Buying Foreclosure Property? What Title Information Can You Rely On?

By Terri D. Molinaro, Esq.

Buying foreclosure property seems like a brilliant idea. Buy it low, sell it high, make tons of money. But how do you know what you're buying? One buyer recently found out the hard way that even if you investigate the condition of title to the property, you cannot always rely on thatinformation!

In late 2007, Ben Soifer bid at a foreclosure sale and paid $1 million for a foreclosing loan. Prior to the sale, Ben requested that a title agent provide him with title information upon which he relied. According to Ben the title agent told him by email that the foreclosing loan on the property that he intended to purchase was the senior lien on the property. Based on that information, Ben completed his purchase. In fact, the foreclosing loan was in second position behind a deed of trust in the amount of $1.6 million. After reselling the property, Ben sustained a $1 million loss, and sued the title company for negligence and negligent misrepresentation.

The California Court of Appeal found in favor of the title company holding that "if a representation was sought from the title company as to the condition of title to a particular property, an abstract of title should have been obtained." Soifer v Chicago Title Company, No. B217956 (Ct. App. Cal., August 10, 2010). The court also referred to its decision in Southland Title Corp. v. Superior Court (Southland) (1991) 231 Cal. App.3d 530, where it held that a title company could not be held liable for the negligent preparation of a preliminary title report.

Ben's case rested entirely on the proposition that an informal verbal agreement with the title agent could, as a matter of law, result in the title company'sliabilityeven though Ben did not request a policy of title insurance nor an abstract of title. Other than Ben's promise of future title business, he did not pay or agree to pay for any services from the title company.

In making its decision, the Court relied on Southland as well as Insurance Code Sections 12340.2 and 12340.10 that define a title policy to mean "a written instrument or contract by means of which title insurance liability is assumed" and an abstract of title to mean a "written representation, provided pursuant to contract intended to be relied upon by the person who has contracted for the receipt of such representation." The Court noted that prior to the enactment of Sections 12340.2 and 12340.10, according to case law, a preliminary title report was the equivalent of an abstract of title. However, in 1981, the Legislature enacted Sections 12340.2 and 12340.10 and "[f]rom that time onward, a preliminary title report [would] no longer be treated or considered to have the legal consequences of an abstract of title. If a current representation as to the status of title is required then an abstract can be ordered and separately purchased." Soifer citing Southland, 231 Cal.App.3d at p. 536.

The bottom line: If you want to assure yourself as to the condition of title when buying property at a foreclosure sale, then you must obtain an abstract of title or title insurance. If you rely ona preliminary title report or other communication from the title company, you won't have any recourse if the information is inaccurate.

The above article is provided for informational purposes only. It is not legal advice, nor does it create an attorney-client or any other relationship. You should always contact an attorney for legal advice applicable to your particular situation.