Borrowers and lenders alike want their real estate closing to go smoothly. A snag in the application process can cost precious time and money and cause a great deal of stress, so it’s imperative that the basics about the property are established and clear to all parties involved. One of the most important ways to ensure that a loan closing goes smoothly is to do the proper diligence and ensure the property has a clean title, one without any liens or outstanding debts.
Conducting a property title search is a standard part of any loan application process and is an absolute must when purchasing commercial real estate. A title search is generally carried out early in the loan application process, when the applicant is expected to produce a clean title, as well as an environmental study and an accurate, recent assessment which verifies the property’s value.
Liens arise when a creditor lays claim to a portion of a debtor’s property as collateral, generally in relation to late payments or debts. There are two types of liens: voluntary and involuntary. A mortgage is considered a voluntary lien, while items such as tax liens, construction liens or outstanding judgments are considered involuntary liens. Whether voluntary or involuntary, securing a loan through traditional or alternate funding sources can be significantly more difficult while debt continues to hang over the property.
For example, if you’re turning to a private lender to fund a commercial real estate purchase and suddenly learn there is a lien against the property for years of unpaid property taxes, that could quickly turn a standard loan into a high-risk situation for a lender. Because of potential pitfalls like this, a title search is one of the first and most essential steps required for financing a real estate purchase through a hard money lender such as Kennedy Funding. If a property is found to have an existing lien against it, a hard money lender will require that some of the loan proceeds are used to pay it off.
While a clean title is certainly important to securing traditional and alternative loans, it doesn’t necessarily guarantee that the deal will be simple. Partnership problems can complicate a loan closing, too, even with a clean title search. Partners need to be on the same page regarding terms, amount and payback schedule before any loan can be granted.
As an experienced private lender, Kennedy Funding can help borrowers fund their commercial real estate needs, even if the borrower’s record would prevent them from securing a loan at a traditional institution. However, a clean title is of universal importance, no matter who the lender may be.