A client owns a building lot and now wants to build their dream home, but needs a construction loan first. The loan officer is anxious to help them realize that dream. Unfortunately, the title company has inspected the lot only to find that brush has been cleared, top soil has been removed, and there’s a port-a-potty on the property. The title company will not issue a lender’s policy because of “broken priority.”
Why do those things matter?
The lender wants to be in first lien position when lending the money to build the borrower’s dream home. Unfortunately, title underwriters might not insure the lender to be in a first lien position if there’s a chance that a mechanic’s lien could be filed against the property. Is the title underwriter worried about mechanic’s liens from the port-a-potty provider, guy who removed the top soil, and/or company that cleared the brush? Not necessarily, as each could be contacted to ensure they have been paid and to obtain lien releases.
The real problem comes from liens filed in the future by those providing services, work, materials, etc., after the loan is in place. Once you have broken priority, future liens, even though they were recorded after the loan was recorded, are now superior and they can foreclose on the property and wipe out the lender’s security interest.
Think of broken priority as a pre-existing health condition when applying for life insurance; if it is serious enough, you may not get coverage, or coverage may be severely limited.
This presents a real dilemma for many who own land and have partially developed and/or constructed on that land. In some instances, due to broken priority, the property will be uninsurable and so the lender most likely will refuse to loan on the property. In other instances the title underwriter may issue a policy that only provides coverage if lien releases from all parties providing services, work, materials, etc. are obtained. This can be a daunting task and some lenders will still refuse to loan on the property if they have to abide by additional requirements like obtaining lien releases.
The best solution is to educate clients to do absolutely nothing to their land prior to obtaining their loan and title insurance policy.