Homeowner loses real estate through careless mistake

Failure to pay property taxes 'puts final nail in the coffin'
By: Robert J. Bruss: Inman News
In 1996, Zarmina Azadozy purchased the property at 421 W. Stanislaus St. in Avenal, Calif., at a foreclosure sale. For some unexplained reason, she failed to record her deed.

Her property taxes went unpaid for several years. Eventually, the county tax collector sold the property for the unpaid property taxes owed. But the successful high bidder paid substantially more than the amount of unpaid real estate taxes.

Under state law, any excess amount paid at a property tax sale goes to (1) any recorded lienholders in order of priority, such as a mortgage lender, and then (2) to any person with title recorded prior to the property tax sale.

Although Azadozy never recorded her deed to the property, which she received in 1996, she claimed the excess proceeds of the 2003 tax sale since there was no mortgage holder or any lienholder claimant.

However, the appellate court ruled because she never recorded her deed to the property, Azadozy is not entitled to receive the excess proceeds exceeding the amount owed for the unpaid property taxes. The case is reported at Azadozy v. Nikoghosian, 27 Cal.Rptr.3d 811.

RECORDING LAWS ESTABLISH PROPERTY RIGHTS. This 2005 court decision is a classic example why all documents affecting real estate titles should be promptly recorded.

The legal reason is recorded documents, such as deeds, mortgages, deeds of trust, contracts for deed, judgment liens, mechanics' liens, income tax liens, and other documents affect the title to a specific property.

However, unrecorded documents do not give "constructive notice" of their legal effect. As Azadozy discovered, her perfectly valid but unrecorded foreclosure sale deed had no legal affect on the property title.

Many types of documents that affect property titles are eligible for recording. The general rule is they must be in recordable form, with the signatures properly notarized. Documents that are not witnessed by a notary public are usually unrecordable.

VERBAL REAL ESTATE TRANSFERS ARE WORTHLESS. "Don't worry. When I die, you will receive all my real estate." Those worthless words have been spoken by many property owners. But, unless backed up by the property owner's written will by appropriate ownership such as joint tenancy with right of survivorship or by state law of intestate succession, such a verbal promise is worthless.

Yet thousands, perhaps millions, of property owners have spoken those worthless words to lovers, friends, relatives and spouses. The reason verbal real estate promises are worthless is the Statute of Frauds requires real estate transfers to be in writing to be valid.

Equally important, written title transfers must be recorded in the county or city where the property is located to have effect against other claimants to the title.

TITLE INSURANCE IS THE BEST PROTECTION. The best way to be certain you own "marketable title" to a specific property is to obtain an owner's title insurance policy. An owner's title policy is valid as long as the insured realty owner or their heirs own the property.

Title insurers carefully research a title before insuring it. If the title insurer made a mistake, which is discovered even many years later, the title insurance company must pay the insured property owner either (1) the full policy limit if the title was completely defective, or (2) the diminished value of the property if the title insurer failed to disclose a recorded document, such as a recorded easement through the home's backyard.

There are many more protections offered by an owner's title policy, such as claims by previous property owners, forged signatures in the chain of title (the primary cause of title losses), and claims of undiscovered heirs and ex-spouses.

RECORDING TIME DETERMINES TITLE PRIORITY. The general recording rule is: "The first in time is the first in right." That means the first claimant to record his/her title or interest in a property wins the race to the courthouse.

Unrecorded deeds, while valid between the grantor and grantee, don't give "constructive notice" to the world.

For example, suppose I sell you my beautiful lot for $100,000 cash and give you a notarized deed in recordable form. But you, being a very busy person, forget to record the deed and put it in your desk.

However, several months later I am in dire need of cash. So I sell the same lot to another buyer for $100,000 cash and give her a notarized deed, which she promptly records.

Who owns the lot?

The obvious answer is the second buyer who had no knowledge of my previous sale of the same property. Legally, the second buyer is known as a BFP (bona fide purchaser) for value without notice of my prior sale of the same property. She won the race to the courthouse.

Of course, as the first buyer of the lot, if you can find me, you can sue for your damages of losing title to the property. However, unless you have an owner's title insurance to prove you received marketable title, your lawsuit is probably worthless unless you know where I moved and hid the $100,000.

This extreme example shows why it is so critical to promptly record every property deed, or any document affecting real estate titles. Although you might think you are dealing with an honest relative or friend, if you fail to record your deed promptly that person might take advantage of your trustworthiness.

QUIET-TITLE LAWSUITS SETTLE PROPERTY DISPUTES. When two parties claim ownership or conflicting interests in the same property, the legal solution is usually for one party to sue the other claimant in a quiet title lawsuit. Then it is up to the judge to determine if the claimant has a legal interest in the property, as determined by the recorded documents.

Unless a document is recorded, it is only valid between the two parties and has no legal effect on other claimants.

Divorces often create problems where the result of the divorce decree is not recorded. To illustrate, I've seen situations where one spouse is given possession of the marital home until the children become 18 or 21 and the house is then to be sold. However, the spouse in possession of the house often then refuses to sell, or worse, tries to sell without the signature of the other ex-spouse who is still a co-owner.

Recording an agreement affecting title to the property will usually prevent problems such as this from arising.

SUMMARY: All documents affecting title to real estate should be promptly recorded to prevent unintended consequences. In conflict situations, the first claimant to record his/her document usually wins the race to the courthouse. Further protection is obtained by insisting on receiving an owner's title insurance policy. When conflicting claims arise, in a quiet-title lawsuit the judge resolves the dispute.