What are Clouds on Title in Real Estate?

If we think of a smooth, uneventful real estate transaction as a sunny day, then anything that hinders the effortless transfer of title, would be deemed a cloud. “Clouds” are any claims, unreleased liens, or documents that appear on a property’s title record.

Property buyers prefer clear titles and clouds make property title transfer more difficult. Additionally, clouds can create doubt about ownership or make a title difficult to insure or transfer until the issue is resolved. A clear title is a record that does not have material defects or adverse claims that would discourage a buyer or lender. (Note: many properties still have recorded items like easements/CC&Rs—those don’t automatically mean the title is “cloudy” if they’re expected and disclosed.)

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Examples of Clouds on Title

The presence of clouds diminishes the value of the home. In many cases, clouds may deter potential buyers. Some clouds involve liens that must be satisfied or released; others are not “debts” at all (like clerical errors, boundary disputes, or unknown heirs).

Some common clouds on title records are as follows:

• Mechanic’s or construction liens
• Clerical or filing errors
• Unknown heirs
• Fraud and forgery
• Encroachments or easements
• Boundary disputes
• Improperly probated wills
• False representation of marital status
• Unreleased deeds of trust

What Causes Clouds on Title?

property is misfiled, misplaced, or omitted. For example, mechanic’s liens are common liens that are filed against a property’s title.

If a contractor is hired to complete work on a property, and they are not paid in full upon completion of the project, contractors can file a mechanic’s lien on a property through the county recorder’s office (rules vary by state). This lien allows the contractor to recover the unpaid balance.

Recent update: in addition to “classic” clouds, more real estate professionals are watching for deed/title fraud (forged deeds, seller impersonation, quitclaim deed fraud). These scams can create serious title problems that take time and legal work to unwind.

How to Find Clouds on Title?

Clouds get discovered during a property title search. This generally occurs after accepting a real estate offer. Title companies will search many sources for documents related to a property. Examples include deeds, county land records, divorce cases, and bankruptcy records. This search will show all unresolved claims and encumbrances on the property title.

Title companies check that the seller has the legal right to transfer a property’s title. It is also a necessary step to determine the title company’s ability to insure the transaction.

Important clarification: there are two common title insurance policies—lender’s title insurance (protects the lender) and owner’s title insurance (protects the buyer/owner). Lender’s coverage is usually required with a mortgage, but it does not protect the buyer’s equity the same way an owner’s policy can.
Title insurance generally covers covered losses up to the policy amount for certain pre-existing title defects—coverage depends on the policy and its terms.

Properties with cloudy title records may not be insurable until the issues are cured, or the title insurer may require the issue to be resolved before issuing coverage. Additionally, mortgage lenders will halt the lending process until the title issues are resolved.

How to Avoid Clouds on Title?

There are a few things property owners can do to avoid future clouds on title.

First, buyers should consider purchasing separate owner’s title insurance. During the closing process, lenders need buyers to purchase title insurance for the property. But, these policies usually protect the lender’s financial investment. If a title claim is successful in court, the owner, without an owner’s title insurance policy, could lose their down payment and accrued equity.

Additionally, an owner’s policy may help cover costs associated with resolving certain past title issues that weren’t discovered through the title search (depending on the policy terms). Real estate agents should encourage their buyers to buy a separate policy to protect their assets.

Property owners can enjoy creating detailed project contracts with contractors. Outlining project timelines, payment schedules, and payment records give both parties a clear paper trail of the agreement. This can reduce the occurrence of missed payments and mechanic’s liens.

Finally, property owners can avoid surprises on their titles. Checking the title record at the county recorder’s office keeps owners up-to-date on their status. This allows them to catch and resolve title defects as issues arise. (Some counties also offer deed/recording notification programs—worth enrolling if available.)

How to Remove the Clouds on Title?

The process of removing a cloud on the title varies. Some are easier to remove than others. For example, to resolve a mechanic’s lien, the homeowner must contact the contractor to pay their balance. Then, the lien must be released (and typically recorded) so the public record reflects that it was satisfied. Similar liens, such as mortgage and tax liens, can be resolved this way.

Real estate agents need to be proactive when working with homes that have clouds on the title. For buyer’s agents, be sure to address the clouds on the title. Leverage this as a negotiation strategy.

For example, informing the seller, “I have a buyer who is interested in your home but they noticed there are clouds on the title. If they are removed, I have a buyer for you!” may motivate them to clear the home’s title in order to secure the sale.

For seller agents, be proactive and take a look at your client’s title report early on in the process. It is possible that the owner is not aware that their property has clouds. Therefore, checking with the title company is very helpful. If there are clouds on the title, agents can work with sellers to make a list of the fixable clouds. Together, they can come up with a strategy to resolve them.

Final Thoughts of Clouds on Title

Clouds on title are any unresolved issues that appear on a property’s title record. There are many types of clouds and their presence can make it more difficult to sell the property. That's because it can impair marketability or create doubt about ownership until resolved.
Title companies play an important role at this stage of the real estate process. They conduct title searches to ensure that the property in question has a clear title.

There are ways that property owners can avoid clouds on title. They can create clear worker contracts, check title records, and buy owner’s title insurance. Resolving clouds on title can be as simple as paying taxes or costly and time-consuming. Agents review the title record of a property with clients to help them make informed choices.