Commercial real estate has long been a cornerstone of savvy investing. Whether you’re eyeing a bustling urban office building or a sprawling suburban retail center, the potential for growth and income is compelling. However, before you can enjoy the fruits of your investment, you must take a crucial step: the commercial title search.
This process is essential for uncovering any legal issues or hidden complications associated with a property, ensuring a smooth and secure investment. Understanding the importance and intricacies of a commercial title search can safeguard your investment and provide peace of mind. With that in mind, let’s dive into everything you need about commercial title search.
What is a Commercial Title Search?
A commercial title search involves a detailed examination of public records related to a piece of commercial real estate. Its primary purpose is to verify the property’s legal ownership and identify any claims, liens, or other encumbrances that could affect its sale.
Unlike a residential title search, which focuses on private homes, a commercial title search deals with properties intended for business use, such as office buildings, retail spaces, and industrial complexes.
Why a Commercial Title Search is Essential for Secure Transactions
Put simply, a commercial title search is crucial for ensuring a smooth and secure property transaction. Without this step, buyers risk encountering legal issues that can lead to financial losses and disputes.
A thorough title search protects your investment, avoids future legal headaches, and ensures that the property deal is legitimate and secure. It’s about making informed decisions and minimizing risks in high-stakes commercial real estate transactions.
What Does the Commercial Title Search Process Look Like?
The process begins with a thorough review of the property’s historical records, including deeds, mortgages, court judgments, and tax records. By examining these documents, the title search traces the property’s chain of ownership, ensuring it has legally changed hands without any disputes.
One key element of a commercial title search is the title abstract. A title abstractor compiles this concise summary of the property’s history. It highlights essential details, such as previous owners, recorded liens or encumbrances, and significant transactions. The abstract is a roadmap, guiding the title examiner through the property’s legal history.
Next, a qualified professional, often a real estate attorney or a title company specialist, scrutinizes the abstract and other records during the title examination. They look for unresolved issues like unpaid taxes, undisclosed heirs, or legal disputes that could cloud the title.
If they find any problems, they must resolve them before the property can be sold. This might involve negotiating with creditors to remove liens, settling disputes through legal channels, or obtaining missing documentation to clear the title.
Finally, the buyer typically purchases title insurance once the title is clear. This policy protects the buyer and lender from future claims or legal issues related to the property’s title.
To recap, the process looks like this:
- Chain of title: Details the historical transfers of a property’s title, showing who bought the property and when. This information can be obtained from public records, usually found in the County Clerk’s Office, or privately owned title plants with comprehensive property data.
- Tax Search: This step verifies the status of real estate taxes on a property, uncovering any unpaid taxes from previous years and checking for special assessments. Outstanding taxes can pose significant financial risks to new owners.
- Inspection: An inspection checks for encroachments or other issues that could affect the property’s title. Inspectors also verify property size, easements, and occupancy.
- Search on Name and Judgment: This search identifies any unsatisfactory judgments against previous owners or the seller. Judgments must be cleared before the property can be transferred. Here, judgments could include property damage, unpaid rent, contractor liens, building code violations, and personal injury (someone was injured on the property due to poor maintenance and sued the owner).
What Doesn’t Fall Under Commercial Title Search?
Okay, so we’ve covered what a commercial title search is, but it’s also important to clarify what it isn’t.
A commercial title search focuses on uncovering potential legal issues related to the property’s ownership, but that leaves many other important things on the table.
Here’s what a commercial title search doesn’t include:
Property Condition
The title search does not inspect the physical condition of the property. It will not reveal structural issues, plumbing problems, or electrical faults. Buyers must hire professional inspectors to assess the property’s physical state thoroughly.
Environmental Hazards
A title search does not check for environmental hazards like asbestos, soil contamination, or underground storage tanks. Ecological assessments are necessary to uncover these potential issues, which can be costly and complicated to resolve.
Zoning and Land Use
The search won’t cover current zoning laws or land use restrictions. Buyers should verify that the property’s intended use complies with local zoning ordinances and that no restrictive covenants could impact their plans.
