Why Chain of Title Is Important to Your Investment Property

When purchasing an investment property, it’s easy to miss chains of title in discussions of interest rates, down payments, and credit scores. However, chain of title documentation is an extremely important step towards securely purchasing an investment property. 

Below, Vaster has explained everything you need to know about chains of title and why chains of title matter. 

What Is a Chain of Title?

A chain of title describes a property’s historical ownership timeline from when it was built until today. In most cases, a chain of title will include many different owners. 

This document shows continuous and unbroken property ownership to prevent future ownership issues from arising. 

Why Is the Chain of Title Important to Your Investment Property?

The chain of title is important for your investment property because a “dirty” chain of title can call the legitimacy of your property ownership into question. A dirty title could also leave you on the hook for liens from previous owners if you’re not careful. 

If you want to protect your property and your finances from potential issues, you need to care about the chain of title. 

How to Verify the Chain of Title When Buying an Investment Property

Verifying the chain of title when buying an investment property is easier said than done, especially when multiple series of documentation and transactions like notations of deeds of trust, transfer documents, easements, and judgments of distribution are involved over many years. 

These types of documents can include anything from declarations of covenants and restrictions to judgments of quiet title to certificates of death of a joint tenant. 

This is where title companies come into play. 

Title companies and abstractors can establish an unbroken chain of ownership through a title search to verify proprietary rights. They also verify proof of the veracity of the owner for the buyer or grantee and that all debts, involuntary liens, voluntary liens, and judgment liens have been settled. 

Even when title companies conduct a chain of title search to ensure there is a clear title, issues can still arise. This is why title insurance is available for your real estate transaction. 

Title insurance effectively protects the present owner of the property’s title from any future claims. These policies typically cover complications like financial loss from missed claims, omissions, future title rights claims, and court costs during a lawsuit. 

In most cases, insurance on a property's title is worth paying, if only for peace of mind. 

Other Things to Consider When Buying an Investment Property

While the property's title is certainly an important consideration and a valuable tool when buying an investment property, several other components can help a new owner ensure a sound investment. 

Specifically, you need to think about property appraisal, inspection, insurance, closing costs, the local real estate market, and potential cash flow. 

Let’s examine each of these components in greater detail:

1. Property Appraisal

The property appraisal effectively determines the value of the property in question. During an appraisal, a professional inspects the property’s condition and features. From there, the appraiser compares those factors with similar properties in the area that have recently sold. 

An appraisal is a key financing component, as lenders aren’t willing to lend more than a property is worth. If an appraisal comes back too high, you need to be able to cover the difference on your own or negotiate a lower price with the seller. 

2. Property Inspection

A property inspection involves searching the property for any potential issues. This inspection is completely visual and doesn’t go beneath the surface to look for hidden issues. Property inspections provide a buyer with the information they need to invest. 

There are a few ways sellers can mitigate any issues that come up during the inspection. The seller could immediately repair these issues while covering the costs themselves, or the seller could provide money for the buyer to complete the repairs. The buyer and the seller could also negotiate so that some repairs are covered by the seller and some are covered by the buyer. 

If the buyer is unwilling to negotiate and no longer wants to proceed with the sale, the buyer can walk away from the sale if they have an inspection contingency in place. 

3. Property Insurance

Most mortgage lenders require borrowers to maintain insurance coverage on their investment property. 

Even if you can self-finance, it’s still wise to take out an insurance policy to cover unexpected damages. For instance, insurance can cover vandalism or theft. 

If you live in an area with many weather-related considerations, insurance could be particularly beneficial by covering damages caused by fire, smoke, wind, hail, snow, ice, lightning, hurricanes, tornadoes, earthquakes, and more. 

You may need to pay higher insurance premiums if you live in areas frequently hit by hurricanes like the Gulf Coast, areas that frequently experience many tornadoes like Tornado Alley, or areas that frequently experience earthquakes like the San Andreas Fault. 

4. Loan Closing Costs

When buying an investment property, it’s easy to get distracted by the biggest cost—the down payment. However, there are closing costs that you need to consider. 

Depending on your loan and lender, you can expect to pay 2% to 5% of the value of your loan in closing costs. 

Closing costs include loan origination fees, appraisal fees, title searches, title insurance, land surveys, property taxes, deed recording fees, credit report fees, and interest rate discount points. 

5. Local Real Estate Market

While it’s impossible to predict the market, it’s wise to have a solid understanding of your local real estate market before you purchase an investment property. This practice can help you identify trends that you can take advantage of as an investor. 

For instance, if there’s an up-and-coming area where properties are fairly cheap, it may be a smart place to purchase an investment property. You may also want to consider the type of properties you’re purchasing. Some areas like South Florida have a higher demand for condos and vacation rentals than other areas. 

Doing your due diligence and researching your local market can be extremely helpful when you invest. 

7. Cash Flow

Finally, you need to consider cash flow. This can help ensure that your purchase will be a beneficial investment. While you may not be cash flow positive right away, this should be within reach. 

You need to make more money from a property than you’re spending to maintain it. Make sure that rents are in line with your mortgage costs, maintenance costs, and management costs. 

Wrapping Up

For more information on how to invest in real estate, check out Vaster Capital’s online resources. If you have any questions or need personalized advice, feel free to reach out to our lending experts for guidance. 

Sources:

What Is Owner's Title Insurance? | Consumer Financial Protection Bureau (CFPB)

The Most Important Factors for Real Estate Investing | Investopedia

FAQs About Home Inspection | American Society of Home Inspectors (ASHI)