Buying a Rent House as an Investment.

What Could Possibly Go Wrong?


Problem: An increase in real estate investments by individuals has exposed new problems the investors did not expect. Our Client bought a house a couple of weeks before it was to be foreclosed but ultimately lost the property to another buyer. Without legal help, she might have lost all her money too.

Story: Our Client found a promising buy while seeking out a house to acquire as a rent property. The house needed some repairs, but nothing major. The property had already been posted for a foreclosure by the senior bank lender, and she had several weeks to complete the closing to stop the foreclosure. This looked to be an opportunity to acquire the house at a discount and turn it into a cash-flowing investment with a little work.

The Client submitted an offer to purchase using the standard Texas form of real estate purchase contract. The offer was acceptable to the Seller as it paid off the bank and left a little money in his pocket as well. After the earnest money was submitted, the title company opened a file, pulled the standard title research, prepared a title commitment, and proceeded with the normal transaction process. On the date of the closing, our Client funded the entire acquisition and paid for a title policy. All this occurred about a week or so prior to the foreclosure date. Our law firm was not yet involved since this was a standard, run-of-the-mill deal for a rent house, and who needs a lawyer for that, right?

What could possibly go wrong at this point, you ask? Well, the title company failed to pay off the bank lender with the closing funds because they mistakenly sent all the money to the Seller. The error resulted in an unfortunate series of events: (i) the Bank lender completed the foreclosure process, (ii) the property was acquired by another buyer in the sheriff’s foreclosure sale on the courthouse steps, and (iii) the other buyer was given a Trustee’s deed for the property.

Wait, that’s not all. Our client had no knowledge of the mistake and all that followed. She only finds out when she arrives at the house with her contractors to get rehab bids, and she finds another contractor on the roof doing repairs for the other buyer! What could she do now?

Solution: The legal solution to this situation was obvious to our lawyers, but not to the Client who was predictably up-in-arms and ready-to-rumble. Our law firm drafted a letter to the title company asserting a claim for the full limits of the title insurance policy. There were some back-and-forth discussions, but in the end, she received a full payoff within 45 days.

Analysis: When we look back, there were a few things that could have been done to achieve an even better outcome. Obviously, the mistake by the title company was avoidable, but that’s why we get title insurance. The insurance premium was for the full amount of the purchase price of the house. Unfortunately, our client was not made whole because she was out a small amount of additional money for inspections, survey and legal fees. If the policy had been increased to cover these potential amounts, the premium would have only a little more, and she could have been completely paid in full for all claims.

The Quote of the Day: "In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some greater fool could be depended on to take the property off their hands and leave them with a profit".     Chicago Tribune, April 1890.