In the transfer of property from one owner to another, a smooth transaction with no red flags might be compared to a sunny day. Any issue that complicates the transfer is known in the industry as a ‘cloud.’

A ‘cloud,’ or a defect on title, typically discovered during a title search, is any type of lien or outstanding issue that casts doubt on or invalidates an owner’s right to sell.

Examples are a fraud or forgery found somewhere in the chain of title, an unpaid contractor’s lien or tax bill, an easement or dispute over boundaries, an improperly probated will, or an error in filing. Whatever it is, a cloud can spell trouble for both the seller and the buyer.

It doesn’t necessarily mean the sale falls through.

If the cloud is a simple one – like an outstanding lien – the seller can simply pay what’s owed – or, if it’s a paperwork issue, do what it takes to clear it.

Although purchasing a home with a cloud on title may make it difficult or impossible to get title insurance (and mortgage lenders typically do not offer financing for a cloudy titled property), a motivated cash buyer might decide to negotiate a lower sale price and take responsibility for clearing the issue themselves. Some investors and house flippers do this to acquire properties at below-market cost from burdened homeowners. One way to do this is getting the seller to transfer legal rights to the property to the buyer via a quitclaim deed.

The bottom line, however, is that some clouds on title are easier to clear than others – and that despite the best efforts of the title company to discover them in their search of public records, it’s possible for a cloud to appear sometime after the sale is completed – the appearance of a previously unknown heir, for example.

That’s why lenders typically require buyers to purchase lender’s insurance – and why buying owner’s title insurance is the most inexpensive way to protect themselves against such claims for as long they own the property.

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This material is meant for general illustration and/or informational purposes only. Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy. This material is not intended to be construed as legal, tax or investment advice. You are encouraged to consult your legal, tax or investment professional for specific advice.