January 31, 2016
After 30 years as a real estate attorney, I thought I had seen everything: Bill Erpenbeck, mortgage fraud, short sale fraud, and the massive fraud perpetrated on America by Wall Street in the housing crisis. Indeed, well before the mortgage crisis hit with full force, I authored a continuing education course entitled “Fraud” and taught it to thousands of Realtors, builders and lenders exposing rampant fraud in the residential and commercial real estate industry .
But still I was shocked in the past two years to be personally involved in two cases involving outright theft of real property right here in Hamilton County. One of those cases is highlighted in the Cincinnati Enquirer here.
Background: The passive, unilateral nature of our property recording system
Assuming that the Hamilton County Commissioners’ abolition of registered land has been effective (read here), the land registration system is entirely passive from the County’s perspective in both Ohio and Kentucky. This system of land record recordation is typical throughout the nation. What this means is that by and large the government officials responsible for accepting documents for recording do just that — they accept what is presented to them, and then index them. They do nothing at all to check their validity.
To transfer real property, one simply brings in for recordation a deed that is purportedly signed and acknowledged (notarized) by the current owner. In Ohio, the Auditor will transfer the real estate on his records and “green light” the deed for recording by the Recorder. The County Recorder simply time-stamps and records whatever original instruments are presented to him in proper form and with a property legal description. In Kentucky, the County Clerk performs these same functions.
It is no one’s job at the Auditor’s office or Recorder’s office to verify signatures — or even to check that the notary public acknowledging the signature is licensed by the state.
The system is “passive” in that the offices receive the instruments for recording, and as long as their grantor information lines up with public records, they index and record the transfer on their records.
Just prepare and sign a deed transferring property into your name
So, the new scam I have seen is follows this pattern:
- The fraudster forms a limited liability company that he owns and controls. Anyone can do this with an attorney, through LegalZoom.Com or even just by completing simple forms available from the Secretary of State of each state. (NOTE: Each state requires each LLC to have a “statutory agent” to receive formal legal notices, but many states — including Ohio do not require the ownership of the LLC to be publicly identified. Kentucky does require LLC ownership to be disclosed.)
- The criminal then finds a suitable real property — presumably one that has vacant and neglected for some time.
- Then, the fraudster prepares a deed transferring that property into the name of his new LLC.
- He signs that deed or finds someone to sign it, and has it acknowledged (notarized).
- The notary public is required by law to verify that the signer of the deed, but many simply do not. Further, if the target property is in a corporate name, it is unusual for the notary to check that the signer has authority in fact to sign for the seller. (NOTE: In the fraud referenced in the article linked above above, he himself acted as the notary, and signed someone else’s name to the deed in place of the actual owner.)
- That fraudster then markets the property for sale and quickly — for consideration — transfers the property to a new buyer, pocketing the cash and disappearing into the woods.
The system is further undermined because office supply and stationary shops will produce a notary seal for anyone — or for a fictional name — without checking if that person is in fact a registered notary public. Thus, the signer and the notary public can be fictional on a deed.
Experienced real estate professionals are shocked this could happen
I have had the chance over the past year to tell the story before audiences of experienced Realtors of two separate frauds in Hamilton County in which I personally participated — once representing the actual owner whose property was “stolen” in this fashion and once representing the end buyer. In each instance, the Realtors were shocked and dismayed that our land title registration system could be so easily gamed. But it can and does happen.
How buyers can protect themselves
As we have explained here, when buying real property there are only two layers of protection for the buyer: (i) the Seller, who makes broad promises by means of a general warranty or limited warranty deed has continuing obligations to the owner under that deed to assure that title is “good,” and (ii) the coverage provided by an owner’s policy of title insurance.
Many sellers have “nothing to their name,” and thus the promises they make under warranty deeds could be worthless — and it is difficult for a buyer to ascertain whether a seller has the means to stand behind their promises. Thus, when I sit at a closing table and hear a buyer tell me why they have no need for an owners’ policy of title insurance — or worse, for their Realtor to explain that it is worthless — I cringe. I don’t want to argue to convince a buyer to purchase something that I am selling and profiting from, but at the same time I do know there are risks the buyer is undertaking if he does not obtain that coverage. The “theft of real property” described above is one of these risks that is difficult or impossible for the closing agent to detect, but one fully covered by title insurance.
The end of the stories
We mention two scenarios above where our clients were victims of property theft. In the first instance, our client was the buyer — and he had purchased an owners’ policy of title insurance. Thus, he was made whole by the underwriter as son as the real owner made a claim to title to the real estate. In the second instance, our client was the owner at the time of the “theft.” He instituted a “quiet title” action to recover record ownership of his property and won a default judgment against the wrongdoer, vesting title back in the rightful owner’s name. That client elected not to pursue the tortfeasors — the thieves, the notary, the closing agent — any further to save time and money.
The moral to this story is twofold: (i) don’t kid yourselves, it is dangerous out there, and (ii) title insurance covers a multitude of “sins” when real estate title goes bad.