What are Clouds on Title in Real Estate?

Jasmine Eddy
Jul 6, 2020
5 min

If we think of a smooth, uneventful real estate transaction as a sunny day, then anything that hinders the effortless transfer of title, would be deemed a cloud. “Clouds” are any claims, unreleased liens, or documents that appear on a property’s title record.

Property buyers prefer clear titles and clouds make property title transfer more difficult. Additionally, clouds could invalidate the legal ownership of the property. A clear title is a record that does not have legal claims or ownership disputes from other parties.

Examples of Clouds on Title

The presence of clouds diminishes the value of the home. Additionally, the new property owner would be responsible for the debts if they decide to purchase. In many cases, clouds may deter potential buyers.

Some common clouds on title records are as follows:

  • Mechanic’s or construction liens
  • Clerical or filing errors
  • Unknown heirs
  • Fraud and forgery
  • Encroachments or easements
  • Boundary disputes
  • Improperly probated wills
  • False representation of marital status
  • Unreleased deeds of trust

What Causes Clouds on Title?

Clouds are often created when creditors file a claim on the property or when paperwork regarding the property is misfiled, misplaced, or omitted. For example, mechanic’s liens are common liens that are filed against a property’s title.

If a contractor is hired to complete work on a property, and they are not paid in full upon completion of the project, contractors can file a mechanic’s lien on a property through the county recorder’s office. This lien allows the contractor to recover the unpaid balance.

How to Find Clouds on Title?

Clouds get discovered during a property title search. This generally occurs after accepting a real estate offer. Title companies will search many sources for documents related to a property. Examples include deeds, county land records, divorce cases, and bankruptcy records. This search will show all unresolved claims and encumbrances on the property title.

Title companies check that the seller has the legal right to transfer a property’s title. It is also a necessary step to determine the title company’s ability to ensure a transaction. The title insurance provides protection for the property owner and lender in the event that liens or encumbrances get discovered.

Properties with cloudy title records may deny title insurance. Additionally, mortgage lenders will halt the lending process until the title issues are resolved.

How to Avoid Clouds on Title?

There are a few things property owners can do to avoid future clouds on title.

First, buyers should consider purchasing separate owner’s title insurance. During the closing process, lenders need buyers to purchase title insurance for the property. But, these policies usually protect the lender’s financial investment. If a title claim is successful in court, the owner, without an owner’s title insurance policy, could lose their down payment and accrued equity.

Additionally, an owner’s policy will cover the fees associated with resolving past title issues that weren’t discovered through the title search. Real estate agents should encourage their buyers to buy a separate policy to protect their assets.

Property owners can enjoy creating detailed project contracts with contractors. Outlining project timelines, payment schedules, and payment records give both parties a clear paper trail of the agreement. This can reduce the occurrence of missed payments and mechanic’s liens.

Finally, property owners can avoid surprises on their titles. Checking the title record at the county recorder’s office keeps owners up-to-date on their status. This allows them to catch and resolve title defects as issues arise.

How to Remove the Clouds on Title?

The process of removing a cloud on the title varies. Some are easier to remove than others. For example, to resolve a mechanic’s lien, the homeowner must contact the contractor to pay their balance. Then, the contractor will remove the lien. Similar liens, such as mortgage and tax liens, can be resolved this way.

Real estate agents need to be proactive when working with homes that have clouds on the title. For buyer’s agents, be sure to address the clouds on the title. Leverage this as a negotiation strategy.

For example, informing the seller, “I have a buyer who is interested in your home but they noticed there are clouds on the title. If they are removed, I have a buyer for you!” may motivate them to clear the home’s title in order to secure the sale.

For seller agents, be proactive and take a look at your client’s title report early on in the process. It is possible that the owner is not aware that their property has clouds. Therefore, checking with the title company is very helpful. If there are clouds on the title, agents can work with sellers to make a list of the fixable clouds. Together, they can come up with a strategy to resolve them.

Final Thoughts of Clouds on Title

Clouds on title are any unresolved issues that appear on a property’s title record. There are many types of clouds and their presence can make it more difficult to sell the property. That's because it can invalidate the owner’s right to the property. Title companies play an important role at this stage of the real estate process. They conduct title searches to ensure that the property in question has a clear title.

There are ways that property owners can avoid clouds on title. They can create clear worker contracts, check title records, and buy owner’s title insurance. Resolving clouds on title can be as simple as paying taxes or costly and time-consuming. Agents review the title record of a property with clients to help them make informed choices.

Every week, we release in-depth videos to help viewers become successful real estate agents on our CA Realty Training YouTube Channel. Also, if you enjoyed reading this article, we would love if you could share it with a friend who you think would get something out of it.

Jasmine Eddy
Jul 6, 2020
5 min