A Cloud Over 1205 23rd

Posted by Dave Fratello on Thursday, December 22nd, 2011 at 10:00pm.

For the past month or so, a newer (2002) East MB home has been on the market and making fairly steady cuts. It's an REO newly priced at $1.378m that will begin to look compelling for an ever-larger number of buyers, even if it does back up onto Marine.

But for anyone who gets closer, there are reasons to be wary and to do some extra due diligence.

The home is 1205 23rd St. (5br/5ba, 3500 sq. ft.), which – we kid you not – has not been lived in for 5 years.

5 years, no people. In a house. There's a yellow flag.

The short version of the answer to "why?" is that the property has been caught for years in a web of litigation over an investment fraud scheme. A former owner of the house was alleged to have lured people into bogus investments and frittered away their money. (We're not going to get into guilt or innocence here.)

A group of onetime investors/marks sought to reclaim their losses in part by making a claim against the home – dating back to 2006-07.

From then till now, the property faced a situation known in the business as a "cloud on title," which can be translated as: You can't buy it, because we're not completely sure who owns it.

The title situation was somewhat more bizarre because the former owner actually lost it back to the bank in early 2007, before it hit the market then as an REO. (An REO in 2007? That was new – then.) You might think that a repo would wipe out other claims on the property, but, as we discuss below, you can't be so sure.

The good news is that, we are told – and we emphasize here, we are told – that the title problem has now been "fixed," and the property can transfer to a new buyer. You can also infer that from the fact that the home was left vacant for so long after a failed transaction in 2007, and now has been brought to the public again. But you really should be sure. The listing agent was not authorized to answer MBC's questions in any detail.

There's only one way to be certain. You need a title company to promise to issue a title insurance policy on the property. A little over 4 years back, when it was last for sale, no one would – with horrid consequences.

Unlucky past: Whoever zeroes in on 1205 23rd and makes a deal should learn from the situation faced by the last buyers to try, back in 2007.

Those buyers sold their home in order to move up to 23rd. They put both homes – their old home and their intended new one – under contract at the same time. As with a lot of these simultaneous sale/purchase agreements, perfect timing was essential. They would close on both transactions at the same time and move to the new home.

Most unfortunately, the difficulty of dealing with the cloud on title for 1205 23rd did not become clear until the would-be buyers had committed, during escrow, to selling their other MB home with the release of sellers' contingencies.

If you're following closely, you're asking: If there was a problem with the purchase of 23rd, couldn't they cancel the sale of their home and stay put? 

No. Not the way the transaction was managed, and with the buyers' agent on holiday at a critical juncture. Once the would-be buyers of 23rd had released contingencies on their old home, they had cleared the way for new people to acquire it, and there was no going back on the sale.

The bank that had repossessed the property seemed to know there was a potential problem. The defrauded investors had filed their initial claim (in the form of a lis pendens) before the bank foreclosed on the former owner of 23rd. The investors believed their claim would survive a foreclosure. So the bank asked the new buyers, in 2007, to sign an unusual agreement absolving the bank of any problems that the buyers might face from the lis pendens. (Red flag.) The buyers only wiggled out of their agreement with the bank when they found that no title company would issue an insurance policy on 23rd – the fine print required a title policy to be issued.

So the "buyers" sold their home and were set adrift. Adding to the personal trauma, they had a very young child at home and a newborn delivered during the final days of the escrow period. They embarked on a period of unplanned renting, finding their next home months later. This time, they represented themselves in the purchase.

What it all means today: Anyone looking to buy 1205 23rd deserves clear answers to some core questions.

For instance: What was the nature of the alleged scheme by the former owner, was he found responsible, has he paid off his claimants?

Also: Have the former investors released any claim to 1205 23rd? Will the bank that owns it provide any reassurance on this point? Will a title company issue a policy on it?

The former would-be buyer of 23rd had this to say to MBC: "[I]f I knew half of what was behind this home when looking at it, I would have never entered escrow."

Here's hoping the next buyers know everything behind it, that they go in eyes wide open and that they get the information they need before proceeding.
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