Marketable vs. Insurable Title in REO Transactions – What is the Difference?

Michael Infanti Real Estate Law

In today’s market, some bank-owned and foreclosure properties (REO) can offer great reward to courageous buyers, but can also be fraught with potential title issues for the unwary.  This article will briefly distinguish some of the differences between “marketable” and “insurable” title, and how those differences might affect an REO purchase.

As a general rule, all marketable title is insurable.  However, not all insurable title is marketable.  “Marketable” title is generally defined as title which is free from encumbrances and any reasonable doubt as to its validity, such that it would be acceptable to a reasonable person.  Conversely, “insurable” title is a lesser quality of title, and is merely title that a reasonably prudent title insurance company would be willing to insure at normal market rates.  Therefore, the principal difference between “insurable” title and “marketable” title is the fact that, for marketable title, it must be acceptable to a reasonable person, whereas insurable title does not.

Although it is a matter that can be negotiated between a buyer and seller, most sales contracts state that the seller shall provide marketable title to the buyer at the time of closing.  However, in many cases, the seller of an REO property will only agree to convey insurable title to the buyer at closing.  This is because, in order for a title company to issue marketable title to the buyer of an REO property, it is typically necessary for the seller of the REO property to provide certain affidavits or undertake certain curative actions prior to closing.  However, if the contract states that the seller is merely obligated to convey insurable title, and not marketable title, to the buyer, then the seller may not be required to provide the affidavits, or undertake any curative actions, as long as the title company will agree to issue a final title policy to the buyer at the time of closing.

With regard to the purchase of a foreclosure property in the state of Florida, the successful bidder at a foreclosure sale obtains title by a Certificate of Title issued by the clerk of court.  This instrument may convey insurable title, but does not necessarily convey marketable title, and will be subject to any and all rights, claims and interests that were not resolved by the foreclosure action.

In light of the above, and other complex issues that can be encountered when closing REO transactions, it is important to consider having an experienced real estate professional review the sales contract, and perform the title search and closing, to ensure that your clients receive the highest quality of title at the time of closing.

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Michael Infanti