Building Code Compliance
Title searches do not verify if the property complies with current building codes. This is particularly important if the property has undergone renovations or additions. Buyers should ensure that all work is permitted and inspected by local authorities.
Is Conducting a Commercial Title Search Mandatory?
No, a commercial title search is not legally mandatory. However, it is considered a very important part of the due diligence process for a commercial property purchase. Remember, it protects you as a buyer and reduces risk by identifying potential issues early on.
Are Commercial Title Searches More Complex Than Residential Title Searches?
Yes, commercial title searches are more complicated than residential ones. The main reason is the larger number of documents involved. For commercial properties, these documents are usually indexed by name at the County Recorder’s Office, unlike residential properties, which are indexed by address. This makes the search process more time-consuming and tricky.
Additionally, commercial properties often have multiple owners, adding more layers of complexity. Inconsistencies in filing names can make it even harder to track down all the necessary documents. These factors increase the chance of missing important information affecting the property’s title.
For example, title searches for oil, gas, and railroad properties can be more complex due to their unique characteristics compared to other types.
Here are some of the reasons how and why they can become “messy“:
- Fragmented Ownership: Oil, gas, and railroad properties often have a long history of ownership changes and subdivisions, leading to fragmented ownership patterns. This can make it challenging to trace the chain of titles accurately.
- Mineral Rights: In the case of oil and gas properties, the ownership of surface rights may differ from the ownership of mineral rights. These rights may have been severed at some point, adding another layer of complexity to the title search.
- Easements and Rights-of-Way: Railroads typically have extensive networks of easements and rights-of-way that must be examined during a title search. Determining the scope and validity of these rights can be complex and may involve reviewing historical documents and agreements.
- Regulatory Compliance: Oil, gas, and railroad properties are subject to various regulatory requirements at the local, state, and federal levels. Title searches often need to confirm compliance with these regulations, which can involve additional research and documentation.
- Environmental Considerations: Oil and gas properties may have ecological liabilities, such as contamination from past operations. Title searches may need to assess these risks and ensure compliance with environmental regulations.
- Historical Records: Many oil, gas, and railroad properties have existed for decades or centuries, leading to many historical records that must be reviewed during a title search. These records may be incomplete, difficult to interpret, or stored in multiple locations, making the search process more complex.
- Specialized Knowledge: Conducting title searches for oil, gas, and railroad properties often requires specialized knowledge of industry-specific terminology, laws, and practices. This expertise may not be readily available to all title search professionals, further complicating the process.
Because of these challenges, hiring an expert title search company is best. They have the experience and resources to conduct a thorough and accurate search, ensuring no details are missed.
Trying to gather all this information yourself from the County Recorder’s Office can be overwhelming and risky. An expert title search company can handle the complexities efficiently, giving you confidence that your investment is safe.
Common Issues That Come Up on Title Reports
So, we’ve covered what you can find on a title search, but how do these things impact you on the ground? When conducting a commercial title search, several common issues can arise. These issues can affect your ownership rights and must be addressed to ensure a clear title. Here are some of the most frequent problems found in title reports:
Discrepancies in the Chain of Title
Knowing precisely who owns the property you are buying is crucial. In commercial real estate, it’s common to encounter multiple entities owning one property, misspelt entity names, or uninsured deeds. The title report will show the current owner(s) and any breaks in the title chain.
For instance, if an entity deeded the property to another entity with discrepancies in the spelling of names, these breaks will be highlighted. Resolving these issues during escrow is essential to ensure clear ownership from day one.
Easements
The title report will reveal any easements recorded on the property. Easements grant others the legal right to use a part of your property for specific purposes, such as public access roads or utility lines.
Understanding these easements is crucial as they can affect the usage and value of your property. Easements are permanent and remain valid against every new owner, meaning you cannot simply remove them by purchasing the property.
Liens
Title reports will show any liens recorded against the property, such as finance or judgment liens. Finance liens often get resolved during escrow by paying off any remaining amounts.
However, old finance liens from defunct lending institutions can be tricky, sometimes requiring a lien release bond. Judgment liens result from court judgments and must be cleared by paying off the owed amount to ensure a clear title.
