A title defect is sometimes called a “cloud on the title.” This is a very colorful term, but offers a good description of what a title defect really is. Basically it is something that casts a shadow or doubt on a title, so that it may be disputed at some time in the future. There are many different types of circumstances that would cause a cloud on the title.
It may seem trivial, but legal documents must be written up with correct spellings. This is a requirement to make sure everyone knows the exact details of the transaction. If the address is misspelled, it might be obvious to you what is meant. The truth is that no matter how sure you are about what the title is referring to, unless it is spelled correctly, others may find room for doubt.
Failures to Record
In several different instances, something concerning the title may not have been filed or recorded properly. The deed itself may not have been recorded at some point along its history. If a mortgage or other lien has been paid off on the property but not recorded, there could be cause for alarm. An easement may have been granted but not properly recorded. This, too, could put the title in murky waters.
Governments do not always notice immediately if taxes are unpaid. Sometimes title can pass from person to person without anyone realizing that the taxes are behind. It is not supposed to happen, but it is a possibility. If it turns out that there is a year sometime when the taxes were not paid, it could be a problem for you if you had bought the property.
If the previous owner is involved in a lawsuit that may include forfeiting the property, the title is not clear at that point. The lawsuit must be concluded in such a way that the property is free to be sold, or the title will not be in the hands of the original seller.
What to Do About Title Defects
The first thing you should always do is to get title insurance. The title company will do a search on the title. If the title company Okays the title, it means that they have not found any clouds on the title in their search. It does not mean that there is absolutely no risk of defect. It does, however, mean that the title insurance will cover your losses if there is a defect.
Finally, if you are negotiating to buy a property and discover a cloud on the title, you have to decide what to do before continuing with the deal. In most cases, it is best to withdraw and look for another investment somewhere else. Having a clear title is essential for your security and peace of mind, as well as for your wallet.