What Is a Bad Title?

The term bad title refers to a legal document associated with an asset that doesn't grant ownership to the entity that holds the title. This may be because of legal and/or financial problems, including unsatisfied legal issues or even unpaid financial obligations, or even something as simple as a clerical error.

Bad titles are almost always associated with real estate and can prevent the titleholder from selling the property. Titleholders can remove the flaws on their titles by satisfying certain conditions.

Key Takeaways

  • A bad title is a legal document associated with an asset that doesn't grant ownership to the entity that holds the title.
  • Bad titles may be the result of legal issues, financial problems, or even simple clerical errors.
  • Bad titles are almost always associated with real estate and can prevent the titleholder from selling the property.
  • Clear or perfect titles are required in order to legally transfer a piece of property.
  • A titleholder can clear up a title by resolving the legal, financial, or clerical issues.

Understanding Bad Titles

Titles are documents that prove legal ownership over tangible assets, such as homes or vehicles, or personal property like jewelry and animals. In other cases, titleholders can prove ownership over pieces of intangible property, such as trademarks. If the titleholder wishes to sell or dispose of the asset in any way, they must ensure that the title is clear. A title that isn't free and clear is referred to as a bad title.

A bad title is one that is defective. It prevents the titleholder from legally disposing of an asset by selling or transferring it to another party. Bad titles are also called clouded titles or those with a break in the title chain, which means there are problems with the title. The titleholder may or may not know of these issues.

A title may be bad for various reasons. The term most commonly appears in real estate and car ownership, where the title may be clouded because of a lien on the property, back taxes, or failure to correct a building violation. Clouded titles may also arise if the property owner fails to pay off the mortgage or car loan. Clerical errors, such as the misspelling of a name or the failure to properly register a title can also lead to bad titles.

In order for the titleholder to legally transfer their property (and for the new owner to take possession), they must hold a perfect title. This means they must resolve any problems associated with the title. If a titleholder sells or transfers a bad title, the receiving party does not legally own the property. In other words, for a bad title to move in any way from one party to another, its status as a bad title must be eradicated first.

You may be able to avoid problems with bad titles by taking out title insurance. Title insurance companies can take care of any issues on their own without any hassles to the property owner.

Special Considerations

If you bid on a property and begin the mortgage process, the mortgage company runs a title search as an obligatory part of the process. If the title searcher discovers that the property history has a record of unpaid taxes or other unpaid liens, an incomplete certificate of occupancy, written deeds, any unresolved legal debts, or building code violations, the title is deemed a bad title. This means the property can no longer be legally sold, and the property owner would not be able to purchase that property at that time.

As noted above, bad titles can be rectified through various legal processes. This means satisfying any liens and/or paying off any outstanding debts. In the case of clerical errors, the titleholder must request changes and provide proof, such as the proper spelling of a name and/or address.

As a real estate investor, you should make sure that a property does not have a bad title before proceeding with any purchase. Homes in foreclosure, for example, may have a number of outstanding issues. Buyers may consider purchasing owner’s title insurance to protect themselves against unforeseen claims against the title.