The Importance of Title Searches on the Marital Home During a Divorce in Arizona

We want to share with you the importance of title searches on the marital home during a divorce in Arizona. Arizona is unlike several other states in many ways: We do not change our time with daylight savings time, we are a right-to-work state, we are a community property state and we use title companies instead of attorneys to research property titles in real estate transactions.

Property titles provide the history of ownership (also referred to as a chain of title) of the property going back many decades, sometimes as far back as when the property was originally staked when Arizona was a territory.

The title search can also reveal sales history of the property, involuntary and voluntary liens, lien releases, zoning parcels, flood maps, and financial encumbrances such as home equity lines of credit (HELOC), mortgages, and equally as important – state and federal tax liens.

When the title to a property has encumbrances as mentioned above these encumbrances are referred to as ‘clouds on the title.’ Before a property can transfer to a new owner all of the clouds on the title must be resolved. In other words, no property can convey to a new owner with a cloud on the title.

However, there are some exceptions to this rule such as – if a property has Covenants, Conditions, and Restrictions (CC&Rs), or an easement right (this might be for a utility company to have access to your property to take care of the utilities) or homeowners association bylaws – these are all ‘exceptions’ to the no cloud rule and these ‘exceptions’ pass from buyer to buyer of the property.

Title Companies Perform the Title Search

As discussed above, when people purchase a home in Arizona a title company is hired to perform a title search. The title company will work to make sure they are no clouds on the title, or if there are clouds, the title company will work with the seller to arrange for the clouds to be removed from the title. In most cases, this requires the seller to pay off any financial encumbrances and the monies needed for the payoffs are acquired from the sale of the property.

Incorrect Information on the Title

In some cases, the title company will find information that is completely inaccurate on a title to a property. For example, a few months ago I was working with a man to sell one of his homes in a distant city.

My client’s name was James Karl Brown (not his real name). When the title company did their preliminary search a tax lien for James Brown showed up on the title to the property he wanted to sell. The title company asked my client to pay off this $18,000 tax debt to clear the title. Of course, my client came unglued because the tax debt was not his.

The title company had to do some digging, but they later discovered the James Brown who had the tax debt was James Edward Brown, but because my client had a similar name the tax agency had attached the tax lien to my client’s house. It took a few days, but we did get the issue resolved when we proved that these two individuals were not the same person and the tax lien was released.

Explaining Lien Hierarchy

The hierarchy of liens on a property can be difficult to understand. The position of a lien on a title indicates which liens get paid off first when the property is sold. In a case where there are two mortgages on a home, but no additional tax liens the lien hierarchy is as follows: Position 1 – 1st Mortgage, Position 2 – 2nd Mortgage.

In the case where there are two mortgages and two tax liens the lien hierarchy is as follows: Position 1 – Federal tax lien, Position 2, State tax lien or property tax lien, Position 3 – 1st Mortgage, Position 4 – 2nd Mortgage.

Do you notice who gets paid first when there are tax liens? If you guessed the government you are correct! Federal, state and property liens always jump into a position ahead of the mortgage when tax liens are filed against a property. The government will get their money! More on this in a moment.

Title Commitment and Title Insurances

In the process of a traditional sale of a property, the title company will do a thorough search of all the records of the property. Once the title company has performed their search they will offer a Title Commitment.

Title Commitment has many details of the title and shows the legal description of the property, sale price, lenders name, and other factors. It also shows what requirements (clouds) are present, if any, that must be resolved before title can transfer to a new buyer.

Once everything has been cleared on a title the title company will offer Title Insurance. There are two types of Title Insurance policy’s – one for the seller (which benefits the buyer), and one for the lender.

The Owner’s Policy is for the benefit of the BUYER – yet paid for by the SELLER….confusing, isn’t it? This is paid by the seller because it reduces the seller’s liability in case of problems that may arise with the title years down the road, such as forgeries, and errors by the title company.

This policy remains valid as long as the buyer or his or her heirs own the property. It is rendered void when the property sells to a new buyer. The policy for the lender is called an ALTA policy and this policy is for the mortgage company or person who granted the loan to buy the property but is paid for by the buyer.

Is All of This Going Anywhere?

I’ve gone through all of this with you so you can understand the title search process people go through when buying a house. However, few people go through this process when requesting to keep a family home when divorcing, thinking that they know everything there is to know about the house because they shared the house with their ex-spouse for many years.

The other issue is that some legal professionals rely upon the standard of ‘the appraisal minus the mortgage equals the equity’ and that is not a great assumption. It’s not a great assumption because there could be many underlying and hidden problems wrapped up in the title of the house and this could be detrimental to the divorce settlement if not uncovered during the discovery stage of the divorce, prior to the divorce being finalized.

She Got the House and the Ex-Husband’s Tax Debt

We know of a case where a man and woman were divorcing. They both owned companies independently one from the other. The house was valued at $620,000 and the mortgage owed on the house was $320,000.

The wife suspected she was getting $300,000 in equity in the house. The man owned his company independently from the ex-wife and had not paid income taxes for several years. This tax debt rose to $148,000. The soon to be ex-wife did not know about the tax debt, nor did she know that a lien had been placed on the family home for $148,000 due to the husband’s unpaid taxes.

The wife was awarded the house in the divorce. Because neither she nor her attorney had performed a title search on the property, with the award of the house she also took on the tax-lien encumbrances of her former husband. Why? Because the tax lien was placed on the house prior to the divorce. A title search could have avoided this disaster for the ex-wife.

Title Search on Home During Divorce in AZ | Hildebrand Law, PC