Boundary Errors in Legal Property Description
The title report includes the complete legal description of the property, outlining its boundaries. Sometimes, this reveals boundary errors or potential disputes. For example, the legal description might indicate a boundary line that encroaches onto a neighboring property or fails to include a portion of the land that is supposed to be part of the parcel.
These discrepancies can lead to disputes with neighbors or issues with zoning compliance. Identifying and correcting these errors is essential to prevent future legal problems regarding property boundaries. Rectifying boundary errors typically involves a surveyor accurately mapping the property and possibly legal action to adjust the recorded boundaries to reflect the actual property lines.
Property Taxes
Property tax is often considered the most unfair tax in the U.S., with many Americans feeling their rates are too high. According to a 2023 UChicago Harris/AP-NORC poll, 69% of adults in the U.S. believe their property tax rates are “unfair.” Areas with higher property taxes, like New Jersey, Illinois, Connecticut, New Hampshire, and Vermont, may be more likely to encounter problems with unpaid taxes. The title report shows the property taxes currently assessed and any back taxes due. IRS tax liens, in particular, can be cumbersome to clear and must be resolved to secure a clear title.
Recording Leases
Title reports will list any recorded leases on the property. However, not all valid leases are recorded. Leases can vary from straightforward tenant agreements to more complex arrangements, such as a laundry lease where the laundry company is the lessee.
Understanding which leases apply to your property and how they affect your ownership rights is crucial when purchasing commercial real estate.
Municipal Ordinances and Code Violations
The title report will reveal any municipal ordinances or code violations recorded against the property. Code violations must be cured, and any accrued fines must be settled. It is wise to discuss these issues with local authorities to negotiate compliance as part of the purchase contract.
The title report might also show ordinances like weed abatement requirements, which you must adhere to as the property owner.
Understanding these common issues can help you navigate the complexities of a commercial title search. Addressing these problems early in the transaction process ensures a smoother path to clear title and secure ownership.
Illegal Deeds
While the chain of title on your commercial property may appear perfectly sound, it’s possible that a prior deed was made by an undocumented immigrant, a minor, a person of unsound mind, or someone reported as single but married.
These instances can affect the enforceability of prior deeds, impacting past and potentially present ownership. For example, if a deed transferring a commercial building was signed by a minor or someone mentally incapacitated, it might be deemed invalid. Such invalid deeds can create legal disputes over ownership, requiring rectification through legal processes to secure a clear title.
Missing Heirs
When a commercial property owner dies, ownership typically transfers to their heirs or those named in their will. However, heirs can sometimes be missing or unknown at death. Additionally, family members might contest the will, claiming their property rights.
These disputes can arise long after you have purchased the property, potentially affecting your ownership rights. For instance, an unknown heir might surface and challenge the validity of the sale of a commercial building, leading to lengthy legal battles to establish rightful ownership and potentially disrupting business operations.
Forgeries
Unfortunately, not all property transactions are conducted honestly. Sometimes, forged or fabricated documents are filed within public records, obscuring the rightful ownership of the commercial property. These forgeries can include falsified signatures on deeds or fraudulent transfers of ownership.
When these fraudulent activities come to light, your rights to the commercial property may be jeopardized.
For instance, if a previous deed was forged to transfer ownership of an office building without the real owner’s consent, the legitimacy of your ownership could be questioned, potentially leading to legal actions to resolve the rightful ownership.
This can cause significant disruptions to your business plans and operations.
The Risks of Skipping a Commercial Title Search: A Cautionary Tale
Let’s say you purchase a commercial property without conducting a thorough title search. Initially, everything seemed fine. The location is perfect, and the price is right. However, a few months later, you receive a notice from the local government about unpaid property taxes from the previous owner, amounting to a significant sum.
Worse, you discover a court judgment against the property. The previous owner’s legal dispute resulted in a lien being placed on the property, which now becomes your responsibility. This unexpected financial burden can disrupt your business plans and lead to costly legal battles.
Furthermore, you might discover that some of the property’s land was sold years ago, information that would have surfaced during a title search. This could severely impact your development plans, as the property boundaries are not what you initially thought.
