I paid those property taxes for nothing?

Imagine you receive a gift deed from your uncle to some valuable, vacant, highway-frontage farmland. You pay the property taxes. About a year later, in need of quick cash your uncle sells the same land to a developer who promptly records his deed. Then your uncle dies.

Who owns that property: you or the developer?

PurchaseBob Bruss reports online.

If you failed to record your gift deed, the legal answer is the developer owns the land. The reason is he is a BFP (bona fide purchaser) for consideration without notice of your prior unrecorded gift deed.

However, in a quiet title lawsuit to determine ownership, you might have an equitable claim that you are the property owner because you paid the property taxes after receiving the unrecorded gift deed. But in most states the recording laws make your prior unrecorded gift deed ineffective due to your failure to record and you will lose the case.

Now let’s change the scenario to specify you receive a gift deed to the same property, fail to record it, but still pay the property taxes; then your uncle dies, willing the land to his son instead.

Now who owns that land? The answer is you do because your gift deed means your uncle no longer owned the land, making his mention of it in his will ineffective.

THE PURPOSE OF RECORDING LAWS. Deeds, mortgages, deeds of trust, mechanics’ liens, judgment liens, income-tax liens, leases, trusts, lis pendens and other documents that affect a property title are recordable in every state to give “constructive notice” to the world. In the example above, if you had recorded your gift deed, even though you paid nothing for it, you would be the rightful owner under the recording laws.

In a few states, an unrecorded deed is invalid until it is recorded. But an unrecorded deed in most states is valid only between the two parties — the grantor and the grantee. It is not effective against a BFP because an unrecorded document does not give constructive notice of its contents.

“First in time is first in right” is the basic rule and the unofficial motto of the title insurance industry. Each property has a chain of title showing all recorded documents affecting its title, such as deeds, mortgages and liens.

Although an unrecorded document might have been executed first, if a later-issued document gets recorded first, that claimant usually wins unless no consideration was paid for it. In other words, the recording laws create a race to the court house to record.

ALWAYS RECORD DOCUMENTS TO PROVE PRIORITY AND VALIDITY. When an old, unrecorded deed is presented to the county recorder of deeds, suspicions arise. However, if the document is in proper legal form, no matter how questionable the circumstances might be, the county recorder usually must allow the recordation.

Later, in a quiet title lawsuit, the claimants to a property can present his or her claims, and a judge will decide who owns the property or who has a valid claim against its title.

Unrecorded documents can be very dangerous.

For example, in some home sales the seller agrees to carry back an unrecorded, or “silent second,” mortgage. The purpose usually is to fool the first mortgage lender into thinking the buyer paid a large cash down payment. After several months, the seller then records the silent second mortgage.

But not recording the document can be dangerous for the seller if the buyer meanwhile obtains and records a home equity loan, which then is recorded like a second mortgage, pushing the unrecorded silent second mortgage into third priority when it is eventually recorded.

HOW TO CHECK YOUR TITLE. The best title protection a property buyer or a mortgage lender can receive is a title insurance policy. This document issued by a reputable title insurer shows all recorded documents affecting a property’s title, such as the deed, first and second mortgage, mechanics’ lien, and perhaps an income-tax lien.

If a title insurer makes a mistake, it must pay valid claims as long as the insured or an heir owns the insured property. The result is a title claim might not become known until many years later, such as a defrauded ex-spouse showing up to claim his or her interest in a property where the other ex-spouse forged the absent spouse’s signature.

Speaking of forgery, that is the biggest cause of title insurance claims. Even the world’s greatest title searcher rarely spots a forged signature. Although state laws discourage forged signatures on deeds and other recorded documents, it happens. That’s why title insurance is always the best protection to assure you have the title you think you own.

When a title insurance claim is paid, the insurance company pays on the basis of (1) the diminished value of the property if the title insurer failed to disclose a recorded document, such as a second mortgage; (2) cost of correcting the error, such as moving an undisclosed but recorded sewer pipeline; or (3) the full policy purchase price limit if the title was completely defective.

VERBAL PROMISES ARE USUALLY WORTHLESS. No matter how many witnesses you may have to a verbal real estate transaction, the promises are worthless until reduced to writing and signed by the party to be charged in a lawsuit. If the document is not recorded, it is open to questionability.

To illustrate, many property owners have said, “When I die, you will receive all my assets.” Those worthless words spoken to their spouse, lover, friend, relative or caregiver have no effect because the statute of frauds in every state requires a written document for valid real estate transfers.

Putting such a promise into a written will or a revocable living trust is equally unenforceable because those documents are usually not recorded and can be changed anytime before death.

Although there are a few court decisions upholding verbal promises to convey real estate, such as when a caregiver takes care of an ill property owner for many years, those decisions usually are based on detrimental reliance and solid evidence.

QUIET TITLE LAWSUITS RESOLVE RECORDING DISPUTES. Title disputes often arise even when the applicable documents are properly recorded. For example, a recorded driveway easement over your land might be indefinite as to its location, size and use restrictions. If you think the easement holder is exceeding the use specified in the recorded easement, a quiet title lawsuit is the best way to let a judge resolve the differences.

Other disputes that can be resolved by a quiet title lawsuit include multiple claims of the same property, adverse possession claims, prescriptive easement rights, and property division after divorces.

SUMMARY: Recording laws allow claimants to establish their rights to ownership and security interest claims in a specific property. The two basic recording rules are: “the first in time is the first in right,” and the first claimant to record their document wins the race to the court house.

If conflicts cannot be resolved between claimants, and a claimant doesn’t have title insurance protection, a quiet title lawsuit is the best way to determine ownership and title claims. For more details, please consult a local real estate attorney.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2007 Inman News

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