During the course of a recent refinance for “Ms. Smith, we performed the title search and uncovered a $300,000 IRS lien against the previous owner. Ms. Smith recalls the title company, the one she hired when she purchased the house, had mentioned that an IRS lien existed. To her surprise, that title company never resolved or removed the defect. Instead, they listed it as an exception on her owner’s title insurance policy, but removed it from her lender’s policy, as if it had been satisfied. As a result, if the IRS would have come forward to collect, she might have incurred significant legal fees trying to resolve the issue.
With a false sense of relief, Ms. Smith now assumed that the title insurance policy that was required by her lender for her refinance would result in a new owner’s policy. Many consumers mistakenly believe that two title policies are issued during a refinance. However, only a lender’s policy is issued, while the owner’s policy that you purchase when you buy the property remains in effect for as long as you own the property. Refinancing to save a few hundred bucks on her monthly mortgage payment, Ms. Smith just discovered that an IRS lien filed against the previous owner was never satisfied from the public record when she purchased the property.
Moral of the story: make sure you deal with a reputable title company and always ask at settlement if all of the previous owner’s liens and judgments have been addressed and are in the process of being satisfied. The original title company should have resolved the title defect two years prior when she purchased the property. Instead, they took the easy way out and simply listed the lien as an exception not to be covered under the owner’s portion of the policy. In so doing, they disregarded the best interest of their client and exposed her unnecessarily to a huge financial risk. Isn’t this the very reason why it’s suggested that we purchase title insurance in the first place?
Fortunately for Ms. Smith, the story ends well. After we discovered the lien, we took the extra steps to get it resolved on her behalf. In this case, the previous owner was Ms. Smith’s father, who was able to document that the IRS lien had been satisfied. Ultimately, we were able to remove the lien completely by contacting the IRS and providing them with evidence that it had been satisfied, but never removed from the public record. Ms. Smith now has a clear title and peace of mind.