In any economic downturn, opportunities present themselves. One such opportunity is the purchase of foreclosed property. The amount of Trustee Sale Notices and properties sold at auction increased six-fold in Pima County between August 2006 and August 2010. Due diligence necessary to purchase foreclosed property generally requires obtaining some kind of title report to learn of any other encumbrances against the title that may exist. Preliminary Title Reports are one common type of report that can be utilized for this purpose. However, recently one purchaser of foreclosed property learned, the hard way, that relying solely on a Preliminary Title Report is a huge risk.
In California, a purchaser of foreclosed property paid $1 million for a foreclosing loan. The purchaser obtained the title information from a title agent, information which he relied upon. While the title information showed the foreclosing loan as the senior loan on the property, it was later discovered that the foreclosing loan was behind a $1.6 million deed of trust. The purchaser sued the title company. The California Court of Appeals held that a title company could not be held liable for negligent preparation of a Preliminary Title Report. The California Court explained that a purchaser could not rely on a Preliminary Title Report, but only a Title Policy or Abstract of the Title. As a result, the purchaser of the foreclosed property lost his $1 million investment.
Could the same thing happen in Arizona? Absolutely. Much like California, Arizona courts, in Moore v. Title Ins. Co. of Minnesota, originally held that a purchaser could rely on a Preliminary Title Report prior to closing a deal. 714 P. 2d 1303, 1307 (Ariz. App. 1985). However, in 1992, the Arizona legislature enacted a definition for a Preliminary Title Report similar to California stating that a Preliminary Title Report is not an Abstract of Title, “[t]he report is not a representation as to the condition of title to real property but does not constitute a statement of the terms and conditions on which the issuer is willing to issue its title insurance if the offer is accepted.” A.R.S. §20-1562.
Although there has been no case law overturning Moore, the enactment of A.R.S. §20-1562 is a clear message that a purchaser may not rely on a Preliminary Title Report prior to making a purchase. The California decision shows that courts agree that one cannot legally rely on Preliminary Title Reports, based on the statutory definitions.
In the foreclosure market where time is of the essence, bargain hunters may be tempted to cut corners and rely on Preliminary Title Reports rather than spending the money necessary to obtain the Title Policy or Abstract of Title. But in order to ensure the condition of title, a purchaser must obtain either an Abstract of Title or title insurance. Simply relying on a Preliminary Title Report will not provide legal recourse if information in the Preliminary Title Report is inaccurate.
