How to Review a Preliminary Title Report: Red Flags That Threaten Financing

Discovering a title defect three days before closing does not just delay the transaction. It can cause a lender to pull funding entirely. If your financing contingency has already expired, you are left in a precarious legal and financial position. The preliminary title report is often treated as a dense piece of boilerplate that buyers skim through during the hectic escrow period. This is a mistake.

In California real estate transactions, the preliminary report is the diagnostic tool for the entire deal. It reveals who truly owns the property and what claims exist against it. Samuel Alcabes brings big-firm training to these reviews, ensuring that every line item is scrutinized for risks that could derail a closing. Most buyers assume that the title company or the escrow officer will flag every issue. In reality, their role is to report what they find, not to advocate for your specific interests or explain how a specific easement might interfere with your planned renovations.

Lenders require what is known as pre-funding title readiness. This means they will not release funds until the title record is clear, accurate, and aligned with the final loan structure. If a defect is found after the lender has issued a clear-to-close, the consequences are immediate. This article breaks down the specific red flags you must identify before your contingency period ends.

The Legal Description and Ownership Record

The most fundamental section of the report is the legal description and the record of ownership. It seems basic, but errors here are common and potentially fatal to a deal. If the legal description on the title commitment does not match the purchase and sale agreement exactly, the title policy will not cover the entire property being conveyed. This often happens with multi-parcel properties or homes where additions were built across old lot lines.

You must verify that the names listed are spelled correctly and match the signatures on the purchase agreement. Public record errors like misspelled names or missing middle initials can create a cloud on the title. If the seller is listed as a trust or a corporation, you need to verify that the person signing the contract has the actual legal authority to do so. A mismatch in ownership records is a serious problem that requires immediate investigation.

In our experience, issues often arise with "vesting." This is how the current owners hold title. If the report shows a deceased spouse is still on the title, or if a divorce decree was never properly recorded, the seller may not have the legal right to transfer the property. These issues must be resolved by providing death certificates or court orders to the title company. Waiting until the final week of escrow to address vesting issues is a recipe for a failed closing.

Unreleased Liens and Deeds of Trust

Financial encumbrances are the most frequent cause of funding delays. The preliminary report will list all outstanding Deeds of Trust. A major red flag is a Deed of Trust that appears to have been paid off years ago but was never reconveyed by the lender. Removing these requires a reconveyance from the trustee or a court-ordered satisfaction. If the previous lender is no longer in business, this can take weeks or months to resolve.

Hidden liabilities can also attach to the property. These include unpaid property taxes, contractor bills known as mechanic's liens, and even child or spousal support judgments against the seller. Lenders will generally refuse to fund until these are cleared. According to a Pre Funding Title Checklist to Avoid Closing Delays, title problems often surface late because they are tied to actions that happen close to closing, such as payoff processing or recording backlogs at local jurisdictions.

One specific catch in California is postponed property taxes. This is a program for senior citizens that allows them to defer taxes until the property is sold. If the report shows postponed taxes, the escrow officer must order a demand from the state to pay them off. According to guidance on identifying red flags in title and escrow, it can take up to two weeks to receive this demand. If you do not catch this in the first week of escrow, you will likely miss your closing date.

Easements and CC&Rs

Covenants, Conditions, and Restrictions (CC&Rs) are standard in most California developments, but they are not all the same. The buyer must read the CC&Rs thoroughly, especially if they plan to make improvements. Some CC&Rs prohibit specific structures like guesthouses or even certain colors of roofing. If your plan for the property relies on a specific use that the CC&Rs forbid, the property may not be worth the purchase price.

Easements and right-of-way issues are another major concern. These grant third parties the right to use portions of the property. While utility easements for power lines are common, private easements can be more problematic. An off-record easement or an encroachment where a neighbor's fence is on the property can limit your development potential. Lenders care about these because they affect the property's value and the validity of their collateral.

If you find a physical inspection reveals an encroachment not listed on the report, it is a sign that the title search may have missed something. These disputes can lead to costly legal battles after the sale is complete. Addressing them before the contingency period expires allows you to negotiate with the seller or walk away without losing your deposit. You can learn more about how modern firms handle these complexities in the article on How Tech-Forward Boutique Law Firms Are Revolutionizing California Real Estate Closings.

When to Call an Attorney

Escrow officers are neutral third parties. Their job is to follow the instructions in the contract and facilitate the exchange of funds and documents. They cannot give you legal advice. If your preliminary title report shows a pending lawsuit (lis pendens), a probate proceeding, or a complex boundary dispute, you need a specialized California real estate attorney.

Samuel Alcabes provides direct, senior-level expertise for these situations. Unlike large firms where your file might be handed to a junior associate, clients at Alcabes Law work directly with the lead attorney. This ensures that complex legal matters are addressed with the sophistication they require. If you see a "Schedule B" exception that looks unusual, do not ignore it. A specialized attorney can determine if a defect is a minor administrative fix or a deal-breaker that will stop your lender from funding.

Lenders will halt pre-funding readiness until every cloud on the title is legally cleared. This often involves collaborating with your other professional advisors. Alcabes Law frequently works with clients' CPAs and financial advisors to ensure that the legal resolution of a title defect does not create unintended tax or financial consequences. This collaborative approach is essential for commercial transactions and high-value residential deals.

Legal Disclaimer
The content on this blog is provided for informational purposes only and does not constitute legal advice. Reading or engaging with this material does not create an attorney-client relationship between you and Alcabes Law. The information presented may not reflect the most current legal developments and may vary by jurisdiction. You should not act or refrain from acting based on anything you read here without first seeking qualified legal counsel familiar with your specific situation. If you need legal advice, please contact a licensed attorney directly.

If you are entering a contingency period on a California residential or commercial property and need experienced legal counsel to review your preliminary title report, contact Alcabes Law. Work directly with Samuel Alcabes for efficient, high-level guidance at https://www.alcabeslaw.com/.