These scenarios highlight why a commercial title search is indispensable. It uncovers hidden issues, ensuring you don’t inherit problems that can jeopardize your investment and business operations.
What Happens After Title Examination and Issue Resolution?
So you’ve gone through the commercial title search process, had an attorney or title company examine the abstract to identify any red flags, and rectified any issues that came up on the report. What now?
Once the title is clear, the next step is obtaining title insurance. This policy protects you against future claims or legal disputes about the property’s title, giving you peace of mind.
Commercial Title Search FAQ
We’ve covered almost everything, but you may still have some questions. Let’s look at some quick-fire FAQs.
Q: How long does a commercial title search typically take?
A: The timeframe can vary depending on the property’s history and complexity. Commercial searches take 4 to 6 weeks for most vendors, and unforeseen issues could extend the timeline even longer. A complex commercial title search could take many months. However, with Pippin’s AI technology, we can reduce the turnover time to as little as 7 days.
Q: What happens if the title search reveals problems?
A: Don’t panic! Depending on the severity of the issue, there might be options. The seller may need to resolve the problem before proceeding, or negotiations might be necessary to adjust the sale price or terms. Consulting with a real estate attorney is crucial in such situations.
Q: What happens if the seller refuses to provide a title search?
A: This should raise a red flag. A seller unwilling to participate in a title search might be hiding something. It’s best to proceed cautiously and consult a real estate attorney before moving forward.
Q: Do I need a title company for a commercial title search?
A: While not mandatory, using a reputable title company is highly recommended. They have the expertise and resources to conduct a thorough search and provide a comprehensive title report. With a commercial title search company, you can access more advanced technology than you would otherwise.
Q: Isn’t title insurance enough?
A: Title insurance protects you from financial losses due to unforeseen title defects. However, it’s not a substitute for a title search. The search helps identify potential issues upfront, allowing you to make informed decisions before purchasing. You can read more about it here.
Q: How much does a commercial title search cost?
A: The cost of a commercial title search can vary depending on the property’s location, size, and complexity of its history. It typically ranges from $1,500 to $15,000, but it can be higher for very large or complex properties.
Q: How long is a title report valid?
A: The validity of a title report typically ranges from 30 to 90 days, depending on the title company and specific circumstances. This is because new liens or encumbrances could be recorded after the search is conducted. It’s essential to ensure the report is current at closing, so Pippin offers update/bringdown searches to ensure accuracy in these cases.
Q: What happens if there are delays in the title search?
A: Delays can occur due to complex title histories, difficulty obtaining records, or unforeseen issues. It’s crucial to communicate openly with all parties involved (seller, agent, lender) and adjust timelines as needed. Sometimes, title insurance with extended coverage can help mitigate risks associated with closing delays. At Pippin, we can offer an end-to-end solution and a real-time portal so that you can keep track of the project at any time. Read more here.
Choosing the Right Professionals
A successful commercial title search hinges on working with experienced professionals. Title companies and real estate attorneys bring expertise and thoroughness, ensuring no detail is overlooked. When choosing a title company, look for one with a solid reputation, strong references, and a history of dealing with commercial properties.
Wrapping Up
Need help with your commercial title search? Look no further.
A commercial title search protects your investment and ensures a smooth transaction. Skipping this crucial step can lead to unforeseen legal and financial complications. To make the process even more complex, commercial title searches are more complicated than residential ones due to the volume of documents, potential multiple owners, and filing inconsistencies. That’s why it’s vital to rely on experts.
At Pippin, we recognized the need for a better title search process and founded our company to address this challenge. For too long, title insurance companies, law firms, and banks have navigated a fragmented network of documents, wasting countless hours managing vendors and interpreting varied reports.
Our advanced technology and a nationwide network of searchers allow us to streamline this process, providing quick and accurate title documents for properties in all 50 states.
We excel in delivering precise title data for construction and development projects, ensuring that real estate and legal professionals have the information they need.
Choose Pippin for your commercial title search needs and experience a seamless, efficient, and reliable service. Let us handle the complexities so you can focus on what matters most.
