This Week's Question

November 21, 2005

By Nena Groskind

Q:   A friend who is in the market to buy a home encountered the following problems. First, a search of the registry revealed that the individual offering to sell the property has paid taxes but is not listed as the owner on the deed. There also is no reference to a trust, a trustee, or a trust agreement of any kind. The history indicates two prior conveyances, one in 1954 and another in 1995 to individuals, in both cases, for the sum of one dollar, which would seem to indicate the existence of a trust. That raises the first question: Is it possible for a trust to hold legal title to a property if the deed does not include any reference to that arrangement? And if an unrecorded trust can hold title to the property, could a beneficiary of the trust still convey title?

The second problem has to do with the condition of the property. The house was undergoing extensive repairs to the bathroom and the kitchen, but apparently, that project was halted in the mid-stream and remains unfinished.  Banks have told my friend that they would be reluctant to approve a mortgage on a property that requires substantial renovations. Is that a policy that may vary from lender to lender, or is there some law or regulation that prohibits lenders from approving loans on properties lacking basic necessities?
 

A:   You’ve described two separate but potentially serious problems. Let’s start with the financing questions. Most lenders will base the amount of the mortgage they will approve on the appraised value of the property in its current condition, not its condition after essential repairs have been completed. If this house would be valued at $200,000 completed but needs $30,000 in repairs, a lender would approve a loan based on a value of $170,000 – that would mean a conventional (80 percent loan with 20 percent down) of $136,000. In addition to coming up with the down payment, your friend probably would have to put in escrow the $30,000 required to complete the renovations, to provide assurance that the repair work would be done. And lenders probably also will insist that your friend hire qualified contractors for the project; unless your friend has construction expertise, most lenders would not be enthusiastic about a do-it-yourself renovation plan.

Your friend probably will find these requirements do not vary much among lenders, because secondary market rules, set by the entities that purchase mortgage loans, won’t permit much leeway. Even lenders that hold loans in their own portfolios rather than selling them are likely to set the same or similar standards, partly to preserve their option to sell loans in the future, but mostly to reduce their lending risks. If your friend defaults on the loan, the lender would be hard-pressed to sell the property for full value if it remains in substantial disrepair.

Your friend might want to consider an acquisition-rehabilitation loan, which could make this transaction more viable. Some lenders offer federally insured loans under a program sponsored by the Department of Housing and Urban Development (203-k), and many lenders offer private (and higher-cost) versions of that federal program. The major advantage is, you get a single loan to cover the acquisition and renovation, based on the property value with renovations completed. But the HUD program has extensive paperwork requirements that limit its appeal to lenders, so it is not a staple on most mortgage menus; your friend will have to do some shopping to find lenders offering it. Also, the mortgage limitations make the program unworkable in high-cost housing markets. Still, this is an option your friend might want to investigate.

But not until after he has addressed the title problem. The real estate attorneys I consulted suggested several possible explanations for the lack of any reference to a trust on the deed:

If a trust exists, the failure to record it does not have to be a huge problem. For example, assume the property owner (A) established a trust and conveyed the house to the seller (we’ll call him C) as a trustee or beneficiary, but then never got around to recording the trust. The seller would hold title individually, and, presumably, could convey the property legally. Or, the trust could be recorded now and C could convey the property as a trustee or beneficiary.

In another possible scenario, the owner (A) may have established a trust with someone other than the seller (call him B) as trustee or beneficiary. If so, it may be necessary to record the trust, or (if the trust has been recorded) have the trustee (B) convey the property to the seller (C), who then could sell it to your friend.

Your friend also has to consider the possibility that there is no trust, which raises the obvious question: How could the seller own the property without being named on the deed? That could occur if the seller acquired the property by “adverse possession,” (meaning he used the property for 20 years as if he owned it, without objection or permission from the legal owner). But while that explanation is possible in theory, my legal sources don’t think it is very likely.

Alternatively, the seller may simply be a “squatter,” who has been paying taxes on the property but has no legal ownership claim, and no authority to convey title to you friend or to anyone else.

The clear message here is, your friend needs to sort out the title questions before getting very far into the purchase process. If he’s serious about buying the house, he should have an attorney do a complete title search to determine who actually owns the property and what is necessary to convey clear title to it. Once the title issues are resolved, your friend can begin talking to lenders about the financing problems, which will be complicated enough by themselves.