| Scenario: You are purchasing a property from a seller under a foreclosure action. The sheriff’s sale is months away and you want to lock up the purchase now. The problem – the seller cannot convey clear title to you because there are too many judgments and liens. What can you do? The answer – try a short-sale. If the foreclosing lender and the other creditors are willing to take less than 100% owed (a “short-sale”), then you may be able to complete the purchase now and avoid further deterioration of the property and the potential that a 3rd party will outbid you at the Sheriff’s sale.
So let’s say you obtained a title commitment from Knight-Barry and payoff statements from the lender and creditors. The next hurdle – what about unknown judgment and lien creditors waiting in line at the courthouse to file a lien that will attach to the property? Will Knight-Barry and its underwriters be willing to insure you against this unknown risk? The answer – it depends.
What we are talking about is GAP coverage, or the period of time from the Effective Date of the title commitment to when the new deed and mortgage are actually recorded. The obstacle - some counties have a back-log of documents to record and file, including mortgages, judgments and liens; thus, Knight-Barry will not be able to find these new liens on the property before you purchase it and record your deed, which means that although you will not be made aware of these new liens, they will become your problem as the new owner of the property.
Typically, however, Knight-Barry can help you sleep easy because we will extend title insurance coverage over these ugly/unknown matters if certain criterion is met (updating the search prior to closing, receiving an affidavit from the seller and payment of the GAP endorsement fee). But a short-sale is not a typical transaction. In a short-sale there is significantly more risk for the title insurer as there is a history of the seller not making payments to creditors (the seller is in foreclosure) and the seller is walking away with little or no money. Will the seller tell Knight-Barry the truth about its creditors? Will the seller, who has been receiving collection demand letters for months on its mortgage, even know if a different creditor is on the verge of obtaining a judgment or lien against him or her? If you are in Knight-Barry’s shoes, would you trust the seller? Whether Knight-Barry will be able to extend the GAP coverage depends upon a number of factors:
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The underwriter – Who is the underwriter? Some underwriters will allow its agents to issue GAP endorsements in short-sale situations, others will not. Knight-Barry writes title insurance for First American, Commonwealth, Lawyers, Fidelity, Ticor and Stewart Title, which we find is a benefit for our customers. When one underwriter says “no” to a risk we can ask another underwriter. Often times one underwriter will have a lower risk tolerance level and will step up to the plate and provide the insurance; GAP coverage in a short-sale being just one of those times.
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GAP period- Is the property in a “slow” or “fast” county? Generally the more urban the area the greater the back-log of documents at the Register of Deeds and Clerk of Courts offices. For example, the GAP period in Milwaukee County can be up to 8 weeks but typically is only 1 or 2 days in Sheboygan County. If the property is in a “slow” county the potential of an unknown judgment or lien creditor waiting in line at the courthouse to attach to the property is greater and thus the risk to the title insurer under the GAP coverage equally greater.
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eRecord – Is the County set up for eRecording the new deed and mortgage? If so, we can get the deed eRecorded within 1 day essentially closing the GAP and jumping ahead of other possible judgment or lien creditors waiting in line at the courthouse.
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The Seller – Are there other judgments and liens against the seller that have attached to the property? Does this seller have a history of not paying creditors? Simply – is the seller trustworthy and will the seller tell us the truth on its closing/GAP affidavit?
If you want GAP coverage in a short-sale, please talk early and often to your title company. Even though your offer to purchase may require the seller to provide GAP coverage, the title company is not obligated to provide that coverage. Knight-Barry will work closely with you to come up with a solution that works best. |
