should include the legal description of the property being bought or sold;
• That an employee of that title company have contact with the principal to verify that he or she is aware for what the "POA" is being used;
• Any information regarding possible incompetency of the principal;
• That the original "POA" be recorded in the records of the county of the property: This is a standard requirement.

It is important to advise your escrow officer of the use of a power of attorney well in advance of closing so that he or she may collect all the necessary items for approval. If the title officer or legal counsel has any unanswerable concerns regarding the validity of the power of attorney, closing could be delayed.

In the case of a "POA" on behalf of the buyer, an involved lender will also want to know about the "POA". Some lenders do not allow them at all: They require that the borrowers personally sign all the documents without exception. Those lenders that do allow their documents to be signed by an attorney-in-fact will also require the "POA" be approval in advance and they may have similar requirements as the title company. One additional requirement that I have seen some lenders place is an expiration date or valid term of the "POA". Remember that both the lender and the title company need to review the "POA" and that one, the other or both may reject the use of the "POA" for one reason or another.

While some powers of attorney do have specific terms for which they are valid as mentioned above, there may be other reasons for a power of attorney to be invalid besides outright fraud. If one of the parties to the "POA" dies then it is ineffective. Also, a principal can revoke a "POA" if he or she chooses. This is another good reason to contact the principal if the "POA" is not specific to the property and transaction the "POA" may have been revoked, but never returned to the principal. Of course, if an attorney-in-fact does not have the actual document in his or her hands, then it’s not very effective either.

While any body can act as an attorney-in-fact, he or she must guard against conflicts: e.g. it is generally not recommended that a real estate broker act as an attorney-in-fact for his or her customer. Of course, any such decisions should be run by the real estate broker’s principal broker. However, a "POA" cannot be used for everybody (or every entity). "POAs” are not applicable for the following kinds of principals:

• Trusts: some form of amendatory document to the trust agreement is needed to authorize someone else to execute documents on behalf of the trust. See your attorney!
• Corporations: as above, some form of amendatory document to the By-Laws is needed to authorize someone else to execute documents on behalf of the corporation, no matter what the size of the corporation. Most By-Laws also call for a board meeting and vote before the By-Laws can be changed, so minutes of such a meeting may be required. See your attorney!
• Partnerships: again, some form of amendatory document to the partnership agreement is needed to authorize someone else to execute the documents on behalf of the partnership. See your attorney!

Uninsured Access

TIP: Get it in writing and get it recorded.

Definitions:

• Easement: A right created by grant, reservation, agreement, prescription, or necessary implication, which one has in the land of another.
• Road Maintenance Agreement: Most commonly, an agreement between land owners regarding who will maintain and pay for maintenance of a road shared in common; may include language granting an easement.
• Egress: A term concerning a right to come and go across the land (public or private) of another. Usually part of the term ingress and egress.

Cases of uninsurable access more often raise their heads on rural properties, although it certainly can happen anywhere. Real estate brokers will often research the property before handling any documents regarding a sale of the property if access appears to be questionable. I have heard of one case where the access to an urban property was by an easement passing over the property and through the garage of the adjacent property: I’m sure that caused some interesting circumstances!

All ALTA policies (including Owner’s and Mortgagee’s, Standard and Extended) now insure for access for ingress and egress to and from the insured property, although this was not the case in the past. To have insurable access, the public records (usually the county recorder’s office) need to document the method and placement of the access. Written and verbal agreements are not insurable until properly documented and recorded; nor is the physical condition of the road or path despite what a visual inspection may indicate.

If there is no recognizable way of access to a parcel, the title officer will place an exception on the title report similar to:

"We are unable to ascertain from the records if the premises herein described has a means of ingress and egress to and from a legally dedicated road or highway, and for this reason, such rights cannot be insured."

If you see this exception, be very concerned: Call your escrow officer and ask questions. A transaction usually cannot close until insurable access is obtained. Even if a purchaser is not concerned about legal access, an institutional lender will not lend on property without insurable access. Obviously, the lack of insurable access can also affect the marketability of the property.

Cases of Uninsurable Access:

• Use of a driveway based upon an old "hand-shake" deal or verbal agreement with no recorded evidence or legal recourse.
• Sale of a parcel of land that leaves a second parcel "landlocked" without access:
  
  
  
  
  
• For example in Figure 1, tax lots 1903 and 1904 are owned by the same person. If the owner sold off tax lot 1903 (which is on First Street), but kept tax lot 1904, there would no longer be any kind of insurable access to lot 1904. Regardless of any discussion about the legality of such a sale, this does happen.
• Use of a driveway, often by several lots or homes, that apparently no one owns or in which no one has an interest. The ownership may be completely unknown, or a road may run across several lots and each owner only owns the portion of the road across his or her lot. There would still be no insurable access via the remaining portions of the road without some form of recorded easement.

