What steps do lenders take in order to insure their loans on your 1031 Exchange Replacement Property?

Before issuing a loan, a lender will request a title report on the property. A full title report includes a survey, a physical inspection of the property and a search through public records. When there is an interest in a property (such as a loan or claim) it is recorded with the local public governing body (city, county, state). For example, a recorded deed lets the world know that a grantee has legal fee title to the property and a recorded mechanics lien lets the world know that there is a claim against the property by a third party.

These recordings are known as constructive notices. Title examiners will pay close attention to these items. Actual notices are another form of notice that are usually given verbally or in writing between parties.

There are two methods that lenders employ in California to obtain assurance of good title. These are the Abstract and Opinion of Title and Title Insurance. The Abstract and Opinion of Title represents a recorded history of the property. This is done by searching the records. Once all the information is obtained, a report is created that shows the history of the property and all the recorded notices. Title insurance is insurance that covers and guarantees the validity and accuracy of the title search.

There are two different types of title insurance, the California Land Title Association (CLTA) and the American Land Title Association (ALTA). A CLTA policy covers the value of the property from sellers to buyers, whereas an ALTA policy covers the amount of the loan. Buyers of real estate thus purchase CLTA policies, and lenders purchase ALTA policies.

A fault of title (often called a cloud) is ay unsatisfied mechanics lien, unpaid property tax bill, etc. Sometimes these clouds are discovered during a title search and the lending process comes to a halt until the cloud is removed.

Often times lenders also employ surveyors or civil engineers to perform surveys on the property. These surveys identify the lot lines, where the buildings are located on the parcel, their size, utility lines and easements, etc. These surveys are a graphical depiction of title, and can reveal whether or not the property conforms with current zoning laws.