How to Buy Options on Properties with Clouded Titles

The term cloud, as it relates to real property, is a claim or encumbrance recorded against a property's title that prevents the owner from having a clear and marketable title to the property. And the problem with a clouded title is that title insurance companies will almost never issue a title insurance policy that insures against a cloud on a property's title. Instead, they will issue a title policy that lists the cloud as an exception to the policy, which means that the so-called exception clouding the title is not covered by the policy. The most common problems that cloud a property's title are:

1. Mortgage and deed of trust loans that have been discharged or paid off, but the lender never recorded a satisfaction of lien in the public records.

2. Missing heirs that must be located to sign the deed and transfer the title to the property.

3. Judgment liens recorded against the property's title and the lienholders cannot be located.

4. Multiple parties claiming ownership of a property by recording quit claim deeds.

5. Unsettled property boundary disputes involving flawed surveys.

When you buy an option on a property with title problems, there are two very important things that you must do. First, you must buy an 8- to 12-month option so that you have ample time to complete a quiet title action in court. Second, you must obtain the property owner's written authorization to allow you to file a lawsuit to quiet title on the owner's behalf. I always have the owner give me a limited power of attorney that allows me to take whatever actions are necessary to quiet the title.

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