Cases of Insurable access:

• Properly dedicated county or city road: A shows that tax lot 1903 is sitting right on First Street and has very clear public (and insurable) access.
• Recorded easement agreement benefiting the property: B indicates tax lot 1907 has access to Second Street (a public road) by an easement over tax lot 1911. This county tax map even exhibits the county’s recording number for the document granting the easement: 99-11111. An easement can also be reserved in a deed (a "deed reservation") conveying property which is especially useful when selling off the part of a parcel that has direct access to a public road.
• An interest in a Tract benefiting several parcels as in a subdivision: C shows that tax lot 1910 is Tract A in a Partition Plat as a private road for access to tax lots 1906 and 1904.

Please note: a tax or plat map may or may not accurately show any recorded easements or other means of ingress and egress. Further research into the recorded documents is always recommended.

A solution exists for uninsurable access:

It’s time to record an easement agreement for access. First, the legal description of the easement needs to be determined: this is the exact description of the roadway and where it lies on the land. If a legal description is not already in existence as in the case of an old extinguished easement, then a surveyor will be required to prepare a new description.

Next, the parties prepare the easement agreement (which may include a road maintenance agreement) using the legal description either prepared or provided. Drafting an easement is considered legal advice, so either the principals must draw the document or an attorney should be retained to draw the agreement. The terms of the agreement and acquisition of the signatures of all the affected parties may require some negotiation and possible payment of a consideration between the land owners involved. Of course, as in Figure 2, a Reservation in the conveyance deed can be an alternative to a separate easement agreement. In any case, a proactive seller will retain an attorney in advance to prepare the proper documents.

OTHER Red Flags

TIP: Don't hesitate to ask your escrow officer the question if you don't know the answer.

Then there are a few miscellaneous "red flags" that are simple in concept, yet they can cause problems at the closing table.

Collected Funds

Oregon state regulations require that funds on deposit with an escrow company be collected before the title & escrow company can record any documents, disburse any monies or close the escrow. Basically, collected funds is actual money that has been deposited into the bank. That means that the other banks that checks have been written upon have sent funds in payment of the check as deposited. A cashier’s check deposited into the bank the day prior to disbursement or a wire transfer of funds are the two guaranteed methods to have collected funds and are required by most escrow companies. Naturally, cash is clearly collected funds, but most escrow companies have policies prohibiting cash since they do not have the facilities such as bank vaults, security guards, armored cars, etc. to handle it.

However, it is surprising how often unprepared buyers have funds that are unavailable at closing and closing is actually delayed. Most commonly, a buyer who has funds on deposit with a brokerage account or some form of out-of-state depository will want to research how to access those funds instantly. A check written on those accounts will not be acceptable since the check usually has to clear through the bank of the brokerage or depository which is often on the East Coast. This can take upwards of 10 days – and the same amount of delay in closing. Some brokerages do not offer wire transfers and/or cashier’s checks. Some brokerages require 2 weeks notice before disbursing funds in large amounts in collected funds. Some brokerages will only issue checks at East Coast locations to be sent here for deposit. Make sure that your buyers know what their brokerages and/or depositories require, allow and provide.

Inheritance of Real Property

Be careful! Just because someone says that he or she inherited the property doesn’t mean that the transaction will be simple. A title company will require some firmer form of proof filed in the court records besides a last will and testament. The preferred option is a full probate as supervised by a court, but other options may be available such as an Affidavit of Small Estate. An attorney should be involved in any case. Alternatives to probate may require extensive review by legal counsel and possibly additional title insurance premiums for the additional risk assumed by the title company.

Pending Dissolution

The end of a marriage can make real estate transactions more complex as well as anything else. When sellers of real estate are divorcing, it is important for them to be clear on a few items before signing the final closing documents: Who is getting how much money, and who is accepting the tax liability, if any, for the sale. If these are unknowns at closing, the transaction could be delayed since title companies have performance obligations under IRS and state regulations.

Lastly . . .

These are things that are helpful for your escrow officer to know. Although they may not matter materially to the transaction or affect negotiations or the contract, they do affect your customers. By knowing these, your title & escrow company can be more effective in their dealings with your customers:

• Recent death in family
• Divorce
• Personal health issues
• Special environmental needs such as wheel chair access or space
• Physical incapacitation (e.g. a customer in a hospital or nursing/long-term care facility)

Of course, there will be limitations on the information you can share due to confidentiality and good taste. But remember, the more that your escrow officer knows about the transaction and people involved, the more helpful and effective he or she can be.

This course may have raised more questions for you than it answered. If so, please contact your escrow officer <> if you have any questions or comments about this topic.

The majority of the definitions in this text come from The Real Estate (6th ed.). (1998). John Talamo, JD. Boston, MA: Financial Publishing Company.

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This educational series is created to allow Realtors to obtain continuing education. The articles are intended for general informational purposes and are not to be construed as legal advice or legal opinion on any specific facts or circumstances. You are advised to consult with an attorney concerning any questions about your rights or responsibilities in any specific situation.