ArcaMax

Reader Question: I have a home in South Carolina that is in short sale, and we went to close, only to find out the title isn't clear. The seller, when I bought it, had a mortgage and a home equity line of credit on the home. Both were paid off, but the equity line was not closed, and the former homeowner continued to use it. In the short sale, the bank accepted an offer and agreed to write off not quite half of the loan balance (the loan in my name). Now the bank wants the lawyer's E&O to pay the former owner's spending. My questions are: Who technically has the title to the home right now? Does the title not transfer to me? If so, how can I sell the home to someone else if I don't have the title? I'm assuming that the E&O of the former attorney will pay off the balance, and what happens then? Does paying off the balance automatically make the title clear in my name? If I didn't get a clear title, what happens then?

Monty's Answer: Your situation is complex but not unusual when a title defect slips past the closing table. Here's what's happening and what you can do.

No. 1: Who holds the title right now? You almost certainly hold title -- but it's clouded. A "cloud" means there's a legal claim or defect that prevents you from transferring clear ownership. When you purchased, you likely received a deed in your name, but the home equity line of credit (HELOC) was never closed, leaving the lender's lien alive.

No. 2: Why didn't this show up at closing? In South Carolina, attorneys typically close real estate deals. The closing attorney should have confirmed that the HELOC was not only paid to zero but formally released and recorded. Missing that step is a serious oversight, which is why the bank is now looking to the attorney's Errors & Omissions (E&O) insurance.

No. 3: Can you sell without clear title? No. Any buyer's title search will show the outstanding lien. Without a recorded release, the contract can't close. You can only convey what you own, and right now that's the property subject to the lender's claim.

No. 4: If the E&O pays off the lien ... The lender should issue a formal lien release. Once recorded in county land records, your title should be clear, restoring your ability to sell.

No. 5: What if the lien isn't paid off? If the E&O carrier disputes the claim, you may need to sue the attorney for negligence. Sometimes, a settlement with the HELOC lender is possible, although you may need to contribute toward the payoff.

No. 6: Next steps:

-- Ask your short sale lender for updates on the E&O claim.

-- Review your title insurance policy (if you have one) and file a claim, as these situations are why it exists.

-- Stay in contact with the HELOC lender to confirm when a release is recorded.

-- Retain a different real estate attorney to track progress and protect your interests.

Bottom line: You have title, but not marketable title. Until the lien is satisfied and the release recorded, the property is tied up in legal knots. Once cleared, you can sell confidently.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @montgomRM or DearMonty.com.

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